<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1998
REGISTRATION NO. 333-48041
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TIMBERLAND GROWTH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
1242 N. SECOND STREET
MEMPHIS, TN 38101
(901) 576-1400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RALPH M. DAVISSON, ESQ.
C/O POTLATCH CORPORATION
601 WEST RIVERSIDE AVENUE, SUITE 1100
SPOKANE, WA 99201
(509) 835-1500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE OF PROCESS)
COPIES TO:
BLAIR W. WHITE, ESQ. ROBERT V. JEWELL, ESQ.
GLENN Q. SNYDER, ESQ. ANDREWS & KURTH L.L.P.
DAVID R. LAMARRE, ESQ. 600 TRAVIS, SUITE 4200
PILLSBURY MADISON & SUTRO LLP HOUSTON, TEXAS 77002
P.O. BOX 7880 (713) 220-4200
SAN FRANCISCO, CALIFORNIA 94120
(415) 983-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1998
15,000,000 SHARES
TIMBERLAND GROWTH CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------
Timberland Growth Corporation, a Delaware corporation, is engaged in the
ownership, management and acquisition of timberlands. The Company's initial
properties consist primarily of approximately 824,000 fee acres of timberlands
located in the southeastern United States. These timberlands represent a
consolidation of the southeastern timberlands of Potlatch Corporation
("Potlatch") and all of the timberlands of Anderson-Tully Company ("ATCO") into
a real estate investment trust. The Company intends to pay regular quarterly
distributions, initially at an annual rate of $1.42 per share, commencing with
a pro rated distribution for the quarter ending June 30, 1998.
All of the 15,000,000 shares of Common Stock offered hereby are being sold by
the Company. These shares represent approximately 42.9% of all shares of Common
Stock (or partnership interests exchangeable for shares of Common Stock)
outstanding after this offering (46.3% if the Underwriters' over-allotment
option is exercised in full). Upon consummation of this offering, Potlatch will
own limited partnership interests in the Company's operating partnership (the
"Partnership") exchangeable under certain circumstances for approximately 57.1%
of the shares of Common Stock (53.7% if the Underwriters' over-allotment option
is exercised in full) and initially will have an equal percentage of the
Company's voting power through its ownership of Special Voting Stock (as
defined herein). Prior to this offering, there has been no public market for
the Common Stock of the Company. It is currently anticipated that the initial
public offering price per share of the Common Stock will be between $18.50 and
$21.50. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price.
Application has been made to list the Common Stock on the New York Stock
Exchange under the symbol "TGC."
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF MATERIAL RISKS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING:
. The volatility of timber prices, caused by changes in timber supply and
demand, will cause the Company's operating results and cash flow to
fluctuate and may have an impact on cash distributions;
. Potlatch's initial control of the Company and associated potential
conflicts of interest, including the Company's dependence on payments from
Potlatch under the Timber Purchase Agreement (as defined herein), which
will initially account for substantially all of the Company's revenues,
and the absence of arm's-length negotiations with respect to the terms of
the Timber Purchase Agreement and the valuation of the timberlands
contributed by Potlatch;
. Limitations on the Company's ability to sell certain timberlands, borrow
funds in certain circumstances and engage in certain transactions without
Potlatch's consent;
. The risk of uninsured losses from fire and other causes;
. Seasonal fluctuations in operating results and cash flow;
. Stringent environmental and endangered species regulations;
. Uncertainties and risks associated with the Company's strategy of growth
through acquisitions;
. Anticipated differences between the Company's share of cash distributed by
the Partnership and the amount of taxable income allocated to it by the
Partnership;
. Potential limitations on distributions to stockholders;
. Taxation of the Company as a corporation if it fails to qualify as a real
estate investment trust; and
. Limitations on potential changes in control of the Company due to
restrictions on ownership of Common Stock to 9.8% of the outstanding
shares of Common Stock and certain other provisions of the Company's
charter documents, Delaware law and the Partnership Agreement.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total(3)................................ $ $ $
</TABLE>
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(1) The Company, the Partnership and Potlatch have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting estimated expenses of $3,000,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 2,250,000 shares of Common Stock at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price, underwriting discount and proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
shares will be ready for delivery in New York, New York on or about ,
1998, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
----------
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
----------
The date of this Prospectus is , 1998.
<PAGE>
[MAP OF TIMBERLAND GROWTH CORPORATION]
All statements other than statements of historical fact included in this
Prospectus, including, without limitation, statements regarding the Company's
business strategy, estimated stockholder distributions, harvest plans and
other estimates, plans, intentions and objectives of management of the
Company, are forward-looking statements that involve risks and uncertainties.
Important factors that could cause actual results to differ materially from
the Company's estimates, plans, intentions or expectations are disclosed under
"Risk Factors," "Distribution Policy," "Management's Discussion and Analysis
of Financial Condition and Results of Operations of the Company" and elsewhere
in this Prospectus.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
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TABLE OF CONTENTS
<TABLE>
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PAGE
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PROSPECTUS SUMMARY........................................................ 6
RISK FACTORS.............................................................. 17
Volatility of Timber Prices............................................. 17
Conflicts of Interest................................................... 18
Risk of Uninsured Losses................................................ 20
Seasonality............................................................. 20
Regulation.............................................................. 20
Risks Associated with Acquisition Strategy.............................. 21
Potential Differences Between Taxable Income and Cash Available for
Distribution........................................................... 21
Potential Limitations on Distributions.................................. 22
Real Estate Investment Trust and Partnership Qualification.............. 22
Factors Limiting Changes in Control..................................... 23
No Operating History as an Independent Company.......................... 24
Contingent Liabilities; No Title Insurance.............................. 24
Limitations on Accounting Income........................................ 25
Lack of Prior Public Market and Possible Volatility of Stock Price...... 25
Immediate and Substantial Dilution...................................... 26
Uncertainties Associated with Inventory Estimates....................... 26
Adverse Effect on Stock Price of Shares Eligible for Future Sale........ 26
Changes in Policies Without Stockholder Approval........................ 26
Other Tax Risks......................................................... 27
ERISA Risks............................................................. 28
USE OF PROCEEDS........................................................... 29
DISTRIBUTION POLICY....................................................... 30
DILUTION.................................................................. 34
CAPITALIZATION............................................................ 35
SELECTED FINANCIAL AND OPERATING INFORMATION OF THE POTLATCH SOUTHERN
TIMBERLANDS.............................................................. 36
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF ATCO....................... 38
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION.................... 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY................................................ 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ATCO....................................................... 57
BUSINESS.................................................................. 62
Overview................................................................ 62
Business Strategy....................................................... 63
Competitive Strengths................................................... 64
Industry Background..................................................... 65
The Initial Timberlands................................................. 67
Resource Management..................................................... 71
Operations.............................................................. 73
Sales and Markets....................................................... 74
Federal and State Regulation............................................ 77
Competition............................................................. 81
</TABLE>
3
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Insurance Coverage...................................................... 81
Legal Proceedings....................................................... 81
Employees............................................................... 81
MANAGEMENT................................................................ 82
Directors and Executive Officers........................................ 82
Executive Compensation.................................................. 84
Employment Agreements................................................... 84
Compensation of Directors............................................... 84
Stock Incentive Plan.................................................... 85
Incentive Bonus Program................................................. 87
Severance Program for Executive Employees............................... 87
Pension Plans........................................................... 87
Compensation Committee Interlocks and Insider Participation............. 88
CERTAIN POLICIES AND OBJECTIVES........................................... 89
Investment Policies..................................................... 89
Dispositions............................................................ 89
Financing............................................................... 89
Working Capital Reserves................................................ 91
Conflict of Interest Policies........................................... 91
Other Policies.......................................................... 91
INFORMATION REGARDING POTLATCH............................................ 92
THE FORMATION TRANSACTIONS................................................ 92
CERTAIN RELATIONSHIPS AND TRANSACTIONS.................................... 94
Administrative Services Agreement....................................... 94
Opportunities Agreement................................................. 94
Registration Rights Agreement........................................... 94
Other Matters........................................................... 95
THE PARTNERSHIP AGREEMENT................................................. 95
Management.............................................................. 95
No Removal of the General Partner; Transfer of the General Partner's
Interest............................................................... 96
Amendments of the Partnership Agreement................................. 96
Transfer of Partnership Units; Substitute Limited Partners.............. 96
Exchange of Partnership Units........................................... 96
Issuance of Additional Limited Partnership Interests.................... 97
Extraordinary Transactions.............................................. 97
Other Covenants......................................................... 97
Exculpation and Indemnification of the General Partner.................. 98
Tax Matters............................................................. 98
Term.................................................................... 98
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 99
Taxation of the Company................................................. 99
Taxation of Taxable U.S. Stockholders of the Company.................... 107
Taxation of Tax-Exempt Stockholders of the Company...................... 109
Taxation of Non-United States Stockholders of the Company............... 110
Tax Aspects of the Company's Ownership of Interests in the Partnership.. 114
Uncertain Impact of Budget Proposal..................................... 117
Other Taxes............................................................. 117
ERISA CONSIDERATIONS...................................................... 118
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs......... 118
Status of the Company and the Partnership under ERISA................... 119
</TABLE>
4
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<TABLE>
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PAGE
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<S> <C>
PRINCIPAL STOCKHOLDERS OF THE COMPANY AND PARTNERS OF THE PARTNERSHIP...... 121
DESCRIPTION OF CAPITAL STOCK............................................... 123
General.................................................................. 123
Common Stock and Special Voting Stock.................................... 123
Preferred Stock.......................................................... 124
Restrictions on Size of Holdings of Shares............................... 124
Transfer Agent and Registrar............................................. 126
New York Stock Exchange Listing.......................................... 126
CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CHARTER AND BYLAWS.... 127
Classification of the Board and Removal of Directors..................... 127
Business Combinations.................................................... 127
Meetings of Stockholders................................................. 128
Limitation of Liability and Indemnification Matters...................... 128
Advance Notice of Director Nominations and New Business.................. 128
Amendment of the Charter and Bylaws...................................... 128
SHARES ELIGIBLE FOR FUTURE SALE............................................ 129
UNDERWRITING............................................................... 131
LEGAL MATTERS.............................................................. 132
EXPERTS.................................................................... 132
ADDITIONAL INFORMATION..................................................... 133
GLOSSARY................................................................... 134
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus. Except as set forth in the financial statements and notes
thereto or otherwise as specified herein, all information in this Prospectus
assumes (i) no exercise of the Underwriters' over-allotment option, (ii) the
consummation of the transactions described under "The Formation Transactions,"
which will occur substantially contemporaneously with the consummation of the
public offering made hereby (the "Offering") and (iii) an initial public
offering price of $20.00 per share. See "The Formation Transactions" and
"Underwriting."
Unless the context otherwise requires, the term "Company," as used herein,
includes Timberland Growth Corporation and its consolidated subsidiaries,
including Timberland Growth Limited Partnership, a Delaware limited partnership
(the "Partnership"). After giving effect to the Offering and related
transactions, the Company will own an approximately 42.9% interest in the
Partnership, as the sole general partner. All references to the Company as a
real estate investment trust ("REIT") assume that the Company will qualify as a
REIT beginning with the tax year ending December 31, 1998. References to the
"Initial Timberlands" are to the timberlands that the Company will acquire from
Potlatch Corporation ("Potlatch") and Anderson-Tully Company ("ATCO") in the
Formation Transactions, consisting of approximately 824,000 fee acres (which
includes approximately 44,000 acres of roads and other non-productive acreage)
and approximately 14,000 leased acres. See "Glossary" for the definitions of
certain additional terms used in this Prospectus.
THE COMPANY
The Company is the first publicly traded REIT primarily dedicated to the
ownership, management and acquisition of timberlands. The Company is one of the
largest private owners of softwood timberlands in Arkansas and of high quality
hardwood timberlands in North America. The Initial Timberlands, which are
located primarily in Arkansas and Mississippi, include approximately 364,000
fee acres of softwood timberlands and approximately 460,000 fee acres of
hardwood timberlands, and represent a consolidation of Potlatch's southeastern
timberlands and ATCO's timberlands into a REIT structure. One of the Company's
principal business strategies is to grow through acquisitions of additional
timberlands. See "--The Formation Transactions" and "--Business Strategy"
below.
The Company's timberlands contain an estimated total merchantable timber
volume of approximately 2.9 billion board feet ("BBF") of sawtimber and 24.1
million tons of pulpwood. The Company's softwood holdings consist primarily of
loblolly pine, and its hardwood lands contain high-value species such as red
oak and ash, as well as other hardwoods such as cottonwood, hackberry, sweet
gum and pecan. The Company's customers, which will initially consist only of
Potlatch, will convert the softwood logs harvested from the Company's
timberlands into lumber, primarily for use in residential home construction,
remodeling and repair and general industrial applications, as well as pulp for
use in paper products. Hardwoods from the Company's lands will generally be
converted into furniture-grade lumber, veneer and solid flooring, architectural
moldings and cabinets, as well as pulp. Potlatch will be required to purchase
all of the timber to be harvested from the Initial Timberlands pursuant to a
long-term purchase agreement at prices designed to reflect fair market value on
a stumpage basis. See "--The Timber Purchase Agreement" below.
The ownership, management and operation of the Company's timberlands will be
conducted solely through the Partnership, a Delaware limited partnership in
which the Company will initially hold an approximately 42.9% interest as the
sole general partner and Potlatch will initially hold an approximately 57.1%
interest as a limited partner. See "The Formation Transactions" and "The
Partnership Agreement."
6
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The Company intends to pay regular quarterly distributions, initially at an
annual rate of $1.42 per share, commencing with a pro rated distribution for
the quarter ending June 30, 1998. The Company anticipates that substantially
all of its initial distributions to stockholders will be characterized as
capital gain for federal income tax purposes. See "Distribution Policy" and
"Certain Federal Income Tax Considerations--Taxation of the Company--Income
Tests."
In addition to its fee timberlands, the Company also leases approximately
14,000 acres of timberlands in Arkansas and owns approximately 8,000 acres of
farmland and interests in six commercial real estate properties. The Company's
principal executive offices are currently located at 1242 North Second Street,
Memphis, Tennessee 38101, and its telephone number is (901) 576-1400.
BUSINESS STRATEGY
The Company's primary objective is to maximize long-term cash flow per share
by pursuing the following strategies:
. Focusing on timberland ownership;
. Aggressively pursuing attractive acquisitions;
. Managing its timberlands to improve their long-term sustainable yield;
and
. Practicing sound environmental stewardship.
FOCUSING ON TIMBERLAND OWNERSHIP. The Company plans to invest primarily in
timberlands. The Company believes that timberland is a unique and attractive
asset, due to the renewable nature of timber resources, timber's long-term
history of price appreciation in excess of inflation and the continuing
tightening of domestic timber supplies relative to anticipated demand. In
addition, by owning timberlands rather than conversion facilities, the Company
will not be directly exposed to certain risks typically encountered by
integrated forest products companies, such as potential mill overcapacity,
higher capital and maintenance costs and potential shortages of wood fiber. The
Company also believes that timber prices generally have been less volatile than
wood product prices.
AGGRESSIVELY PURSUING ATTRACTIVE ACQUISITIONS. Growth through acquisitions is
an integral part of the Company's business strategy. The Company believes that
there are many potential opportunities to acquire additional timberlands.
Timberland ownership in the United States is highly fragmented, with large
numbers of commercial owners and more than one-half million private non-
industry owners of more than 100 acres of timberland. In the southeastern
United States, where the Company's operations are currently concentrated, non-
government owners hold a majority of all timberlands. The Company believes that
it will enjoy a competitive advantage in competing for acquisition
opportunities, in part due to its ability to offer many potential sellers both
enhanced liquidity and favorable tax treatment through the exchange of
interests in the Partnership ("Partnership Units") for timberlands. See "--
Competitive Strengths" below. The critical elements of the Company's
acquisition strategy include: (i) identifying undervalued timberlands
throughout North America, including those that are likely to benefit from the
application of sophisticated resource management techniques; (ii) pursuing
timberlands within the Company's existing and future operating regions that
offer potential operational synergies; and (iii) pursuing strategic alliances
with operators of conversion facilities in North America, including Potlatch,
that permit the Company to participate in acquisitions of timberlands that
include or are vertically integrated with converting facilities.
MANAGING TIMBERLANDS TO IMPROVE LONG-TERM SUSTAINABLE YIELD. The Company
plans to manage its timberlands in a manner designed to optimize the balance
among current cash flow, timber growth and prudent environmental management, in
order to achieve increasing levels of sustainable yield. The Company believes
that opportunities exist to enhance its lands' productivity and yield through
7
<PAGE>
intensive silvicultural management on a species- and site-specific basis. The
Company intends to continue to manage its timberlands to maximize sustainable
yield over the long term, although, with Potlatch's concurrence with respect to
lands subject to the Timber Purchase Agreement (as defined below), the Company
may choose to harvest timber from time to time at levels above its then-current
estimate of sustainability for various reasons, including to improve its lands'
long-term productivity.
PRACTICING SOUND ENVIRONMENTAL STEWARDSHIP. The Company pursues a program of
environmental stewardship and active involvement in federal, state and local
policymaking to maximize its assets' long-term value. Among other things, the
Company intends to manage its lands in a manner consistent with the principles
set forth in the Sustainable Forest Initiative ("SFI"), a program sponsored by
the American Forest & Paper Association which prescribes minimum levels of
reforestation and other "best management practices." See "Business--Federal and
State Regulation--Background and Approach."
COMPETITIVE STRENGTHS
Management believes that the Company possesses several competitive strengths
that will enable it to execute its business strategy effectively, including:
.Strategically located, highly productive timberlands;
.High quality timber;
.An experienced senior management team and Board of Directors;
.A strong capacity to pursue acquisitions of timberlands;
.A long-term purchase commitment from Potlatch; and
.A diversified species mix.
STRATEGICALLY LOCATED, HIGHLY PRODUCTIVE TIMBERLANDS. The Initial Timberlands
are located in close proximity to numerous conversion facilities operated by
Potlatch and others. In addition, the Company's lands are generally well
consolidated into large blocks, which permits more efficient management,
harvesting and transportation of timber. The Company's timberlands are also
highly productive. In particular, the hardwood lands acquired from ATCO benefit
from excellent growing conditions, resulting in annual growth exceeding 230
board feet ("BF") per acre, which is approximately three times greater than
recent averages on all hardwood timberlands available for commercial harvesting
in ATCO's operating region, based on United States Forest Service ("USFS")
data.
HIGH QUALITY TIMBER. The Company's lands contain substantial inventories of
high quality softwood and hardwood timber. In particular, the Company believes
that the lands acquired from ATCO are among the highest quality hardwood
forests in North America. The Company estimates that over 40% of ATCO's
hardwood sawtimber is USFS #1 grade, which is more than four times greater than
recent averages on all hardwood timberlands available for commercial harvesting
in ATCO's operating region, based on USFS data.
EXPERIENCED SENIOR MANAGEMENT TEAM AND BOARD OF DIRECTORS. The Company's
senior management team has an average of more than 15 years in the industry,
including extensive experience in the management and acquisition of
timberlands. The Company's Board of Directors includes members with extensive
experience in real estate, investments and the management of timberland assets.
None of the Company's senior management will be employees of or otherwise
affiliated with Potlatch, and a majority of the Company's Board of Directors
will not be employees of or otherwise affiliated with Potlatch.
STRONG CAPACITY TO PURSUE ACQUISITIONS OF TIMBERLANDS. As the first publicly
traded timber REIT, the Company believes that it will be well positioned to
acquire timberlands due to (i) its ability to offer many potential sellers both
enhanced liquidity and favorable tax treatment through the exchange
8
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of Partnership Units for timberlands (which will permit tax deferral for many
sellers), (ii) its advantage over certain competing acquirers due to its
ability to focus on pre-tax cash flow returns as opposed to after-tax earnings,
and (iii) its ability to provide capital gains treatment on substantially all
initial stockholder distributions. The Company's expertise in both softwoods
and hardwoods should also facilitate acquisitions. For example, the Company
believes that its expertise in hardwoods management, gained through ATCO's
focus on hardwoods, gives the Company a strong capability to analyze, effect
and integrate other hardwood purchases.
LONG-TERM PURCHASE COMMITMENT FROM POTLATCH. The Company's long-term timber
purchase agreement with Potlatch (the "Timber Purchase Agreement") creates an
assured level of demand for the Company's timber from a major forest products
company without associated marketing expenses. The agreement provides for
prices designed to reflect fair market value on a stumpage basis. See "--The
Timber Purchase Agreement" below.
DIVERSIFIED SPECIES MIX. The Company's holdings are well diversified by
timber type and species. The Company's high quality hardwoods are utilized in
different markets than its softwoods, and the Company believes that these two
categories experience different market dynamics. Accordingly, the Company
believes it should experience somewhat reduced volatility in its operating
results and cash flow than it would experience with a less diverse species mix.
RELATIONSHIP WITH POTLATCH
Through its ownership of the Company's sole share of Special Voting Stock,
Potlatch will have voting power equal to the number of votes to which Potlatch
would be entitled if all of its interests in the Partnership were exchanged for
shares of Common Stock, which will initially represent approximately 57.1% of
the Company's voting power. A majority of the Company's directors, however,
will not be employed by or affiliated with Potlatch. Potlatch will purchase all
of the timber to be harvested from the Company's Initial Timberlands pursuant
to the Timber Purchase Agreement, as described below, and Potlatch has also
committed, at the Company's option, to provide certain administrative services
to the Company for up to five years following the Offering, at a price equal to
Potlatch's cost. Potlatch has also agreed to give the Company a right of first
opportunity to pursue certain timberland purchases, as long as Potlatch
beneficially owns at least 20% of the Company's voting power. So long as the
Company's right of first opportunity remains in effect, Potlatch may elect to
have the Timber Purchase Agreement cover certain timberlands that may be
acquired by the Partnership in the future, as described below.
THE TIMBER PURCHASE AGREEMENT
Historically, the Initial Timberlands have been the principal source of raw
material for Potlatch's converting facilities in the southeastern United
States, including the facilities that Potlatch will acquire in the Formation
Transactions. Under the Timber Purchase Agreement, Potlatch will be required to
purchase and harvest all of the timber from the Initial Timberlands designated
in the Company's harvest plans at prices designed to reflect fair market value
on a stumpage basis. The Timber Purchase Agreement has an initial term of 20
years and may be extended by either party for up to 18 successive ten-year
periods. Consistent with the Company's strategy of managing its timberlands on
a sustainable basis over the long term, the Timber Purchase Agreement requires
the Company to continue to manage the timberlands covered by the agreement in
accordance with prudent management practices and in a manner consistent with
sustainable forestry principles. The agreement covers all of the Initial
Timberlands, and, so long as Potlatch continues to own beneficially at least
20% of the Company's voting power, certain additional timberlands that may be
acquired by the Company in the future within defined geographic areas (or that
Potlatch is required to offer to the Company in connection with Potlatch's
acquisition of a business consisting primarily of non-timberland assets) may
also become subject to the agreement at Potlatch's election. See "Business--
Sales and Markets--The Timber Purchase Agreement."
9
<PAGE>
SUMMARY RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters discussed under "Risk Factors" in this Prospectus before deciding
whether to invest in the shares of Common Stock offered hereby. Such risk
factors include:
. The volatility of timber prices caused by changes in timber supply and
demand will cause the Company's operating results and cash flow to
fluctuate and may have an impact on cash distributions;
. Potlatch's initial control of the Company and associated potential
conflicts of interest, including the Company's dependence on Potlatch's
payments under the Timber Purchase Agreement, which will initially
account for substantially all of the Company's revenues, and the absence
of arm's-length negotiations with respect to the terms of the Timber
Purchase Agreement and the valuation of the timberlands contributed by
Potlatch;
. Limitations on the Company's ability to sell certain timberlands, borrow
funds in certain circumstances and engage in certain transactions without
Potlatch's consent;
. The risk of uninsured losses from fire and other causes;
. Seasonal fluctuations in operating results and cash flow;
. Stringent environmental and endangered species regulations;
. Uncertainties and risks associated with the Company's strategy of growth
through acquisitions, including the potential unavailability of external
financing to fund acquisitions;
. Anticipated differences between the Company's share of cash distributed
by the Partnership and the amount of taxable income allocated to it by
the Partnership;
. Potential limitations on distributions to stockholders;
. Taxation of the Company as a corporation if it fails to qualify as a
REIT;
. The anti-takeover effect of (i) limiting actual or constructive ownership
of shares of Common Stock by a single person to 9.8% of the outstanding
shares of Common Stock (subject to certain exceptions) to comply with
certain requirements related to qualification of the Company as a REIT
and to otherwise protect the Company from the consequences of a
concentration of ownership among its stockholders and (ii) certain other
provisions of the organizational documents of the Company and the
Partnership, and of Delaware law, any of which may have the effect of
delaying or preventing a transaction or change in control of the Company
that might involve a premium price for the shares of Common Stock or
might otherwise be in the best interests of the Company's stockholders;
. The Company's lack of operating history as an independent company;
. Potential contingent liabilities and the absence of title insurance;
. Limitations on accounting income due, in part, to the allocation to
Potlatch of all of the "built-in" accounting gain associated with the
timberlands contributed by Potlatch;
. The lack of a prior market for the Common Stock and the potential impact
of changes in timber prices, interest rate fluctuations and other factors
on the trading price of the Common Stock;
. The immediate dilution to investors in the Offering of $10.64 per share
in the net tangible book value per share of Common Stock;
. Uncertainties associated with inventory estimates;
. The potential adverse effect of shares available for future sale on the
price of the Common Stock;
. The ability of the Company to make changes in its investment, financing
and other policies without the approval of its stockholders;
. Other tax-related risks, including issues under the Foreign Investment in
Real Property Tax Act ("FIRPTA") for non-United States investors; and
. Special considerations for fiduciaries of pension, profit-sharing,
employee benefit and retirement plans and IRAs.
10
<PAGE>
THE FORMATION TRANSACTIONS
Substantially contemporaneously with the consummation of the Offering, the
Company, ATCO and Potlatch will engage in several transactions (the "Formation
Transactions"), which are designed to consolidate the ownership of the Initial
Timberlands in the Partnership, transfer most of ATCO's converting assets to
Potlatch, facilitate the Offering and enable the Company to qualify as a REIT
for federal income tax purposes commencing with the year ending December 31,
1998. The Formation Transactions include (i) Potlatch's contribution of its
southeastern timberlands (the "Potlatch Southern Timberlands") to the
Partnership in exchange for 20,000,000 Partnership Units; (ii) the Company's
acquisition of ATCO through a merger funded in part by the net proceeds of the
Offering; (iii) the Company's contribution to the Partnership of the
timberlands and certain other real estate assets formerly owned by ATCO
(collectively, the "ATCO Timberlands") in exchange for the issuance to the
Company of a general partnership interest equivalent to 15,000,000 Partnership
Units; (iv) Potlatch's acquisition of the sole share of Special Voting Stock
from the Company; and (v) the execution of the Timber Purchase Agreement by
Potlatch and the Partnership. In connection with these transactions, Potlatch
will purchase substantially all of ATCO's timber harvesting, converting and
transportation assets from ATCO and certain related entities.
As a result of the Formation Transactions, (i) the Company will own a 42.9%
interest in the Partnership as the sole general partner of the Partnership,
(ii) Potlatch will own a 57.1% interest in the Partnership as the initial
limited partner, (iii) Potlatch will own the sole share of Special Voting
Stock, initially entitling Potlatch to 57.1% of the total voting power of the
Company, (iv) the Partnership will own the Initial Timberlands, and (v) the
Partnership and Potlatch will be parties to the Timber Purchase Agreement. The
following chart illustrates the ownership structure of the Company and the
Partnership after the completion of the Formation Transactions and the
Offering:
[CHART APPEARS HERE]
11
<PAGE>
DISTRIBUTIONS
The Company intends to pay regular quarterly distributions to its
stockholders. The Board of Directors, in its sole discretion, will determine
the actual distribution rate based on the Company's results of operations, cash
flow and capital requirements, economic conditions, tax considerations
(including those related to maintaining REIT status) and other factors.
The Company's first distribution, for the period ending June 30, 1998, is
anticipated to equal a pro rated share of the anticipated initial quarterly
distribution of $0.355 per share of Common Stock, which, on an annualized
basis, will represent a distribution rate of $1.42 per share of Common Stock,
or 7.1% of the initial public offering price (assuming an initial public
offering price of $20.00 per share). Substantially all of the Company's initial
stockholder distributions are expected to constitute capital gain
distributions, due to provisions in the Internal Revenue Code of 1986, as
amended (the "Code"), treating as long-term capital gains certain dispositions
of standing timber which have been held (or deemed held under the Code) for
more than one year, pursuant to a timber cutting agreement where the owner of
such timber retains an economic interest in such timber. If the Company
harvests timber where the one-year holding period described above is not met,
however, income from such disposition would constitute ordinary income. See
"Certain Federal Income Tax Considerations--Taxation of the Company--Income
Tests." As the ATCO Timberlands will have a low tax basis when contributed to
the Partnership, the Company anticipates that only a small percentage, if any,
of its initial distributions to stockholders will constitute a return of
capital. The Company intends to maintain a distribution rate approximately
equal to the initial quarterly distribution rate through the quarter ending
June 30, 1999 unless actual results of operations, cash flow, economic
conditions or other factors differ from the assumptions used in calculating the
initial estimated distribution rate. See "Distribution Policy" for estimated
Funds from Operations and Cash Available for Distribution (as defined herein)
and related assumptions. Non-United States investors are advised to consider
the United States federal income and withholding tax consequences of an
investment in the Company under FIRPTA. See "Certain Federal Income Tax
Considerations--Taxation of Non-U.S. Stockholders of the Company--Distributions
by the Company."
Unlike most existing REITs, the Company anticipates that its operations will
generate net capital gains and net ordinary losses, resulting in an overall net
capital gain. Accordingly, the Company does not anticipate that the requirement
that a REIT distribute 95% of its net taxable income (excluding net capital
gains) will require the Company to distribute any material amounts of cash to
remain qualified as a REIT. Notwithstanding the lack of any federal income tax
requirement that it do so, the Company plans to make certain distributions to
its stockholders, generally as a capital gain distribution. If, after giving
effect to the Company's distributions for a tax year, the Company has not
distributed 100% of its capital gains, then the Company will be required to pay
tax on the undistributed portion of such taxable income at regular federal
corporate tax rates (currently 35%). In such cases, the Company anticipates
that it would generally make an election pursuant to which (i) any federal
income tax paid by the Company on its retained capital gains would be treated
as having been paid on behalf of the Company's stockholders and (ii) such
retained capital gains would be treated as having been distributed to the
Company's stockholders. Although required to take their share of such gains
into income, stockholders (including tax-exempt U.S. stockholders) may file a
claim for refund if their proportionate share of the taxes paid by the Company
exceeds their actual tax liability (if any). See "Distribution Policy" and
"Certain Federal Income Tax Considerations--Taxation of Taxable U.S.
Stockholders--Distributions by the Company."
12
<PAGE>
PRO FORMA SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table sets forth pro forma summary financial information for
the Company. The pro forma statement of operations data and other financial
data are presented as if the Formation Transactions and the Offering (assuming
an initial public offering price of $20.00 per share) had occurred on January
1, 1997, and the pro forma balance sheet data are presented as if such
transactions occurred as of December 31, 1997. Accordingly, the following pro
forma summary financial information incorporates certain assumptions that are
included in the Pro Forma Condensed Consolidated Financial Information
contained elsewhere in this Prospectus. Among other things, the following pro
forma summary financial information reflects the substantial depletion (a non-
cash accounting expense) that will be recorded in the Company's financial
statements as a result of the acquisition of the ATCO Timberlands. The pro
forma summary financial information is unaudited and does not purport to
represent what the Company's financial position and results of operations would
actually have been had the Formation Transactions and the Offering, in fact,
occurred as of the dates presented, or to project the financial position or
results of operations of the Company for future periods. In particular, the pro
forma summary financial information does not reflect anticipated changes in
harvest levels. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company" for a discussion of these
anticipated changes and certain other factors which may cause the Company's
future financial position and results of operations to differ from those
reflected in the pro forma summary financial information. The following pro
forma summary financial information should also be read in conjunction with
"Pro Forma Condensed Consolidated Financial Information" and "The Formation
Transactions."
13
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DEC. 31, 1997(1)
--------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 69,957
Depletion, depreciation and amortization.................. 22,789
Operating expenses........................................ 7,511
General and administrative expenses....................... 4,000
Earnings from operations.................................. 35,657
Minority interest in Partnership income................... (30,042)
Net earnings.............................................. 2,658
<CAPTION>
PRO FORMA
DECEMBER 31, 1997(1)
--------------------
<S> <C>
BALANCE SHEET DATA:
Total assets.............................................. $ 488,072
Long-term debt............................................ 132,106
Minority interest......................................... 51,491
Stockholders' equity...................................... 276,002
<CAPTION>
PRO FORMA
YEAR ENDED
DEC. 31, 1997(1)
--------------------
<S> <C>
OTHER FINANCIAL DATA:
Net earnings.............................................. $ 2,658
Add:
Depletion and real estate-related depreciation and
amortization........................................... 22,474
Minority interest in Partnership income................. 30,042
Income tax benefit ..................................... (238)
Income taxes payable due to Arkansas nonconformity...... (949)
---------
Funds from Operations (2)................................. 53,987
Add:
Non-real estate-related depreciation and amortization... 315
Subtract:
Capital expenditures.................................... (2,219)
Principal payments on indebtedness...................... (481)
---------
Cash Available for Distribution before income taxes on
retained capital gains(3)................................ $ 51,602
=========
Company's share of Cash Available for Distribution before
income taxes on retained capital gains................... $ 22,115
Subtract:
Income taxes on retained capital gains (4).............. --
---------
Company's share of Cash Available for Distribution after
income taxes on retained capital gains................... $ 22,115
=========
Funds from Operations per share(5)........................ $ 1.54
=========
</TABLE>
- --------
(1) Gives effect to the Formation Transactions and the sale by the Company of
15,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $20.00 per share and the application of the
estimated net proceeds therefrom. See "Use of Proceeds," "The Formation
Transactions" and "Pro Forma Condensed Consolidated Financial Information."
(2) The Company believes that Funds from Operations is helpful to investors as
a measure of the performance of an equity REIT because, along with cash
flow from operating activities, investing
14
<PAGE>
activities and financing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt and
make capital expenditures. The Company calculates Funds from Operations as
net earnings (computed in accordance with generally accepted accounting
principles ("GAAP")) excluding significant non-recurring items, gains (or
losses) from debt restructuring and major sales of property, plus minority
interest, income taxes paid on retained capital gains, depletion and real
estate-related depreciation and amortization (including amortization of
logging roads) and after adjustments for unconsolidated partnerships and
joint ventures, less any preferred stock dividends. Depletion is a non-cash
expense representing amortization of the costs associated with acquiring or
establishing timber stands. The Company believes that it is appropriate to
include depletion in calculating Funds from Operations in part because
depletion is analogous to the real estate-related depreciation and
amortization typically included in Funds from Operations by non-timber
REITs. The definition of Funds from Operations approved by the National
Association of Real Estate Investment Trusts ("NAREIT") includes real
estate-related depreciation and amortization but does not specifically
address timber-related depletion. In addition, as described in footnote (4)
below and under "Distribution Policy" below, the Company includes any
income taxes paid on retained capital gains in its calculation of Funds
from Operations. The definition of Funds from Operations approved by NAREIT
does not include such taxes. Due to the Company's inclusion of depletion
and any taxes paid on retained capital gains in its calculation, the
Company's Funds from Operations will not be directly comparable to Funds
from Operations reported by other REITs, including REITs that define the
term using the definition of Funds from Operations approved by NAREIT.
Funds from Operations should not be considered as an alternative to net
earnings (computed in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
(computed in accordance with GAAP) as a measure of the Company's liquidity,
nor is it necessarily indicative of funds available to fund the Company's
cash needs, including its ability to make distributions.
(3) Cash Available for Distribution means Funds from Operations plus non-real
estate-related depreciation and amortization, minus capital expenditures
and principal payments on indebtedness. Cash Available for Distribution is
not intended to be a projection or forecast of the Company's results of
operations or its liquidity, nor is the methodology upon which such
adjustments were made necessarily intended to be a basis for determining
future distributions.
(4) The Company may elect not to distribute all of its capital gains. If the
Company does not distribute all of its capital gains, it expects that it
would generally make an election pursuant to which (i) the federal income
taxes that it pays on its retained capital gains (at regular federal
corporate rates) will be treated for income tax purposes as having been
paid by the Company's stockholders and (ii) the Company's retained capital
gains will be treated as having been distributed to the Company's
stockholders. As a result of such election, the Company's stockholders
will be required to take their proportionate share of such retained
capital gains into income, but will be entitled to claim a tax credit
equal to their proportionate share of such taxes paid by the Company, and
their basis in the Company's stock will be increased by their
proportionate share of the capital gains (net of such tax credit) retained
by the Company. To the extent a stockholder's share of the taxes paid by
the Company exceeds such stockholder's tax liability on the capital gains
deemed distributed to such stockholder, such stockholder (including a tax-
exempt U.S. stockholder) may file a claim for refund for such excess.
Income taxes on retained capital gains have been added to net earnings in
determining Funds from Operations and Cash Available for Distribution
before income taxes on retained capital gains. The adjustment has been
made both because income taxes paid by the Company on retained capital
gains will be a deemed distribution to stockholders and because the
Company is expected to determine the amount, if any, of capital gains to
retain after calculating Funds from Operations before income taxes paid on
retained capital gains.
(5) Funds from Operations divided by the 35,000,000 shares of Common Stock to
be outstanding upon consummation of the Offering (assuming the exchange of
all Partnership Units held by Potlatch for Common Stock).
15
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company...................... 15,000,000 shares
Common Stock to be outstanding
after the Offering........... 35,000,000 shares(1)
Use of proceeds............... To fund a majority of the purchase price for the
acquisition of ATCO
Proposed NYSE symbol.......... TGC
</TABLE>
- --------
(1) Includes 20,000,000 shares of Common Stock issuable under certain
circumstances in exchange for Partnership Units held by Potlatch. Excludes
3,000,000 shares of Common Stock reserved for issuance under the Company's
1998 Stock Incentive Plan. See "Management--Stock Incentive Plan" and "The
Partnership Agreement."
TAX STATUS
The Company plans to elect to be taxed as a REIT under the Code, commencing
with its taxable year ending December 31, 1998. Pillsbury Madison & Sutro LLP
has acted as counsel to the Company in connection with the Offering, the
acquisition of ATCO and the Company's election to be taxed as a REIT. Skadden,
Arps, Slate, Meagher & Flom LLP has acted as special tax counsel to ATCO in
connection with ATCO's election to be taxed as a REIT commencing with its
taxable year beginning January 1, 1998. In the opinion of Pillsbury Madison &
Sutro LLP, commencing with the Company's taxable year ending December 31, 1998,
the Company will be organized in conformity with the requirements for
qualification as a REIT, and the Company's proposed method of operation will
enable it to meet the requirements for qualification and taxation as a REIT
under the Code provided that (i) the elections and other procedural steps
described under "Certain Federal Income Tax Considerations" are completed in a
timely fashion and (ii) the Company and the Partnership operate in accordance
with various assumptions and factual representations made by the Company and
the Partnership concerning their organization, business, properties and
operations (and the organization, business, properties and operations of ATCO
prior to its acquisition by the Company). In addition, in providing its
opinion, Pillsbury Madison & Sutro LLP is relying upon an opinion of Skadden,
Arps, Slate, Meagher & Flom LLP as to the qualification of ATCO as a REIT. In
providing its opinion, Skadden, Arps, Slate, Meagher & Flom LLP is relying upon
certain representations received from ATCO. As a REIT, the Company generally
will not be subject to federal income taxes on net income that it distributes
to its stockholders. See "Distribution Policy" for a discussion of this
requirement in the specific circumstances applicable to the Company. REITs are
subject to a number of organizational and operational requirements. Even if the
Company continues to qualify for taxation as a REIT, the Company may be subject
to certain federal income taxes and certain state and local taxes on its income
and property. See "Risk Factors--Real Estate Investment Trust and Partnership
Qualification," "Risk Factors--Other Tax Risks" and "Certain Federal Income Tax
Considerations."
16
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective purchasers of the Common Stock should carefully
consider the following risk factors, as well as the other information
presented in this Prospectus, in evaluating an investment in the Common Stock.
Each of these factors could adversely affect the Company's results of
operations and ability to make anticipated distributions to stockholders. All
statements other than statements of historical fact included in this
Prospectus, including, without limitation, statements regarding the Company's
business strategy, estimated stockholder distributions, harvest plans and the
other estimates, plans, intentions and objectives of management of the
Company, are forward-looking statements that involve risks and uncertainties.
Important factors that could cause actual results to differ materially from
the Company's estimates, plans, intentions and objectives are disclosed below
and elsewhere in this Prospectus.
VOLATILITY OF TIMBER PRICES
The Company's results of operations and cash flow are, and will continue to
be, affected by the volatile nature of timber prices. The demand for and
supply of standing timber have been and are expected to be subject to cyclical
and other fluctuations, which often result in significant variations in timber
prices. The demand for softwood sawtimber is primarily affected by the level
of new residential construction activity and, to a lesser extent, home repair
and remodeling activity and other industrial uses of wood fiber, which are
subject to fluctuations due to changes in economic conditions, interest rates,
population growth, weather conditions and other factors. The demand for
hardwood sawtimber depends on the markets for furniture and other products
made from hardwoods, as well as the foregoing factors. The demand for
pulpwoods is also cyclical, and tends to fluctuate based on changes in the
demand for paper, tissue and similar products, as well as conversion capacity
in the relevant region. Reductions in residential construction activity and
other events reducing the demand for standing timber could have a material
adverse effect on the Company's results of operations and cash flow.
The Company's results of operations and cash flow will also be affected by
changes in timber availability at the local and national level. Increases in
timber supply could adversely affect the prices that the Company receives for
timber. The Company's operations are currently concentrated in the
southeastern United States, where most timberlands are privately owned.
Historically, increases in timber prices have often resulted in substantial
increases in harvesting on private timberlands, including lands not previously
made available for commercial timber operations, causing a short-term increase
in supply that has tended to moderate price increases. In addition, any
substantial increase in sales of timber from publicly-owned lands could
significantly reduce timber prices, which could have a material adverse effect
on the Company. In the last decade, environmental concerns and other factors
have limited timber sales by government agencies, which historically have been
major suppliers of timber to the United States forest products industry,
particularly in the West. Any reversal of policy that substantially increases
public timber sales could materially adversely affect the Company's results of
operations and cash flow, as the increased availability of timber in the West
and other regions with significant public timber ownership would depress
prices for timber and converted wood products in other regions, including the
Southeast. More locally, timber supplies can fluctuate depending upon factors
such as changes in weather conditions and harvest strategies of local forest
products industry participants, as well as occasionally high timber salvage
efforts due to unusual pest infestations or fires. Furthermore, increased
imports of wood products 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 that the Company receives for its timber.
Over the longer term, the development and application of silvicultural
techniques and genetic improvements on forest products industry lands have
also tended to expand the overall supply of timber.
17
<PAGE>
Due to the foregoing factors, timber prices have historically been volatile
and frequently experience significant monthly and quarterly fluctuations. As
an example, southeastern pine sawtimber prices fluctuated throughout the 1980s
and 1990s, including a decline of 15% from 1984 to 1985, an increase of 29%
from 1994 to 1995, a decline of 11% from 1995 to 1996 and an increase of 23%
from 1996 to 1997, according to a trade publication. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company." The Company's results of operations and cash flow will be
substantially dependent upon the market price for timber in its operating
regions and, accordingly, are expected to fluctuate.
CONFLICTS OF INTEREST
The Formation Transactions, and future transactions involving the Company
and Potlatch or its affiliates, may be subject to conflicts of interest. The
following description summarizes certain of these conflicts of interest and
the relationships through which they may tend to arise. Because of Potlatch's
initial control of the Company and the other aspects of their relationship
described below, there can be no assurance that the Company will be able to
achieve the same results in its dealings with Potlatch that it might achieve
in the absence of such relationships.
CONTROL BY POTLATCH
Upon completion of the Offering, the Company will have Common Stock, which
is entitled to one vote per share, and Special Voting Stock, which is entitled
to a number of votes per share equal to the number of shares of Common Stock
into which the Partnership Units then held by the stockholder could be
exchanged. Potlatch will own the Company's sole share of Special Voting Stock
after the Offering, which will initially entitle Potlatch to 57.1% of the
Company's voting power. Potlatch will therefore be able to control all matters
requiring approval by the stockholders of the Company, including the election
of all of the directors (a majority of whom will not be employed by or
otherwise affiliated with Potlatch) and certain business combinations.
Potlatch, as a limited partner of the Partnership, will also have the right
under certain circumstances to exchange its Partnership Units for cash or, in
the Company's discretion, shares of the Company's Common Stock. See "The
Partnership Agreement," "Certain Relationships and Transactions" and
"Principal Stockholders of the Company and Partners of the Partnership."
Under the Partnership's Amended and Restated Agreement of Limited
Partnership (the "Partnership Agreement"), the holders of at least a majority
of the limited partnership interests must approve certain mergers and
consolidations of the Company, certain amendments to the Partnership Agreement
and certain other matters. Potlatch will initially own a 57.1% interest in the
Partnership and thus will initially be able to control any such decision. See
"--Conflicting Interests in Harvests of Timber and Sales of Timberlands" and
"The Partnership Agreement."
ABSENCE OF ARM'S-LENGTH NEGOTIATIONS OR APPRAISALS IN FORMATION TRANSACTIONS
The valuation of the Company has been determined based upon the factors
discussed under "Underwriting" rather than an asset-by-asset valuation based
on historical cost or current market value. This methodology has been used
because management believes that it is appropriate to value the Company as an
ongoing business rather than with a view to values that could be obtained in a
liquidation of the Company or its individual assets. There have been no arm's-
length negotiations or third-party appraisals for the purpose of determining
the value of the timberlands contributed by Potlatch to the Partnership upon
its formation. There can be no assurance that a similar valuation would have
been determined, had the contribution been negotiated on an arm's-length
basis. Furthermore, there were no arm's-length negotiations with respect to
the other terms of the Formation Transactions involving Potlatch, in
particular with respect to Potlatch's representations, warranties and
indemnification obligations, and the terms of the Timber Purchase Agreement.
18
<PAGE>
RISKS ASSOCIATED WITH TIMBER PURCHASE AGREEMENT
Initially, the Company will receive substantially all of its revenues from
Potlatch, through Potlatch's purchases of timber under the Timber Purchase
Agreement. The Timber Purchase Agreement has an initial term of 20 years, may
be extended by either party for up to 18 successive ten-year periods, and is
generally not terminable by either party except under certain limited
circumstances. Any failure or delay by Potlatch to make payments to the
Company under the agreement may have a materially adverse effect on the
Company and its ability to make distributions to stockholders. Certain
additional timberlands that may be acquired by the Company in the future may
also become subject to the agreement at Potlatch's election. Prices payable
under the agreement will be based upon available market data and other factors
deemed relevant. Initially, prices are generally expected to take into account
prices paid in (i) arm's-length transactions for comparable logs delivered to
the mill, less Potlatch's reasonable costs of logging and transporting the
logs to the mills where they are to be processed, and (ii) stumpage sales.
Accordingly, the prices payable by Potlatch for timber may be affected by
Potlatch's reasonable logging and transportation costs. The potential exists
for disagreements and conflicts of interest with respect to the negotiation
and adjustment of prices under the Timber Purchase Agreement and decisions
concerning the designation of timber to be harvested and the timing of
harvests. Because Potlatch will initially have voting control of the Company,
it may be able to influence the Company's decisions in the foregoing areas.
Although a committee consisting of members of the Board of Directors not
employed by the Company or employed by or otherwise affiliated with Potlatch
will periodically review the implementation of the Timber Purchase Agreement,
including the procedures used to determine the prices paid by Potlatch, no
assurance can be given that the prices payable by Potlatch will be equivalent
to fair market value stumpage prices, or that such procedures will be
identical to those that would be established in the absence of Potlatch's
influence over the Company.
CONFLICTS OF INTEREST IN ACQUISITIONS BY THE COMPANY
Potlatch may not be inclined to permit the Company to pursue an acquisition
made in exchange for the Company's Common Stock, Partnership Units or other
equity securities, because the issuance of such securities would reduce
Potlatch's voting control over the Company. Potlatch may also have different
incentives than the Company with respect to the financial and tax
characteristics of acquired properties, and may resist acquisitions that would
be beneficial to the Company for other reasons. In addition, the Company's
ability to use debt financing to effect acquisitions may be limited due to the
Company's agreement to refrain from taking any action that would cause
Potlatch to breach its debt covenants so long as they apply to the Company.
See "--Risks Associated with Acquisition Strategy" below.
CONFLICTING INTERESTS IN HARVESTS OF TIMBER AND SALES OF TIMBERLANDS
The interests of Potlatch and the Company could differ in connection with
the proposed harvest of timber or a proposed sale of timberlands. As a result
of the Formation Transactions, the Company will acquire ATCO, which will have
unrealized gain for tax purposes in its interests in the timberlands and
timber inventories acquired from ATCO. Potlatch will also have unrealized gain
for tax purposes in its interest in the timberlands and timber inventories
that Potlatch contributed to the Company. The harvest of timber or sale of
timberlands contributed by Potlatch may cause adverse tax consequences to
Potlatch, while the harvest of timber or sale of timberlands contributed by
ATCO may cause adverse tax consequences to the Company since, as a result of
such sales, Potlatch or the Company, as the case may be, may be allocated
taxable gain by the Partnership which may exceed its respective share of the
cash distributed by the Partnership at such time. See "--Potential Differences
Between Taxable Income and Cash Available for Distribution." Potlatch and the
Company may also have differing incentives with respect to the selection of
timber to be harvested or timberlands to be sold, because harvesting or
selling the timberlands contributed to the Partnership by Potlatch will have
different
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financial accounting consequences for Potlatch than harvesting or selling the
ATCO Timberlands. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company--Overview." The Partnership
Agreement and Timber Purchase Agreement prohibit the Company from selling or
pledging any of the Potlatch Southern Timberlands without Potlatch's prior
consent in its sole discretion, subject to limited exceptions. In addition,
the Timber Purchase Agreement can be extended past the initial term of 20
years at Potlatch's election and (subject to limited exceptions) does not
terminate when a tract of the Potlatch Southern Timberlands is sold. This may
diminish the value of such timberland to certain prospective buyers.
POSSIBLE COMPETITION FROM POTLATCH AND ITS AFFILIATES
Potlatch controls approximately 1,037,000 acres of timberlands not being
contributed to the Company, consisting of 672,000 acres of timberland in
Idaho, a 22,000-acre hybrid poplar farm in Oregon and 343,000 acres of
timberland in Minnesota. The Company believes that none of these properties
currently competes directly with any of the Initial Timberlands. However, the
future timber holdings of the Company may compete with Potlatch. In addition,
while Potlatch has given the Company a right of first opportunity, subject to
limited exceptions, to acquire additional timberlands for so long as Potlatch
beneficially owns at least 20% of the Company's voting power, Potlatch and the
Company may be in competition if the Company rejects an opportunity or under
certain other circumstances. The Partnership Agreement does not restrict
Potlatch or its affiliates from competing with the Company or from entering
into long-term supply agreements or cutting contracts with other timber
companies. See "Certain Relationships and Transactions."
RISK OF UNINSURED LOSSES
The volume and value of timber that can be harvested from the Company's
lands, and therefore, its operating results and cash flow, may be limited by
natural disasters such as fire, insect infestation, disease, ice storms,
windstorms, flooding and other weather conditions, and other causes. For
example, the Company's primary softwood species, the loblolly pine, is subject
to fusiform rust, and other pests such as sawflies, southern pine beetles and
pales weevil are also common on the Company's lands. As is typical in the
industry, the Company does not maintain insurance for any loss to its standing
timber from natural disasters or other causes.
SEASONALITY
The Company's operating results and cash flow will fluctuate due to several
seasonal factors. Timber harvesting activities in the Company's softwood
operations are somewhat limited during the three- to four-month Winter rainy
season. Rainfall from November to April also depresses harvest volumes to some
extent in the Company's hardwood operations, due in part to the seasonal rise
in the Mississippi River. The Company's revenues and cash flow will be
significantly reduced during the foregoing periods. Due to these seasonal
limitations, the Company may need to borrow funds to make distributions to
stockholders. There can be no assurance that such funds will be available on
reasonable terms or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company--Historical
Results of Operations of Potlatch Southern Timberlands--Quarterly Results of
Operations" and "--Liquidity and Capital Resources."
REGULATION
The Company's operations are subject to numerous federal, state and local
laws and regulations, including those relating to the environment, endangered
species, the Company's forestry activities, and health and safety. In
particular, the Company anticipates that laws and regulations intended to
protect threatened and endangered species, and other environmental laws and
regulations, will generally
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become increasingly stringent. A number of species indigenous to the Company's
timberlands, such as the red cockaded woodpecker and the bald eagle, have been
and in the future may be protected under the federal Endangered Species Act
and similar state laws. The presence of protected species on or near the
Company's timberlands may restrict timber harvesting, road building and other
activities on its lands. The Company's operations will also be subject to
specialized statutes and regulations governing forestry operations, and to
other environmental laws, some of which impose strict liability. The Company's
lands, particularly its bottomlands along the Mississippi River, may become
subject to laws and regulations designed to protect wetlands, which may in the
future restrict harvesting, road building and other activities. There can be
no assurance that current and future laws and regulations will not cause the
Company to incur significant costs, damages, penalties and liabilities, or
that they will not materially and adversely affect harvesting operations on
the Company's timberlands. See "Business--Regulation."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company's business strategy includes expanding through acquisitions. See
"Business--Business Strategy." No assurance can be given that any acquisition
by the Company will occur, or that any such acquisition will enhance the
Company's results of operations or cash flow. The amount of timberland
available for acquisition at any given time may be limited by various factors,
including price, and the Company will compete for timberland acquisition
opportunities with entities having substantially greater financial resources
than the Company. See "Business--Competition." In addition, the Company may
need to obtain additional financing in order to effect acquisitions. The
Company's ability to obtain debt financing will be limited by (i) certain
covenants in its credit facility, (ii) the Partnership's agreement to refrain
from taking any action that would cause Potlatch to breach its debt covenants
so long as they apply to the Company (generally, so long as Potlatch owns more
than 50% of the Company's voting power or otherwise consolidates the Company
for accounting purposes), and (iii) its inability to effect certain secured
financings without Potlatch's consent. The Company will not be able to prevent
Potlatch from incurring indebtedness or otherwise utilizing most or all of the
available capacity under Potlatch's debt covenants. If Potlatch were to
utilize such capacity, the Company may be prohibited from incurring
indebtedness. There is no assurance that additional financing will be
available to the Company on terms acceptable to the Company (and, with respect
to secured financings and certain other indebtedness as to which Potlatch's
consent is required, to Potlatch). If the Company is unable to acquire
additional timberlands at attractive prices, the Company's ability to grow and
to increase distributions to holders of Common Stock will be adversely
affected.
Any acquisition that the Company consummates will involve numerous risks,
including difficulties in the assimilation of the acquired company or its
timberlands into the Company's operations, assumption of liabilities of which
the Company is unaware at the time of acquisition, potential uncertainties
associated with operating in new markets, potentially dilutive issuances of
equity securities, the possible incurrence of debt, and the possible diversion
of management's attention from other business concerns.
POTENTIAL DIFFERENCES BETWEEN TAXABLE INCOME AND CASH AVAILABLE FOR
DISTRIBUTION
The Company's share of cash distributed from the Partnership may differ from
the amount of taxable income allocated to it by the Partnership. The
difference between the value of the assets contributed to the Partnership by
ATCO and their basis for federal income tax purposes will have to be taken
into account by the Company when the Partnership sells or harvests timber from
the ATCO Timberlands or otherwise disposes of such assets. However, the
Company's share of the cash realized from such transactions will be based on
its percentage ownership of the Partnership. ATCO's tax basis in the assets to
be contributed by ATCO to the Partnership is expected to be approximately 5%
of their value. Accordingly, the Company will generally be allocated more
taxable income upon harvesting of the ATCO Timberlands (or other disposition
of the ATCO assets acquired by the Company) than the
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amount of cash it will be entitled to receive from the Partnership due to such
harvesting or disposition. Similar rules will apply to the timberlands that
Potlatch contributes to the Partnership. In the case of Potlatch's contributed
property, however, the additional taxable income will be allocated to
Potlatch, and as a result the Company will be entitled to more cash from a
disposition of assets contributed by Potlatch than its share of income from
such a disposition. Accordingly, the Company's share of cash distributed from
the Partnership will generally differ from the amount of taxable income
allocated to it by the Partnership.
POTENTIAL LIMITATIONS ON DISTRIBUTIONS
The Company intends to maintain a distribution rate approximately equal to
the initial quarterly distribution rate of $0.355 per share through the
quarter ending June 30, 1999. If actual Cash Available for Distribution falls
short of estimates, the Company may be unable to maintain its proposed initial
distribution rate. The actual amounts of the Company's stockholder
distributions may fluctuate and will depend upon numerous factors, including
timber prices, the timing and amounts of Potlatch's payments under the Timber
Purchase Agreement, required principal and interest payments on the Company's
debt, acquisition costs, issuances of debt and equity securities by the
Company, capital expenditures, adjustments in reserves and other factors, many
of which will be beyond the control of the Company. Unlike many other equity
REITs, which derive substantial portions of their cash flow from leases or
other contracts providing for relatively stable payments, the Company's cash
flow may be subject to significant short-term fluctuations due to the
anticipated volatility of timber prices. See "Distribution Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company." The Company's ability to pay stockholder
distributions may also be affected by the fact that the Company's share of
cash distributed from the Partnership is anticipated to differ from the amount
of taxable income allocated to it by the Partnership. See "--Potential
Differences Between Taxable Income and Cash Available for Distribution." In
addition, Potlatch will be able to prevent the disposition of any of the
Potlatch Southern Timberlands, with only limited exceptions. See "--Conflicts
of Interest." As a result of these and other factors, there can be no
assurance regarding the levels of distributions, if any, to be paid by the
Company.
Unlike most existing REITs, the Company anticipates that its operations will
generate net capital gains and net ordinary losses, resulting in an overall
net capital gain. Accordingly, the Company does not anticipate that the
requirement that a REIT distribute 95% of its net taxable income (excluding
net capital gains) will require the Company to distribute any material amounts
of cash to remain qualified as a REIT. Notwithstanding the lack of any federal
income tax requirement that it do so, the Company plans to make certain
stockholder distributions, as described under "Distribution Policy." In
addition to the potential differences between taxable income and Cash
Available for Distribution (as described above), differences in timing between
the receipt of income and the payment of expenses in arriving at taxable
income (as a result of seasonality or otherwise) and the effect of required
debt amortization payments could require the Company to borrow funds on a
short-term basis to make the distributions necessary to maintain its
distribution objectives. There can be no assurance that the Company will be
able to borrow funds necessary to make such distributions, due in part to
certain contractual limitations on its ability to borrow. See "Distribution
Policy" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company--Liquidity and Capital Resources."
REAL ESTATE INVESTMENT TRUST AND PARTNERSHIP QUALIFICATION
The Company intends to elect to be taxed as, and to operate so as to qualify
as, a REIT under Sections 856 through 860 of the Code, commencing with its
taxable year ending December 31, 1998. Although the Company believes that it
will be so organized and will operate in such a manner, no assurance can be
given that the Company will qualify or remain qualified as a REIT.
Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only
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limited judicial or administrative interpretations. The complexity of these
provisions and of the applicable income tax regulations that have been
promulgated under the Code (the "Treasury Regulations") is greater in the case
of a REIT that holds its assets in partnership form. The determination of
various factual matters and circumstances not entirely within the Company's
control may affect its ability to qualify as a REIT. In addition, no assurance
can be given that legislation, new regulations, administrative interpretations
or court decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. See "--Other Tax Risks" and "Certain Federal Income Tax
Considerations."
Pillsbury Madison & Sutro LLP has acted as counsel to the Company in
connection with the Offering, the acquisition of ATCO, and the Company's
election to be taxed as a REIT. In the opinion of Pillsbury Madison & Sutro
LLP, commencing with the Company's taxable year ending December 31, 1998, the
Company will be organized in conformity with the requirements for
qualification as a REIT, and the Company's proposed method of operation will
enable it to meet the requirements for qualification and taxation as a REIT
provided that (i) the elections and other procedural steps described under
"Certain Federal Income Tax Considerations" are completed in a timely fashion
and (ii) the Company and the Partnership operate in accordance with various
assumptions and factual representations made by the Company and the
Partnership concerning their organization, business, properties and operations
(and the organization, business, properties and operation of ATCO prior to its
acquisition by the Company). To maintain REIT status, the Company must meet a
number of organizational and operational requirements. As a REIT, the Company
will generally not be subject to federal income tax on net income that it
distributes to its stockholders.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to stockholders in
computing taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. As a result, the funds available for distribution to
the Company's stockholders would be materially reduced for each of the years
involved. Although the Company currently intends to operate in a manner
designed to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the Company to fail to qualify as
a REIT or may cause the Board of Directors to revoke the Company's REIT
election. See "Certain Federal Income Tax Considerations" and "Certain
Policies and Objectives."
The Partnership has been structured to be classified as a partnership for
federal income tax purposes. If the Internal Revenue Service challenged
successfully the tax status of the Partnership as a partnership for federal
income tax purposes, the Partnership would be treated as an association
taxable as a corporation. In such event, the character of the Company's assets
and items of gross income would change and preclude the Company from
satisfying the asset tests and possibly the income tests imposed by the Code
and, in turn, would prevent the Company from qualifying as a REIT. See
"Certain Federal Income Tax Considerations--Taxation of the Company--
Requirements for Qualification." In addition, the imposition of a corporate
tax on the Partnership would materially reduce the amount of Partnership funds
available for distribution to the Company and would thus materially reduce the
Company's ability to pay distributions to stockholders. See "Certain Federal
Income Tax Considerations--Tax Aspects of the Partnership."
FACTORS LIMITING CHANGES IN CONTROL
Certain restrictions on the ownership of outstanding shares of Common Stock
intended to ensure compliance with REIT qualification requirements and to
otherwise protect the Company from the consequences of a concentration of
ownership among its stockholders, as well as certain provisions of the
Partnership Agreement, the Company's Certificate of Incorporation (the
"Charter") and Bylaws (the "Bylaws") and Delaware law, may have the effect of
inhibiting a change in control of the Company
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or the removal of existing management, even where such a change could be
beneficial to the Company's stockholders. These restrictions and provisions
include the following.
In order for the Company to qualify and to maintain its qualification as a
REIT, not more than 50% in value of its outstanding stock may be owned,
directly or constructively, by five or fewer individuals (as defined in the
Code to include certain entities). The Charter prohibits "beneficial
ownership" (which may be direct, indirect or constructive) of more than 9.8%
of the aggregate number of the outstanding shares of the Common Stock or
preferred stock (if any) of the Company (the "Ownership Limit"), unless waived
by the Company's Board of Directors. Potlatch and its successors are excluded
from the Ownership Limit. Stock owned by a group of related individuals or
entities may be deemed to be beneficially owned by one individual or entity.
As a result, the acquisition of less than 9.8% of the Common Stock (or the
acquisition of an interest in an entity which owns Common Stock) by an
individual or entity could cause that individual or entity (or another
individual or entity) to own constructively in excess of 9.8% of the Common
Stock, and thus subject such Common Stock to the Ownership Limit. Beneficial
ownership of shares of Common Stock in excess of the Ownership Limit would
cause the violative transfer or ownership to be void, and cause such shares to
be designated as "Excess Shares," as defined below. See "Description of
Capital Stock--Restrictions on Size of Holdings of Shares."
Certain provisions of Delaware law and the potential issuance of Preferred
Stock could also delay or prevent a change in control of the Company. The
Charter authorizes the Board of Directors to issue Preferred Stock in one or
more series and to establish the preferences and rights of any series of
Preferred Stock issued, all without stockholder approval. The rights of
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. No Preferred Stock will be issued or outstanding as of the closing of
the Offering. See "Certain Provisions of Delaware Law and the Company's
Charter and Bylaws" and "Description of Capital Stock--Preferred Stock."
In addition, the staggered structure of the Company's Board of Directors may
have an anti-takeover effect by impairing a third party's ability to acquire
immediate control of the Board of Directors. The Board of Directors of the
Company will have three classes of directors serving three-year terms, with
initial terms expiring in 1999, 2000 and 2001, respectively.
NO OPERATING HISTORY AS AN INDEPENDENT COMPANY
Prior to the Partnership's acquisition of the Initial Timberlands from
Potlatch and ATCO, the Initial Timberlands were managed as part of those
companies' overall businesses, which include the operation of conversion
facilities. As such, the Company does not have an operating history as an
independent public company. Moreover, the Company's senior management team has
been assembled only recently. The Company believes that its success will
depend to a significant extent upon the efforts and abilities of this
management team, and the loss of any of the Company's senior management could
have a material adverse effect on the Company. Following the consummation of
the Offering, the Company will be responsible for maintaining its own
administrative functions, except for certain services to be provided by
Potlatch pursuant to an administrative services agreement. See "Certain
Relationships and Transactions." There can be no assurance as to the Company's
future operating results as an independent public company.
CONTINGENT LIABILITIES; NO TITLE INSURANCE
The Company (through the Partnership) will acquire all of the Initial
Timberlands subject to environmental liabilities with respect to the Initial
Timberlands and certain other existing or potential liabilities. The Company
will not obtain title insurance policies for the Initial Timberlands acquired
from Potlatch and ATCO, and will rely upon the representations of Potlatch and
ATCO as to their ownership
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of such lands. No assurance can be given that the Company would have adequate
recourse against Potlatch for any defect in title. In addition, there can be
no assurance that the Company will not be subject to claims or losses under
environmental laws due to the Company's acquisition of the Initial
Timberlands, which have not been subjected to any investigation or audit by an
independent environmental consultant. The Company will also succeed to any
other liabilities existing on the Initial Timberlands at the time of their
conveyance to the Company.
LIMITATIONS ON ACCOUNTING INCOME
The Company does not expect to record significant net earnings for several
years and believes that prospective investors should consider the Company's
cash flow, as well as other factors, in evaluating an investment in the Common
Stock. The Company's accounting income will be significantly reduced by
depletion, which is a non-cash expense representing amortization of the costs
associated with acquiring or establishing timber stands. In particular, due to
the acquisition of ATCO under the purchase method of accounting, the depletion
associated with the cutting of timber from the ATCO Timberlands will
significantly reduce the Company's accounting income. In addition, Potlatch
will be allocated all of the "built-in" accounting gain attributable to the
Potlatch Southern Timberlands as of their contribution to the Company, which
will be substantial due to their low basis. This allocation will significantly
reduce the accounting income reported by the Company. Any decline in timber
values after the closing of the Offering may cause the Company to incur net
losses, because each partner of the Partnership (initially, Potlatch and the
Company) will be allocated its full pro rata share of any accounting gain or
loss arising upon the harvesting or sale of timber or timberlands that is
attributable to appreciation or depreciation in those assets after the closing
of the Formation Transactions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company--Overview."
LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price for the Common Stock will be
determined by negotiations among the Company and the representatives of the
Underwriters and may bear no relationship to the price at which the Common
Stock will trade after completion of the Offering. See "Underwriting" for a
description of the factors to be considered in determining such offering
price.
The market price of the Common Stock could be subject to significant
fluctuations in response to quarter-to-quarter variations in operating results
and cash flow, levels of stockholder distributions, fluctuations in timber
prices, changes in environmental or tax laws, revisions of securities
analysts' estimates, the opening or closing of conversion facilities within
the regions served by the Company's timberlands, announcements of changes in
federal or state timber sales or timber management policies, and other events
or factors. The trading price of the Common Stock may also be influenced by
the annual yield from distributions by the Company on the Common Stock as
compared to yields on other financial instruments. An increase in market
interest rates will result in higher yields on certain other financial
instruments, which could adversely affect the market price of the Common
Stock. In addition, in recent years the stock market has experienced extreme
price and volume fluctuations that have particularly affected the market
prices of many forest products companies and REITs and that have often been
unrelated or disproportionate to the operating performance of such companies.
These fluctuations, as well as general economic and market conditions, may
adversely affect the market price of the Common Stock. See "--Volatility of
Timber Prices."
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IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock in the Offering will experience
immediate and substantial dilution of $10.64 per share in the net tangible
book value of the shares of Common Stock from the assumed initial public
offering price of $20.00 per share. See "Dilution."
UNCERTAINTIES ASSOCIATED WITH INVENTORY ESTIMATES
The estimated timber inventories set forth in this Prospectus are based upon
estimates by Company personnel that are inherently uncertain. Although the
Company believes that the estimated inventories set forth herein have a
reasonable basis, actual timber volumes may differ from the Company's
estimates. If actual timber volumes were materially lower than those
estimated, the amount of timber harvestable from the Company's lands could be
reduced from the levels anticipated by the Company, adversely affecting the
Company's operating results and cash flow.
ADVERSE EFFECT ON STOCK PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock (including shares issued in
exchange for Partnership Units pursuant to the Partnership Agreement), or the
perception that such sales could occur, may adversely affect prevailing market
prices for the Common Stock. An aggregate of 20,000,000 Partnership Units will
be held by Potlatch, as the sole initial limited partner of the Partnership,
upon completion of the Formation Transactions. The Partnership Units held by
the Partnership's limited partners may be exchanged at any time after the
second anniversary of the completion of the Offering (or earlier, in the event
of certain tender or exchange offers, extraordinary dividends, mergers and
other fundamental transactions) for cash, or at the Company's option, for
shares of Common Stock on a one-for-one basis (subject to antidilution
adjustments). See "The Partnership Agreement--Exchange of Partnership Units."
The shares of Common Stock issuable upon exchange of the Partnership Units may
be sold in the public market pursuant to Rule 144 under the Securities Act of
1933. The Company also has granted Potlatch certain "piggyback" and "demand"
registration rights commencing on the second anniversary of the completion of
the Offering. See "Certain Relationships and Transactions" and "Shares
Eligible for Future Sale." If the Company elects to issue shares of Common
Stock in exchange for Partnership Units, the number of shares eligible for
sale in the public market would increase substantially, which could have a
material adverse effect on the trading price of the Common Stock. The Company
and Potlatch have agreed, with certain exceptions, not to offer or sell shares
of Common Stock for one year after the date of this Prospectus without the
consent of Goldman, Sachs & Co. Additionally, approximately 100,000 shares of
Common Stock issuable upon exercise of stock options will be eligible for sale
in the public market one year after the date of this Prospectus, upon
expiration of lock-up agreements with Goldman, Sachs & Co.
The Company's acquisition strategy will depend in part on access to
additional capital through sales and issuances of equity securities, including
Partnership Units. The market price of the Common Stock may be adversely
affected by the availability for future sale of shares of Common Stock that
may be issued in future acquisitions, or that may be issued upon exchange of
Partnership Units issued in future acquisitions. No predictions can be made as
to the effect that future sales of shares, or the perception that such sales
could occur, will have on the price of the Common Stock.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The Board of Directors of the Company determines the Company's investment
and financing policies, as well as its policies with respect to certain other
activities, including its growth, capitalization, distributions and operating
policies. Although the Board of Directors has no present intention to amend or
revise these policies, the Board of Directors may do so at any time without a
vote of the Company's stockholders. See "Certain Policies and Objectives."
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OTHER TAX RISKS
STATE CONFORMITY WITH FEDERAL TAX LAW. While it is anticipated that the
Company will qualify as a REIT for federal income tax purposes, the
qualification of the Company as a REIT under the laws of the individual states
will depend, among other things, on such states' level of conformity with
federal tax law. In particular, one change made by the Taxpayer Relief Act of
1997 (which eliminated percentage limitations on the amount of capital gain
income a REIT can have from assets held or deemed held for less than four
years) is critical to the federal income tax treatment described herein.
Absent conformity with such change, the status of the Company as a REIT for
purposes of a particular state's tax laws would be doubtful.
While some states automatically conform to changes in federal income tax
law, other states must pass specific legislation to adopt such changes. In the
case of a state which has automatically or by express legislative action
adopted such change in tax law, the status of the Company as a REIT for such
state's purposes would be based on its qualification as a REIT for federal
income tax purposes. See "Certain Federal Income Tax Considerations."
Arkansas is the only state in which the Company presently anticipates doing
business which has not conformed to the 1997 federal tax law changes. It is
not possible to predict whether Arkansas will conform to such changes and, if
it does so, whether such conformity would be retroactive to the effective date
of the 1997 federal tax law changes. Accordingly, for Arkansas state tax
purposes, the Company would likely be considered a regular corporation and, if
so, would be subject to the relevant income, franchise or income-based excise
taxes imposed by such state on the Company's income sourced to such state,
until such time as Arkansas either conforms with federal law or the Company
otherwise qualifies as a REIT under the law relating to REITs prior to 1997.
In the case of a state which has not automatically or by express legislative
action adopted the 1997 federal income tax changes, and in which the Company
is not engaged in business (either presently or in the future due to
acquisitions), the inability of the Company to qualify as a REIT for such
state's tax purposes due to such state's failure to conform to federal law is
not expected to have any material effect on the Company, as the Company would
generally not be subject to taxation by such state. Distributions by the
Company to its stockholders in such state, however, would likely be
characterized as dividends rather than capital gains for purposes of computing
such stockholders' state tax liability. This difference will generally be
relevant only in those states where capital gains are taxed at preferential
rates or where a stockholder has a net capital loss carryforward available for
state tax purposes. Prospective investors in the Common Stock are advised to
consult with their tax advisers concerning the state tax consequences of an
investment in the Common Stock.
USE OF REIT PROVISIONS OF THE CODE FOR TIMBER OPERATIONS. The Company is the
first publicly traded REIT primarily dedicated to the ownership of
timberlands. It is possible, although in the view of the Company's management
(after consultation with its advisors) unlikely, that the Internal Revenue
Service (the "Service") may challenge the Company's qualification as a REIT or
attempt to recharacterize the nature of the Company's income for federal
income tax purposes. The Company does not intend to seek a ruling from the
Service as to the foregoing matters, and will rely upon opinions of counsel
which are not binding on the Service or any court. See "Certain Federal Income
Tax Considerations."
CAPITAL GAINS FOR NON-U.S. STOCKHOLDERS. Non-United States stockholders
should be aware that the Company anticipates that substantially all of the
amounts distributed by the Company to its stockholders will constitute capital
gains distributions. Under the provisions of the Foreign Investment in Real
Property Tax Act ("FIRPTA"), such capital gain distributions are generally
subject to withholding at a rate of 35%.
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POTENTIAL PAYMENTS OF TAX ON CAPITAL GAIN INCOME. Unlike most existing
REITs, the Company anticipates that its operations will generate net capital
gains and net ordinary losses, resulting in an overall net capital gain.
Accordingly, the Company does not anticipate that the requirement that a REIT
distribute 95% of its net taxable income (excluding net capital gains) will
require the Company to distribute any material amounts of cash to remain
qualified as a REIT. If, after giving effect to the Company's distributions
for a tax year, the Company has not distributed 100% of its net taxable income
(including capital gains), then the Company will be required to pay tax on the
undistributed portion of such taxable income at regular federal corporate tax
rates (currently 35%). In such cases, the Company anticipates that it would
generally make an election pursuant to which (i) any federal income taxes paid
by the Company on its retained capital gains would be treated as having been
paid on behalf of the Company's stockholders and (ii) such retained capital
gains would be treated as having been distributed to the Company's
stockholders. Although required to take their share of such gains into income,
stockholders (including tax-exempt U.S. stockholders) may file a claim for
refund if their proportionate share of the taxes paid by the Company exceeds
their actual tax liability (if any). To the extent that the Company has funds
available (including from operations, borrowings, equity issuances, sales of
assets or otherwise), the Company may elect to use such funds to pay taxes on
its retained capital gains. If the Company would not have sufficient funds,
after giving effect to expected distributions to its stockholders, to pay its
taxes on such retained capital gains and if, in the judgment of the Board of
Directors, it would not be in the best interests of the Company and its
stockholders to obtain or use funds from borrowings, equity issuances, sales
of assets or other sources to pay such taxes, then the amount of cash actually
distributed to the Company's stockholders may be reduced to the extent
necessary to pay such taxes. See "Certain Federal Income Tax Considerations--
Taxation of Taxable U.S. Stockholders--Distributions by the Company."
UNCERTAIN IMPACT OF BUDGET PROPOSAL. The Budget Proposal submitted by the
President to Congress on February 2, 1998 contains a number of provisions
which, if adopted in their present form, could affect REITs in general and the
Company in particular. The proposal requests four changes to the rules
applicable to REITs. The proposal would (i) restrict the ability of any person
(including any corporation) from owning more than 50% of the vote or value of
all classes of equity securities of a REIT, effective for companies electing
REIT status for tax years beginning on or after the date of "first committee
action" on the budget bill; (ii) restrict the ability of a REIT to own more
than 10% of the vote or value of all equity securities of a corporation (in
contrast to current rules, which provide that a REIT may not own more than 10%
of the vote of all equity securities of a corporation), effective for
acquisitions of stock on or after the date of "first committee action" on the
budget bill; (iii) require the immediate taxation of all built-in-gains on the
conversion of a subchapter C corporation into a REIT (excluding conversions
where the corporation at issue had a value of $5 million or less), effective
for conversions after January 1, 1999; and (iv) eliminate certain tax benefits
for the few existing "paired share" REITs. The Company does not believe that
the proposed legislation, in its current form (including the proposed
effective dates), would have a material adverse impact on the Company if it
were passed in substantially the same form as set forth in the Budget
Proposal. The Company cannot presently predict whether one or more of the
provisions of such proposal will pass, what form any final legislative
language will take if so passed, or the effective date of any such
legislation.
ERISA RISKS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and section 4975 of the Code prohibit certain transactions that involve (i)
certain pension, profit-sharing, employee benefit, or retirement plans or
individual retirement accounts (each, a "Plan") and (ii) the assets of a Plan.
A "party in interest" or "disqualified person" with respect to a Plan will be
subject to (x) an initial 15% excise tax on the amount involved in any
prohibited transaction involving the assets of the Plan and (y) an excise tax
equal to 100% of the amount involved if any prohibited transaction is not
corrected. Consequently, the fiduciary of a Plan contemplating an investment
in the Common Stock
28
<PAGE>
should consider whether the Company, any other person associated with the
issuance of the Common Stock, or any affiliate of the foregoing is or might
become a "party in interest" or "disqualified person" with respect to the
Plan. In such a case, the acquisition or holding of Common Stock by or on
behalf of the Plan could be considered to give rise to a prohibited
transaction under ERISA and the Code. See "ERISA Considerations--Employee
Benefit Plans, Tax Qualified Retirement Plans and IRAs."
Regulations of the Department of Labor that define "plan assets" (the "Plan
Asset Regulations") provide that in some situations, when a Plan acquires an
equity interest in an entity, the Plan's assets include both the equity
interest and an undivided interest in each of the underlying assets of the
entity, unless one or more exceptions specified in the Plan Asset Regulations
are satisfied. In such a case, certain transactions that the Company might
enter into in the ordinary course of its business and operations might
constitute "prohibited transactions" under ERISA and the Code. The Company
does not believe that the assets of the Company should be deemed to be "plan
assets" of any Plan that invests in the Common Stock. See "ERISA
Considerations--Status of the Company and the Partnership under ERISA."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 15,000,000 shares of
Common Stock being offered by the Company are estimated to be $276.0 million
($317.9 million, if the Underwriters' over-allotment option is exercised in
full), assuming an initial public offering price of $20.00 per share and after
deducting estimated underwriting discounts and commissions and offering
expenses. The Company intends to use all of the net proceeds of the Offering
to fund a majority of the purchase price for its acquisition of ATCO, with the
balance to be funded through borrowings under the Company's credit facility.
See "The Formation Transactions."
29
<PAGE>
DISTRIBUTION POLICY
The Company intends to pay regular quarterly distributions to its
stockholders. The Board of Directors, in its sole discretion, will determine
the actual distribution rate based on the Company's results of operations,
cash flow and capital requirements, economic conditions, tax considerations
(including those related to maintaining REIT status) and other factors. The
first distribution, for the period ending June 30, 1998, is anticipated to
equal a pro rated share of the anticipated initial quarterly distribution of
$0.355 per share of Common Stock, which, on an annualized basis, is $1.42 per
share of Common Stock, or 7.1% of the assumed initial public offering price.
The Company does not expect to change its anticipated initial distribution per
share of Common Stock if the Underwriters' over-allotment option is exercised.
The anticipated initial distribution rate is based on an estimate of the
Company's Funds from Operations for 1998 and is based on the Company's pro
forma Funds from Operations for the year ended December 31, 1997, with certain
adjustments to reflect anticipated changes in harvest levels and other matters
as described below. The Company's estimate of Funds from Operations is being
made solely for the purpose of setting the initial distribution rate and is
not intended to be a projection of the Company's results of operations or its
liquidity, nor is the methodology used to set the anticipated initial rate
necessarily intended to be a basis for determining future distributions. The
Company's estimates include estimated changes in harvest volumes based on the
initial harvest plans set forth in the Timber Purchase Agreement, and do not
include any adjustments to historical prices due to the volatility and
unpredictability of timber prices. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of the Company--Certain
Factors Affecting Results of Operations and Cash Flow."
The following table describes the calculation of initial estimated Funds
from Operations for the year ending December 31, 1998 and the anticipated
initial distribution rate, as well as initial estimated Cash Available for
Distribution before and after income taxes on retained capital gains for such
period.
<TABLE>
<CAPTION>
CALCULATION
OF ESTIMATED
INITIAL PAYOUT RATIO
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
----------------------
<S> <C>
Pro forma net earnings.................................. $ 2,658
Add:
Pro forma depletion and real estate-related
depreciation and amortization........................ 22,474
Pro forma minority interest in Partnership income (1). 30,042
Pro forma income tax benefit.......................... (238)
Pro forma income taxes payable due to Arkansas
nonconformity (2).................................... (949)
Adjustment for increased 1998 harvest volumes (3)..... 2,360
-------
Estimated Funds from Operations (4)..................... 56,347
Add:
Non-real estate-related depreciation and amortization. 315
Subtract:
Estimated capital expenditures........................ (5,434)
-------
Estimated Cash Available for Distribution before income
taxes on retained capital gains (5).................... $51,228
=======
Company's share of estimated Cash Available for Distri-
bution before income taxes on retained capital gains... $21,955
Subtract:
Estimated income taxes on retained capital gains after
increase in 1998 harvest
volume (6)........................................... (922)
-------
Company's share of estimated Cash Available for Distri-
bution after income taxes on retained capital gains.... $21,033
=======
Expected initial distribution to stockholders........... $21,300
=======
Expected initial distribution per share................. $ 1.42
=======
Expected initial payout ratio based on Company's share
of estimated Funds from Operations (7)................. 88%
</TABLE>
30
<PAGE>
- --------
(1) Reflects Potlatch's 57.1% share of the Partnership.
(2) Arkansas is the only state in which the Company presently anticipates
doing business which has not conformed to federal tax law changes
affecting REITs made in 1997. It is not possible to predict whether
Arkansas will conform to such changes and, if it does so, whether such
conformity would be retroactive to the effective date of the 1997 federal
tax law changes. Accordingly, for Arkansas state tax purposes, the Company
would likely be considered a regular corporation and, if so, would be
subject to the relevant income, franchise or income-based excise taxes
imposed by such state on the Company's income sourced to such state, until
such time as Arkansas either conforms with federal law or the Company
otherwise qualifies as a REIT under the law relating to REITs prior to
1997. Arkansas has a history of passing conforming legislation, but not on
a retroactive basis. Accordingly, a provision for Arkansas state income
taxes has been included in the Pro Forma Condensed Consolidated Statement
of Operations. See "Risk Factors--Other Tax Risks" and "Certain Federal
Income Tax Considerations."
(3) Reflects estimated increase in 1998 harvest levels, as set forth in the
initial harvest plan contained in the Timber Purchase Agreement.
Historical prices have not been adjusted due to the Company's inability to
predict changes in timber prices. The amount shown includes the following
adjustments to the Company's pro forma Funds from Operations for the year
ended December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Revenues......................................................... $2,528
Depletion, depreciation and amortization......................... (4,102)
------
Net decrease in earnings from operations...................... (1,574)
Subtract:
Additional income tax expense.................................. (153)
------
Decrease in net earnings (excluding minority interest in
Partnership income).......................................... (1,727)
Add:
Depletion, depreciation and amortization....................... 4,102
Additional income tax expense.................................. 153
Increase in income taxes payable due to Arkansas nonconformity. (168)
------
Net adjustment to estimated Funds from Operations to reflect
increased 1998 harvest levels................................ $2,360
======
</TABLE>
(4) The Company believes Funds from Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flow
from operating activities, investing activities and financing activities,
it provides investors with an understanding of the ability of the Company
to incur and service debt and make capital expenditures. The Company
calculates Funds from Operations as net earnings (computed in accordance
with GAAP) excluding significant non-recurring items, gains (or losses)
from debt restructuring and major sales of property, plus minority
interest, income taxes paid on retained capital gains, depletion and real
estate-related depreciation and amortization (including amortization of
logging roads) and after adjustments for unconsolidated partnerships and
joint ventures, less any preferred stock dividends. Depletion is a non-
cash expense representing amortization of the costs associated with
acquiring or establishing timber stands. The Company believes that it is
appropriate to include depletion in calculating Funds from Operations in
part because depletion is analogous to the real estate-related
depreciation and amortization typically included in Funds from Operations
by non-timber REITs. The definition of Funds from Operations approved by
the National Association of Real Estate Investment Trusts ("NAREIT")
includes real estate-related depreciation and amortization but does not
specifically address timber-related depletion. In addition, as explained
in footnote (6) below, the Company includes any income taxes paid on
retained capital gains in its calculation of Funds from Operations. The
definition of Funds from Operations approved by
31
<PAGE>
NAREIT does not include such taxes. Due to the Company's inclusion of
depletion and any taxes paid on retained capital gains in its calculation,
the Company's Funds from Operations will not be directly comparable to
Funds from Operations reported by other REITs, including REITs that define
the term using the definition of Funds from Operations approved by NAREIT.
Funds from Operations should not be considered as an alternative to net
earnings (computed in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
(computed in accordance with GAAP) as a measure of the Company's liquidity,
nor is it necessarily indicative of funds available to fund the Company's
cash needs, including its ability to make distributions.
(5) Cash Available for Distribution means Funds from Operations plus non-real
estate-related depreciation and amortization, minus capital expenditures
and principal payments on indebtedness. Estimated capital expenditures
based on the Company's current plans have been included for the period
indicated. The estimate of Cash Available for Distribution is not intended
to be a projection or forecast of the Company's results of operations or
its liquidity, nor is the methodology upon which such adjustments were
made necessarily intended to be a basis for determining future
distributions.
(6) The Company may not distribute all of its capital gains. If the Company
does not distribute all of its capital gains, it expects that it would
generally make an election pursuant to which (i) the federal income taxes
that it pays on its retained capital gains (at regular federal corporate
rates) will be treated for income tax purposes as having been paid by the
Company's stockholders and (ii) the Company's retained capital gains will
be treated as having been distributed to the Company's stockholders.
Although required to take their proportionate share of such retained
capital gains into income, stockholders (including tax-exempt U.S.
stockholders) will be entitled to a tax credit equal to their
proportionate share of such taxes paid by the Company, and their basis in
the Company's stock will be increased by their proportionate share of the
capital gains (net of such tax credit) retained by the Company. To the
extent a stockholder's share of the taxes paid by the Company exceeds such
stockholder's tax liability on the capital gains deemed distributed to
such stockholder, such stockholder (including a tax-exempt U.S.
stockholder) may file a claim for refund for such excess. Income taxes on
retained capital gains have been added to net earnings in determining
Funds from Operations and Cash Available for Distribution before income
taxes on retained capital gains. The adjustment has been made both because
income taxes paid by the Company on retained capital gains will be a
deemed distribution to stockholders and because the Company is expected to
determine the amount of capital gains, if any, to retain after calculating
Funds from Operations before income taxes paid on retained capital gains.
(7) Represents the expected initial distribution to stockholders divided by
the Company's 42.9% share of estimated Funds from Operations. Management
believes that the initial distribution rate of $1.42 may represent a
smaller percentage of Funds from Operations for the year ended December
31, 1998, although the Company's actual cash flow for such year will
depend upon a number of factors, as discussed below and under "Risk
Factors."
The Company intends to maintain a distribution rate approximately equal to
the initial rate through the quarter ending June 30, 1999 unless actual
operating results, cash flow, economic conditions or other factors differ from
the assumptions used in calculating the initial estimated distribution rate.
The Company's actual cash flow and the amount available for distribution to
stockholders will be affected by a number of factors, including the Company's
actual harvest levels, changes in timber prices, the operating expenses of the
Company, the interest expense incurred on its borrowings and unanticipated
capital expenditures. No assurance can be given that the Company's estimates
will prove accurate. In addition, pro forma results of operations do not
purport to represent the actual results that can be expected for future
periods. Factors that could cause actual results to differ materially from the
Company's estimates are discussed below and under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company."
Substantially all of the Company's stockholder distributions are expected to
constitute capital gain distributions for federal income tax purposes. As the
ATCO assets being acquired by the Company will have a low tax basis when
contributed to the Partnership, the Company anticipates that only a small
32
<PAGE>
percentage, if any, of its distributions to stockholders will constitute a
return of capital. For a discussion of the federal income tax treatment of
distributions to holders of Common Stock, see "Certain Federal Income Tax
Considerations." Unlike most existing REITs, the Company does not anticipate
that the 95% distribution requirement applicable to REITs will require the
Company to distribute any material amounts of cash in order to remain
qualified as a REIT. Notwithstanding the lack of any federal income tax
requirement that it do so, the Company intends to make certain distributions
to its stockholders, generally as a capital gain distribution. If, after
giving effect to the Company's distributions for a tax year, the Company has
not distributed 100% of its net taxable income (including capital gains), then
the Company will be required to pay tax on the undistributed portion of such
taxable income at regular federal corporate tax rates (currently 35%). In such
cases, the Company anticipates that it would generally make an election
pursuant to which (i) any federal income taxes paid by the Company on its
retained capital gains would be treated as having been paid on behalf of the
Company's stockholders and (ii) such retained capital gains would be treated
as having been distributed to the Company's stockholders. Although required to
take their share of such gains into income, stockholders (including tax-exempt
U.S. stockholders) may file a claim for refund if their proportionate share of
the taxes paid by the Company exceeds their actual tax liability (if any). If
the Company has funds available (including from operations, borrowings, equity
issuances, sales of assets or otherwise), the Company may elect to use such
funds to pay taxes on its retained capital gains. If the Company would not
have sufficient funds, after giving effect to expected distributions to its
stockholders, to pay its taxes on such retained capital gains and if, in the
judgment of the Board of Directors, it would not be in the best interests of
the Company and its stockholders to obtain or use funds from borrowings,
equity issuances, sales of assets or other sources to pay such taxes, then the
amount of cash actually distributed to the Company's stockholders may be
reduced to the extent necessary to pay such taxes.
Future distributions by the Company will be at the sole discretion of the
Board of Directors and will depend on the actual results of operations, cash
flow and capital requirements, economic conditions, tax considerations
(including those relating to maintaining REIT status) and such other factors
as the Board of Directors deems relevant. See "Risk Factors--Potential
Limitations on Distributions," "Risk Factors--Changes in Policies Without
Stockholder Approval" and "Certain Federal Income Tax Considerations--Taxation
of the Company as a REIT."
33
<PAGE>
DILUTION
The initial price per share to the public of the Common Stock offered hereby
exceeds the net tangible book value per share. Therefore, Potlatch will
realize an immediate increase in the net tangible book value of the
Partnership Units issued to Potlatch in connection with the Formation
Transactions, while purchasers of Common Stock in the Offering will realize an
immediate and substantial dilution of the net tangible book value of their
shares. Net pro forma tangible book value per share is determined by
subtracting pro forma total liabilities from pro forma total tangible assets
and dividing the remainder by the number of shares of Common Stock that will
be outstanding after the Offering (assuming the exchange of all of Potlatch's
Partnership Units for Common Stock). The following table illustrates the
dilution to purchasers of Common Stock sold in the Offering, based on an
assumed initial public offering price of $20.00 per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.......................... $20.00
Pro forma net tangible book value per share as of December 31,
1997 prior to the Offering, attributable to Partnership Units
issued to Potlatch(1)......................................... $2.57
Increase attributable to new investors......................... $6.79
-----
Pro forma net tangible book value per share as of December 31,
1997 after the Offering(2).................................... $ 9.36
------
Dilution to new investors...................................... $10.64
======
</TABLE>
- --------
(1) Based on the Pro Forma Condensed Consolidated Balance Sheet contained
elsewhere in this Prospectus.
(2) Based on pro forma stockholders' equity of $276,002,000 and minority
interest of $51,491,000 divided by 35,000,000 shares of Common Stock
outstanding. This assumes all Partnership Units held by Potlatch have been
exchanged for Common Stock.
The following table sets forth the number of shares of Common Stock offered
to the public hereby, the total price to be paid for such shares (assuming an
initial public offering price of $20.00 per share), the number of Partnership
Units to be issued to Potlatch in exchange for assets in the Formation
Transactions, and the net book value of the average contribution per share of
Common Stock and per Partnership Unit based on total contributions (all
determined as if the Formation Transactions had been consummated on December
31, 1997).
<TABLE>
<CAPTION>
PURCHASE
SHARES SOLD BY COMPANY CASH/BOOK VALUE OF PRICE/BOOK
AND PARTNERSHIP UNITS CONTRIBUTIONS TO VALUE OF
ISSUED BY PARTNERSHIP COMPANY/PARTNERSHIP CONTRIBUTION
-------------------------------------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE/UNIT
------------- ---------------------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New investors in the Of-
fering................. 15,000,000 42.9% $ 300,000(1) 85.4% $20.00(1)
Partnership Units issued
to Potlatch............ 20,000,000 57.1% 51,491(2) 14.6% 2.57(2)
------------- ------- ----------- ------- ------
Total................. 35,000,000 100% $ 351,491 100% $10.04
============= ======= =========== ======= ======
</TABLE>
- --------
(1) Before deducting estimated underwriting discounts and commissions and
estimated expenses of the Offering.
(2) Based on the December 31, 1997 net book value of assets to be contributed
to the Partnership by Potlatch in the Formation Transactions.
The foregoing table assumes no exercise of any outstanding stock options.
Upon the closing of the Offering, the Company intends to grant options to
purchase an aggregate of approximately 200,000 shares of Common Stock to
certain officers, directors and employees. To the extent these options are
exercised, there will be further dilution to new investors. See "Management--
Stock Incentive Plan" and Notes to Consolidated Financial Statements of the
Company.
34
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company (i) as of December 31, 1997 and (ii) on a pro forma basis after giving
effect to the Formation Transactions, including the sale of the 15,000,000
shares of Common Stock being offered by the Company at an assumed initial
public offering price of $20.00 per share and the application of the estimated
net proceeds therefrom as set forth under "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------
(IN THOUSANDS)
PRO FORMA AS
ACTUAL ADJUSTED(1)
------ ------------
<S> <C> <C>
Long-term debt.............. -- $132,106
------ --------
Minority interest........... -- 51,491
------ --------
Stockholders' equity:
Preferred Stock, $.01 par
value; 50,000,000 shares
authorized; no shares
issued and outstanding... -- --
Common Stock, $.01 par
value; 250,000,000 shares
authorized; no shares
issued and outstanding
actual; 15,000,000 shares
issued and outstanding
pro forma as adjusted(2)... -- 150
Special Voting Stock, $.01
par value; one share
authorized, none issued
and outstanding actual;
one share issued and
outstanding pro forma as
adjusted(2).............. -- --
Additional paid-in
capital.................. -- 275,852
Retained earnings......... -- --
------ --------
Total stockholders'
equity................. -- 276,002
------ --------
Total capitalization........ $ -- $459,599
====== ========
</TABLE>
- --------
(1) To reflect assumed net proceeds of approximately $276.0 million from the
sale by the Company of shares of Common Stock in the Offering at an
assumed initial public offering price of $20.00 per share (the midpoint of
the Offering range), after deducting estimated underwriting discounts and
offering expenses and the transactions described under "Formation
Transactions" and "Use of Proceeds."
(2) Shares issued and outstanding excludes (i) 20,000,000 shares of Common
Stock that may be issued upon exchange of Partnership Units held by
Potlatch, and (ii) 3,000,000 shares of Common Stock reserved for issuance
and available for grant or sale under the Company's 1998 Stock Incentive
Plan. See "The Partnership Agreement--Exchange of Partnership Units" and
"Management--Stock Incentive Plan."
35
<PAGE>
SELECTED FINANCIAL AND OPERATING INFORMATION
OF THE POTLATCH SOUTHERN TIMBERLANDS
(IN THOUSANDS, EXCEPT FOR OPERATING DATA)
The selected financial information set forth below under the caption "Income
Statement Data" for each of the years in the three-year period ended December
31, 1997 and the caption "Balance Sheet Data" as of December 31, 1996 and 1997
are derived from the financial statements of the Potlatch Southern
Timberlands, which are included elsewhere in this Prospectus and have been
audited by KPMG Peat Marwick LLP, independent certified public accountants,
whose report thereon is also included herein. The selected financial
information set forth below under the caption "Income Statement Data" for the
years ended December 31, 1993 and 1994 and the caption "Balance Sheet Data" as
of December 31, 1993, 1994 and 1995 has been derived from unaudited financial
statements of the Potlatch Southern Timberlands which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results as of and for such
periods.
The data set forth below are qualified by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company--Historical Results of Operations of Potlatch
Southern Timberlands," and the financial statements of the Potlatch Southern
Timberlands and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues..................... $23,726 $ 19,854 $ 29,715 $ 28,318 $ 40,449
------- --------- -------- -------- --------
Costs and expenses:
Depletion, depreciation and
amortization.............. 1,285 1,364 1,398 3,466 1,683
Operating expenses......... 3,247 3,599 4,232 4,523 4,788
------- --------- -------- -------- --------
Total costs and expenses..... 4,532 4,963 5,630 7,989 6,471
------- --------- -------- -------- --------
Earnings from operations..... 19,194 14,891 24,085 20,329 33,978
Other income, net............ 5,775 2,631 1,537 1,252 1,362
------- --------- -------- -------- --------
Net earnings................. $24,969 $ 17,522 $ 25,622 $ 21,581 $ 35,340
======= ========= ======== ======== ========
BALANCE SHEET DATA
Timber and timberlands....... $47,278 $ 50,189 $ 51,924 $ 50,898 $ 52,328
Total assets................. 47,735 50,500 52,479 51,364 52,807
Potlatch Corporation equity.. 46,944 49,462 51,593 50,062 51,491
OPERATING DATA
Sawtimber harvested (MBF).... 77,331 64,205 81,831 93,498 97,169
Pulpwood harvested (tons).... 493,579 466,599 545,583 624,577 583,061
Average prices:
Sawtimber ($/MBF).......... $266.34 $ 261.47 $ 311.09 $ 258.03 $ 367.19
Pulpwood ($/ton)........... $ 6.34 $ 6.57 $ 7.81 $ 6.71 $ 8.18
OTHER DATA
Funds from Operations(1)..... $21,572 $ 17,259 $ 26,557 $ 24,872 $ 36,755
Cash from operating
activities.................. 26,235 18,639 27,172 24,631 37,009
Cash from investing
activities.................. (1,047) (4,129) (3,377) (2,351) (3,126)
Cash from financing
activities.................. (25,188) (14,510) (23,795) (22,280) (33,883)
Cash Available for
Distribution(2)............. 20,598 12,767 23,462 22,665 34,166
</TABLE>
36
<PAGE>
- --------
(1) Funds from Operations have been calculated as net earnings (computed in
accordance with GAAP) excluding significant non-recurring items, gains (or
losses) from debt restructuring and major sales of property, plus
depletion and real estate-related depreciation and amortization (including
amortization of logging roads) and after adjustments for unconsolidated
partnerships and joint ventures, less any preferred stock dividends.
Depletion is a non-cash expense representing amortization of the costs
associated with acquiring or establishing timber stands. The Company
believes that it is appropriate to include depletion in calculating the
Potlatch Southern Timberlands' Funds from Operations in part because
depletion is analogous to the real estate-related depreciation and
amortization typically included in Funds from Operations by non-timber
REITs. The definition of Funds from Operations approved by NAREIT includes
real estate-related depreciation and amortization but does not
specifically address timber-related depletion. Due to the inclusion of
depletion in this calculation, the Funds from Operations shown above will
not be directly comparable to Funds from Operations reported by other
REITs, including REITs that define the term using the definition of Funds
from Operations approved by NAREIT. Funds from Operations should not be
considered as an alternative to net earnings (computed in accordance with
GAAP) as an indication of the Potlatch Southern Timberlands' financial
performance or to cash flow from operating activities (computed in
accordance with GAAP) as a measure of the Potlatch Southern Timberlands'
liquidity, nor is it necessarily indicative of funds available to fund
cash needs.
(2) Cash Available for Distribution means Funds from Operations plus non-real
estate-related depreciation and amortization, minus capital expenditures
and principal payments on indebtedness. See "Distribution Policy" for a
further discussion of the Company's calculation of Cash Available for
Distribution.
37
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF ATCO
(IN THOUSANDS, EXCEPT OPERATING DATA)
The selected consolidated financial information as of July 31, 1995, 1996
and 1997, and for the fiscal years then ended, and as of December 31, 1997 and
for the five months then ended, set forth below under the captions "Income
Statement Data" and "Balance Sheet Data" has been derived from audited
financial statements of ATCO. ATCO's consolidated financial statements for
each of the three years in the period ended July 31, 1997 and for the five
months ended December 31, 1997 have been audited by Deloitte & Touche LLP,
independent auditors, whose report with respect to such consolidated financial
statements appears elsewhere in this Prospectus. ATCO's consolidated financial
statements for the five months ended December 31, 1996 and for the years ended
July 31, 1994 and 1993 have not been audited by independent auditors. However,
in the opinion of management, the selected financial data for such periods
include all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the data. This data should be read in
conjunction with ATCO's financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of ATCO" appearing elsewhere in this Prospectus.
The following selected consolidated financial information of ATCO will not
be comparable to the results of operations and cash flow that the Company will
derive from the ATCO Timberlands in future periods. The historical financial
statements of ATCO include the results of certain converting facilities and
barge operations not being acquired by the Company, and do not reflect recent
and anticipated changes in harvest levels as described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company."
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED JULY 31, ENDED DEC. 31,
------------------------------------------ -----------------
1993 1994 1995 1996 1997 1996 1997(2)
------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenues, net..... $79,740 $87,066 $ 91,665 $ 88,160 $ 96,908 $ 35,779 $ 52,485
Total costs and
expenses............... 71,766 76,028 78,136 77,035 85,055 33,048 45,495
Income from operations.. 7,974 11,038 13,529 11,125 11,853 2,731 6,990
Interest expense, net... 702 863 1,491 2,368 2,911 931 2,339
Income before minority
interest............... 9,525 8,157 7,661 6,087 7,470 1,452 64
Net earnings............ $ 9,525 $ 8,157 $ 7,661 $ 6,087 $ 5,650 $ 962 $ (1,316)
BALANCE SHEET DATA
Timberland and timber,
net.................... $11,165 $10,912 $ 11,951 $ 11,343 $ 9,968 $ 10,367 $ 9,281
Total assets............ 74,710 83,297 101,640 121,184 136,486 125,012 132,099
Total debt.............. 10,057 14,455 27,906 44,609 51,170 44,358 104,143
Total stockholders'
equity (deficit)....... 40,430 45,647 50,026 52,345 54,373 49,685 (5,877)
OPERATING DATA
Harvest volumes:
Sawtimber (MBF)....... 58,843 58,353 54,116 52,059 80,593 29,121 41,714
Pulpwood (tons)....... * (1) * (1) 209,725 277,302 363,540 141,554 274,781
</TABLE>
- --------
(1) Not available.
(2) Results of operations for the five months ended December 31, 1997 includes
a $5.1 million loss on the sale of assets primarily associated with the
laminated flooring plant.
38
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The following Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1997 presents unaudited pro forma operating
results of the Company, including the Partnership's balances on a consolidated
basis, as if the Formation Transactions had occurred as of January 1, 1997.
See "The Formation Transactions." The following Pro Forma Condensed
Consolidated Balance Sheet presents the unaudited pro forma financial
condition of the Company as if the Formation Transactions had occurred as of
December 31, 1997.
The Pro Forma Condensed Consolidated Financial Information reflects
adjustments to the historical financial statements of the Potlatch Southern
Timberlands and ATCO that (i) eliminate results of operations and related
assets and liabilities that will not be acquired by the Company, (ii) reflect
purchase method of accounting adjustments associated with the Company's
acquisition of ATCO,(iii) adjust historical results of operations to reflect
the Timber Purchase Agreement, (iv) include estimated incremental expenses
associated with the Company's operation as a public company, and (v) reflect
other adjustments, such as the issuance of Common Stock and incurrence of
indebtedness, as discussed in "The Formation Transactions."
ATCO's fiscal year-end has historically been July 31. For purposes of
preparing the Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1997, ATCO's historical operating results for the five
months ended December 31, 1996 were subtracted from ATCO's historical
operating results for the year ended July 31, 1997, and ATCO's historical
operating results for the five months ended December 31, 1997 were added to
ATCO's historical operating results for the year ended July 31, 1997.
The Pro Forma Condensed Consolidated Financial Information does not purport
to represent what the Company's financial position or results of operations
actually would have been had the Formation Transactions, in fact, occurred on
the dates indicated, or to project the Company's financial position or results
of operations at any future date or for any future period. Among other things,
the Company's 1998 harvest plan differs from the actual volumes harvested in
1997, as described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company--Certain Factors Affecting
Results of Operations and Cash Flow--Harvest Levels."
The Pro Forma Condensed Consolidated Financial Information should be read in
conjunction with (i) the Company's historical consolidated balance sheet as of
February 27, 1998, (ii) the Potlatch Southern Timberlands' historical
financial statements, and (iii) ATCO's historical consolidated financial
statements, all of which are included elsewhere herein.
39
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------
POTLATCH
SOUTHERN PRO FORMA
COMPANY TIMBERLANDS ATCO ADJUSTMENTS PRO FORMA
------- ----------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Timber sales............ $ -- $40,449 $ 3,676 $ 22,519 (a) $69,957
3,313 (b)
Other revenue........... -- -- 104,196 (104,196)(c) --
----- ------- ------- --------- -------
Total revenues........ -- 40,449 107,872 (78,364) 69,957
----- ------- ------- --------- -------
Costs and Expenses:
Depletion, depreciation
and amortization....... -- 1,683 9,247 11,859 (d) 22,789
Operating expenses...... -- 4,788 86,495 (83,772)(c) 7,511
General and
administrative
expenses............... -- -- -- 4,000 (e) 4,000
----- ------- ------- --------- -------
Total costs and
expenses............. -- 6,471 95,742 (67,913) 34,300
----- ------- ------- --------- -------
Earnings from operations. -- 33,978 12,130 (10,451) 35,657
Other income, net........ -- 1,362 1,046 2,997 (c) 5,405
Interest expense......... -- -- (4,438) 2,378 (c) (8,600)
(6,540)(f)
----- ------- ------- --------- -------
Earnings before minority
interest and income
taxes................... -- 35,340 8,738 (11,616) 32,462
Minority interest in
Partnership income...... -- -- (2,710) 2,710 (c) (30,042)
(30,042)(g)
----- ------- ------- --------- -------
Earnings before income
taxes................... -- 35,340 6,028 (38,948) 2,420
Income taxes............. -- -- (2,656) 2,656 (c) 238
238 (h)
----- ------- ------- --------- -------
Net earnings........... $ -- $35,340 $ 3,372 $ (36,054) $ 2,658
===== ======= ======= ========= =======
Weighted average number
of shares............... 15,000
=======
Net earnings per share
(i)..................... $ 0.18
=======
</TABLE>
40
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------
POTLATCH
SOUTHERN PRO FORMA
COMPANY TIMBERLANDS ATCO ADJUSTMENTS PRO FORMA
------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash
equivalents............. $ -- $ -- $ 1,711 $ (1,711)(j) $ 2
2 (k)
Other current assets..... -- -- 23,921 (22,725)(j) 1,196
Timber and timberlands,
net..................... -- 52,328 9,281 355,523 (l) 442,395
25,263 (m)
Property, plant and
equipment, net.......... -- 479 64,300 (63,300)(j) 1,479
Commercial real estate
and farmland............ -- -- 29,801 13,199 (l) 43,000
Other assets............. -- -- 3,085 (3,085)(j) --
------ ------- -------- -------- --------
Total assets........... $ -- $52,807 $132,099 $303,166 $488,072
====== ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT):
Accounts payable and
accrued expenses........ $ -- $ 1,316 $ 15,493 $(13,599)(j) $ 3,210
Long-term debt........... -- -- 104,143 (85,198)(j) 132,106
113,161 (o)
Deferred taxes........... -- -- 13,971 (13,971)(j) 25,263
25,263 (m)
Other long-term
liabilities ............ -- -- 1,507 (1,507)(j) --
Minority interest........ -- -- 2,862 (2,862)(j) 51,491
51,491 (n)
Stockholders' equity
(deficit)............... -- 51,491 (5,877) (45,614)(j) 276,002
2 (k)
276,000 (p)
------ ------- -------- -------- --------
Total liabilities and
stockholders' equity.. $ -- $52,807 $132,099 $303,166 $488,072
====== ======= ======== ======== ========
</TABLE>
41
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(a) To record timber sales from the ATCO Timberlands to Potlatch in
accordance with the terms of the Timber Purchase Agreement as if the agreement
were in effect for the entire period. The adjustment consists of the actual
volume of fee timber used for the year ended December 31, 1997 by ATCO's
converting assets, multiplied by the prices that the Company estimates would
have been determined pursuant to the Timber Purchase Agreement had it been in
effect for such period. See "Business--Sales and Markets--The Timber Purchase
Agreement--Pricing."
(b) To adjust the price for timber transferred from the Potlatch Southern
Timberlands to Potlatch converting facilities to incorporate the pricing that
the Company estimates would have been determined pursuant to the Timber
Purchase Agreement had it been in effect for such period. See "Business--Sales
and Markets--The Timber Purchase Agreement--Pricing."
(c) Reflects the elimination of the results of operations related to ATCO
assets and liabilities that will not be acquired by the Company. Historically,
ATCO's activities have largely been comprised of converting timber into
finished goods and selling those finished goods. As described under "The
Formation Transactions," certain of ATCO's converting assets and log
transportation operations will be sold to Potlatch.
(d) Reflects the following depletion, depreciation and amortization
adjustments:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Elimination of historical ATCO depletion, depreciation and
amortization................................................ $ (9,247)
New depletion expense related to application of purchase
method of accounting to ATCO timberlands.................... 19,850
New depreciation expense related to application of purchase
method of accounting to ATCO commercial real estate,
equipment................................................... 1,256
--------
Net adjustment............................................. $ 11,859
========
</TABLE>
(e) Reflects estimated recurring incremental general and administrative
costs (e.g., management salaries and benefits, legal fees, preparation of tax
returns and stockholder reports, investor relations and other costs) of
approximately $4.0 million per year.
(f) To adjust interest expense to reflect a full year of interest on
borrowings either incurred or assumed by the Company in connection with the
Formation Transactions.
(g) To reflect Potlatch's equity in earnings of the Partnership. The
calculation of Potlatch's equity in the Partnership's earnings will include
any realization of "built-in gains" on assets contributed by Potlatch to the
Partnership (that is, the excess of fair market value over accounting basis
when such assets were contributed to the Partnership in the Formation
Transactions), which amounted to $24.9 million. In addition, Potlatch will be
allocated its proportionate share (initially 57.1%) of any earnings or losses
realized by the Partnership after taking into account the "built-in gains."
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company" and "The Partnership Agreement."
42
<PAGE>
(h) To provide for federal and state income taxes on retained capital gains
and Arkansas state income taxes. Arkansas is the only state in which the
Company presently anticipates doing business which has not conformed to
federal tax law changes affecting REITs made in 1997. It is not possible to
predict whether Arkansas will conform to such changes and, if it does so,
whether such conformity would be retroactive to the effective date of the 1997
federal tax law changes. Accordingly, for Arkansas state tax purposes, the
Company would likely be considered a regular corporation and, if so, would be
subject to the relevant income, franchise or income-based excise taxes imposed
by such state on the Company's income sourced to such state, until such time
as Arkansas either conforms with federal law or the Company otherwise
qualifies as a REIT under the law relating to REITs prior to 1997. Arkansas
has a history of passing conforming legislation, but not on a retroactive
basis. Accordingly, a provision for Arkansas state income taxes has been
included in the Pro Forma Condensed Consolidated Statement of Operations. See
"Risk Factors--Other Tax Risks" and "Certain Federal Income Tax
Considerations."
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income taxes:
Arkansas nonconformity............................... $ -- $ 949 $ 949
Retained capital gains............................... -- -- --
----- ----- ------
-- 949 949
----- ----- ------
Deferred income taxes:
Arkansas nonconformity............................... (322) (807) (1,129)
Retained capital gains............................... (55) (3) (58)
----- ----- ------
(377) (810) (1,187)
----- ----- ------
$(377) $ 139 $ (238)
===== ===== ======
</TABLE>
(i) The weighted average number of shares outstanding used to calculate net
earnings per share consists of Common Stock and Special Voting Stock.
Partnership Units owned by Potlatch are exchangeable under certain
circumstances for Common Stock of the Company and are common stock
equivalents. The impact of the Partnership Units is antidilutive, however.
Therefore, the Partnership Units have not been included in the weighted
average number of shares outstanding used to calculate net earnings per share.
(j) Reflects the elimination of the assets and liabilities of ATCO that will
not be acquired by the Company.
(k) Reflects the issuance by the Company of one share of Special Voting
Stock, as described elsewhere in this Prospectus, for $1,500.
(l) To adjust the cost basis of ATCO assets to reflect the Company's
purchase (in thousands):
<TABLE>
<S> <C>
Elimination of historical cost of ATCO timber and timberlands, net
of accumulated depletion......................................... $ (9,281)
Purchase price of ATCO timber and timberlands..................... 364,804
--------
Net adjustment.................................................. $355,523
========
Elimination of historical cost of ATCO commercial real estate and
farmland, net of accumulated depreciation........................ $(29,801)
Purchase price of ATCO commercial real estate and farmland........ 43,000
--------
Net adjustment.................................................. $ 13,199
========
</TABLE>
43
<PAGE>
The total purchase price of $410 million is comprised of (in thousands):
<TABLE>
<S> <C>
Proceeds from debt financing arrangements........................... $113,161
Net proceeds from the sale of 15,000,000 shares of Common Stock..... 276,000
Liabilities of ATCO assumed by the Company.......................... 20,839
--------
Total purchase price.............................................. $410,000
========
</TABLE>
The $410 million total purchase price is allocated to the assets and
liabilities of the Company based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Assets acquired:
Timber and timberlands........................................... $364,804
Commercial real estate and farmland.............................. 43,000
Equipment........................................................ 1,000
Current assets................................................... 1,196
--------
410,000
Less:
Accounts payable and accrued expenses assumed.................... (1,894)
Long-term debt assumed........................................... (18,945)
--------
Net assets acquired............................................ $389,161
========
</TABLE>
(m) To record deferred income taxes. The amount is calculated by applying
the expected effective tax rate to the portion of the difference (on which the
Company expects to pay income taxes in the future) between the purchase price
of the ATCO assets and the respective tax bases of the affected assets.
(n) To record the portion of Potlatch's interest in the Company attributable
to Potlatch's contribution to the Partnership of the net assets of the
Potlatch Southern Timberlands. For financial accounting purposes, Potlatch's
interest is credited at Potlatch's carrying cost of the assets to be
contributed to the Partnership.
(o) To record borrowings of $113.2 million under the Company's Credit
Facility.
(p) Reflects the issuance by the Company of 15,000,000 shares of Common
Stock, as described elsewhere in this Prospectus, at an assumed initial public
offering price of $20.00 per share for net proceeds of approximately $276
million (after deducting estimated underwriting discounts and commissions and
estimated offering expenses).
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed below, as well as those discussed under "Risk Factors"
and elsewhere in this Prospectus.
OVERVIEW
The Company is a real estate investment trust ("REIT") formed to acquire
approximately 824,000 fee acres of timberlands in the southeastern United
States, comprising Potlatch's Arkansas timberlands (the "Potlatch Southern
Timberlands") and all of ATCO's timberlands and other real estate assets (the
"ATCO Timberlands," and collectively with the Potlatch Southern Timberlands,
the "Initial Timberlands"). The Company will acquire the ATCO Timberlands,
which consist of 324,000 acres of primarily hardwood timberlands concentrated
in Arkansas and Mississippi, in a cash merger funded in part from the net
proceeds of the Offering. See "The Formation Transactions." The Potlatch
Southern Timberlands comprise approximately 500,000 fee acres and
approximately 14,000 leased acres of primarily softwood lands located in
southern Arkansas. The Initial Timberlands contain an estimated total
merchantable timber volume of approximately 2.9 billion board feet of
sawtimber and 24.1 million tons of pulpwood. See "Business."
The Company will conduct its business solely through the Partnership, a
Delaware limited partnership in which the Company will initially hold a 42.9%
interest as the sole general partner. The Company's financial statements will
consolidate those of the Partnership. Accordingly, references to the "Company"
in this discussion include references to the Partnership unless the context
otherwise requires.
The discussion below first addresses certain factors that are expected to
have particularly significant effects on the Company's future results of
operations and cash flow, followed by a discussion of the pro forma results of
operations and financial condition of the Company after giving effect to the
Company's acquisition of ATCO and the consummation of the Offering, as
described under "The Formation Transactions." The Potlatch Southern
Timberlands' historical results are then discussed under "--Historical Results
of Operations of Potlatch Southern Timberlands." The following discussions
should be read in conjunction with the "Pro Forma Condensed Consolidated
Financial Information," "Selected Financial and Operating Information of the
Potlatch Southern Timberlands" and "Selected Consolidated Financial
Information of ATCO" appearing elsewhere in this Prospectus, as well as the
historical financial statements of the Company, the Potlatch Southern
Timberlands and ATCO included in this Prospectus.
The historical financial statements of ATCO and of the Potlatch Southern
Timberlands do not reflect recent and anticipated changes in harvest levels as
described below under "--Harvest Levels." In particular, due to a recent
change in ATCO's harvest strategy, ATCO began to harvest mature timber on the
ATCO Timberlands at a higher rate in 1997, and this accelerated harvesting has
continued into 1998. As a result, the foregoing historical financial
statements will not be directly comparable to the results of operations and
cash flow that the Company will derive from the ATCO Timberlands and the
Potlatch Southern Timberlands in future periods. In addition, the historical
financial statements of ATCO and of the Potlatch Southern Timberlands will not
be comparable to the Company's future results of operations and cash flow due
to certain other factors. First, the historical financial statements of ATCO
include the results of certain converting facilities and barge operations not
being acquired by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of ATCO." Second, the historical
financial statements of the
45
<PAGE>
Potlatch Southern Timberlands reflect periods during which the Potlatch
Southern Timberlands were operated and managed as part of Potlatch's overall
business, as discussed below under "--Historical Results of Operations of
Potlatch Southern Timberlands." As an independent company, the Company will
incur certain operating, administrative and interest expenses which have not
been reflected in the historical financial statements of the Potlatch Southern
Timberlands. See "--Expenses" below. Third, the Company's results of
operations and cash flow will reflect the terms of the Timber Purchase
Agreement, which has not historically applied to ATCO or the Potlatch Southern
Timberlands. Fourth, the Company's results of operations will differ from the
historical results of ATCO and the Potlatch Southern Timberlands due to the
use of the purchase method of accounting for the Company's acquisition of
ATCO, which will result in significant depletion (a non-cash expense).
The Company will account for its acquisition of the ATCO Timberlands under
the purchase method, while the Company will carry over Potlatch's low basis in
the Potlatch Southern Timberlands. As a result, Potlatch will be allocated all
of the "built-in" accounting gain attributable to the Potlatch Southern
Timberlands as of their contribution to the Partnership (that is, the
difference between fair market value and historical accounting basis as of the
contribution date), which gain will be recorded as a component of "minority
interest" in the Company's income statement. In addition, the Company's
operating income will bear all of the depletion (a non-cash expense)
attributable to the Company's stepped-up accounting basis in the ATCO
Timberlands. Accordingly, the Company does not expect to record significant
net earnings for several years and believes that prospective investors should
consider the Company's cash flow, as well as other factors, in evaluating an
investment in the Common Stock.
CERTAIN FACTORS AFFECTING RESULTS OF OPERATIONS AND CASH FLOW
Historically, the Initial Timberlands have been the principal source of raw
material for Potlatch's converting facilities in the southeastern United
States, including the lumber and veneer converting facilities that Potlatch
will acquire from ATCO and certain related entities in connection with the
Formation Transactions. In 1997, approximately 68% of the sawtimber
requirements of Potlatch's mills in the Southeast were met with timber
harvested from the Potlatch Southern Timberlands, and substantially all of the
sawtimber requirements of ATCO's mills were met with timber harvested from the
ATCO Timberlands. In connection with the Formation Transactions, the Company
has entered into the long-term Timber Purchase Agreement covering all of the
Initial Timberlands, pursuant to which Potlatch will purchase and harvest all
of the standing timber designated by the Company on an annual basis, subject
to limited exceptions. Potlatch's purchases under this agreement will
initially account for substantially all of the Company's revenues and cash
flow. See "--Harvest Levels" and "--Timber Prices" below, and "Business--Sales
and Markets--The Timber Purchase Agreement."
The Company's results of operations and cash flow will be affected by
several factors including harvest levels on its timberlands, timber prices and
operating expenses.
HARVEST LEVELS. Harvest levels will depend upon a number of factors. First,
harvest levels will depend upon the Company's estimates of the "sustainable
yield" from its properties. One of the Company's principal strategies is to
manage its timberlands on a sustainable yield basis over the long term,
reflecting a balance between timber growth and harvesting, which is also
required under the Timber Purchase Agreement. However, with Potlatch's
concurrence, the Company may choose to harvest timber from time to time at
levels above the Company's then-current estimate of sustainability for various
reasons, including to improve its lands' long-term productivity.
The following table summarizes the historical harvest levels on the Initial
Timberlands and ranges of estimated harvest levels. As described more fully
below, actual harvest levels can be expected to differ from these estimates
due to a number of factors, many of which will be beyond the Company's
control.
46
<PAGE>
<TABLE>
<CAPTION>
SOFTWOOD HARDWOOD SOFTWOOD HARDWOOD
SAWTIMBER SAWTIMBER PULPWOOD PULPWOOD
---------- ---------- ----------- -----------
YEAR (MMBF) (MMBF) (TONS 000S) (TONS 000S)
---- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Actual:
1994........................ 63 58 187(1) 280(1)
1995........................ 80 49 315(1) 230(1)
1996........................ 94 63 392(1) 540(2)
1997........................ 97 93 376(1) 704(2)
Harvest Plans(3):
1998........................ 90-100 102-112 340-376 923-1021
1999........................ 90-100 102-112 340-376 895-989
2000........................ 90-100 102-112 340-376 866-958
2001........................ 90-100 102-112 288-318 857-947
2002........................ 90-100 102-112 288-318 782-864
2003........................ 90-100 98-108 287-317 782-864
</TABLE>
- --------
(1) Potlatch Southern Timberlands only. Pulpwood harvest data for the ATCO
Timberlands are not available for calendar 1994 and 1995. Softwood
pulpwood data for 1996 and 1997 excludes immaterial volumes harvested by
ATCO.
(2) Includes softwood pulpwood harvested from the ATCO Timberlands, which ATCO
estimates were immaterial.
(3) 1998 and 1999 estimates represent 95% to 105% of the volumes designated in
the initial two-year harvest plan under the Timber Purchase Agreement,
which range was selected because a shortfall in Potlatch's actual harvest
volumes from the volumes designated under the agreement will not
constitute a breach of the agreement so long as at least 95% of the
designated volume is harvested during the relevant year or within
specified cure periods. The Partnership will have limited rights to
increase the volumes to be harvested in given year from the volumes
designated in the harvest plan, subject to compensating volume reductions
over the following five-year period. Amounts shown for 2000 to 2003 are
based on management's current estimates.
The differences between historical harvest levels and the Company's current
harvest plans are due to changes in silvicultural practices and harvesting
strategies that Potlatch and ATCO began to implement over the past three
years.
From 1994 to 1997, Potlatch's softwood sawtimber harvesting increased
somewhat as Potlatch began to shift an increasing percentage of its softwood
acreage to plantations, as described more fully below. Potlatch's softwood
pulpwood harvest levels fluctuated over this three-year period primarily due
to variations in the acreage of softwood plantations reaching ages appropriate
for thinning, and Potlatch's hardwood pulpwood harvests declined due primarily
to the sale of a hardwood tract in 1994. ATCO's harvest levels through the
mid-1990s reflect its historical business objective of enhancing the asset
value of its timber resources by maximizing the growing stock volume of
desirable species in good condition for the production of high-quality
hardwood sawtimber. In the mid-1990s, ATCO achieved its resource management
goals for quality and growing stock volume, and in early 1997, ATCO shifted
its business objective from enhancing asset value to maximizing both cash flow
and timber growth rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of ATCO." Due to ATCO's shift in
strategy, its hardwood harvest levels increased approximately 44% from
calendar 1996 to 1997, as ATCO began to harvest large-diameter timber at a
higher rate in order to increase cash flow and improve the long-term growth
rates of the remaining, younger timber. ATCO's new harvesting strategy also
contributed to an increase in its pulpwood harvest in 1997. As explained more
fully below, the Company intends to continue to implement this strategy,
resulting in increased harvests of hardwood sawtimber and pulpwood.
The Company's anticipated harvest levels for its softwoods and hardwoods
will reflect the different silvicultural practices and resource management
objectives applicable to these two types of timber. In
47
<PAGE>
softwoods, the Company's harvest plans will be significantly affected by its
plan to improve long-term growth rates and harvest levels by shifting an
increasing percentage of its softwood acreage from an "uneven-aged" condition
to "even-aged" stands which consist of trees of similar ages and sizes. This
management change, which Potlatch began in the mid-1990s, is being effected by
clear-cutting selected tracts, then planting genetically improved seedlings.
As these stands continue to be cut to make way for faster-growing seedlings,
the Company anticipates that its immediate-term softwood sawtimber harvest
levels will approximate 1996 and 1997 levels. As these faster-growing trees
mature, however, softwood sawtimber harvest levels are expected to rise to a
level exceeding the Company's average level in the early- to mid-1990s.
Softwood pulpwood harvest levels are expected to decline by approximately 15%
from current levels over the next four to five years due to an imbalance in
the current age distribution of plantations, which will result in fewer stands
ready to be thinned over that period.
Over the next five years, hardwood harvest levels are expected to exceed the
levels that prevailed prior to 1997 and are anticipated to be between
approximately 102 MMBF and 112 MMBF per year. This increased harvest level
reflects the recent shift in ATCO's business objective as discussed above.
Within approximately five years, the Company anticipates that this accelerated
harvesting will be substantially complete, resulting in longer-term estimated
harvest levels of hardwoods that are slightly below the current, accelerated
harvest level but above the historical average on the ATCO Timberlands.
Actual harvest levels can be expected to differ from the estimates set forth
in the Company's harvest plans. Among other things, the Company's long-term
harvest plans reflect its present estimate of long-term sustainable yield. The
Company's calculation of the sustainable yield from its properties, and thus
its harvest plans, will change over time, due in part to genetic improvements
and other silvicultural advances. Harvest levels may also be affected by
natural disasters, timber growth rates, regulatory constraints and other
factors, many of which are beyond the Company's control.
The Company's annual harvest levels will also fluctuate due to seasonal
weather factors. Softwood harvesting activities are somewhat limited during
the three- to four-month Winter rainy season in Arkansas. Rainfall from
November to April also depresses harvest volumes to some extent in the
Company's hardwood operations, due in part to the seasonal rise in the
Mississippi River. The Company's revenues and cash flow will be significantly
reduced during the foregoing periods. See "--Historical Results of Operations
of Potlatch Southern Timberlands--Quarterly Results."
Initially, Potlatch will harvest all of the timber to be harvested from the
Company's timberlands pursuant to the Timber Purchase Agreement, which has an
initial term of 20 years and may be extended by either party for up to 18
successive ten-year periods. The agreement covers all of the Initial
Timberlands. Timberlands that may be acquired by the Company in the future in
specified regions near Potlatch's and ATCO's current converting facilities and
lands offered to the Company in a Potlatch acquisition consisting primarily of
non-timberland assets may also become subject to the agreement at Potlatch's
election. Under the agreement, Potlatch will purchase all of the standing
timber designated in the Company's harvest plans at prices designed to reflect
fair market value on a stumpage basis. See "--Timber Prices" below. The
Company will recognize revenues when legal ownership and the risk of loss pass
to Potlatch. Payments under the agreement will generally be made monthly. See
"Business--Sales and Markets--The Timber Purchase Agreement."
TIMBER PRICES. The Company's results of operations and cash flow will depend
substantially upon the market price for timber in its operating regions and,
accordingly, are expected to fluctuate. Pursuant to the Timber Purchase
Agreement, timber from the Company's timberlands will be sold to Potlatch at
prices designed to reflect fair market value on a stumpage basis. The
agreement provides
48
<PAGE>
that, in determining fair market value, Potlatch and the Partnership will
consider such factors as they deem relevant. Initially, prices will generally
reflect the two methods by which Potlatch has historically supplied its
sawmills: (1) purchasing logs on a "delivered log" basis at the mill, and (2)
stumpage purchases through competitive bidding or otherwise. Accordingly,
initial prices will generally take into account (i) the price paid in arm's-
length transactions for comparable logs delivered to the mill, less Potlatch's
average costs of logging and transporting the logs to the mills where they are
to be processed, and (ii) prices paid in stumpage sales. Where Potlatch
assigns its right to harvest timber at the stump, Potlatch will pay the
Partnership the actual price paid in a competitive bid sale (or such other
price as the Partnership may agree), less an administrative charge. The prices
paid by Potlatch for timber from the Initial Timberlands will be redetermined
quarterly, and retroactive reconciling payments will be made if necessary. See
"Business--Sales and Markets--The Timber Purchase Agreement."
Over the long term, United States timber prices have historically
appreciated faster than general inflation, although prices can be expected to
fluctuate in the short term due to the cyclical nature of the forest products
industry and the factors discussed under "Business--Timber Supply" and
"Business--Timber Demand." The following graph illustrates trends in timber
prices in the southern United States, as reported in a trade publication.
HISTORICAL SOUTHERN STUMPAGE PRICES (a)
YEARLY INDEXED PRICE HISTORY
<TABLE>
<CAPTION>
Pine Hardwood Oak Pine Hardwood
Sawtimber Sawtimber Sawtimber Pulpwood Pulpwood CPI Index
--------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1987 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
1988 113.9 103.1 109.4 106.6 124.7 104.1
1989 111.1 109.2 117.6 117.0 173.2 109.1
1990 118.5 115.4 136.5 130.5 173.2 115.0
1991 117.6 123.1 134.1 136.4 173.2 119.8
1992 148.1 147.7 156.5 159.0 230.8 123.5
1993 175.9 206.2 215.3 181.7 288.6 127.1
1994 226.9 195.4 208.2 180.4 284.6 130.4
1995 246.3 218.5 242.4 195.1 410.9 134.1
1996 219.4 190.8 232.9 193.6 366.0 138.0
1997 269.4 218.5 270.6 221.7 439.0 141.3
</TABLE>
(a) Source: Timber Mart-South, 1998. Data for the Southeastern United States.
Hardwood sawtimber includes a mix of hardwood species; excludes oak.
Local timber prices often differ significantly from regional or national
averages, due to variations in fiber quality, local converting capacity and
demand, and other factors. Due to the high quality of its timber, ATCO has
generally realized higher stumpage prices for timber from the ATCO Timberlands
than regional averages. For example, the Company estimates that over 40% of
ATCO's hardwood sawtimber is USFS #1 grade, which is more than four times the
recent average on all hardwood
49
<PAGE>
timberlands available for commercial harvesting in ATCO's operating region,
based on USFS data. However, there can be no assurance that the Company will
continue to receive prices that exceed regional or national prices.
In addition, timber prices are indirectly affected by lumber prices, which
fluctuate depending upon a number of factors including lumber imports from
Canada. However, imports of wood products have historically been limited by
freight costs and, since April 1996, by the five-year U.S.-Canada lumber trade
agreement.
EXPENSES. The Company's expenses will consist primarily of costs incurred in
certain silvicultural activities, depletion and road amortization, property
taxes and administrative expenses, as well as interest expense. The Company
generally intends to capitalize silvicultural costs associated with
establishing timber stands and certain road building expenditures. Other
silvicultural costs, such as the cost of thinning existing stands, will be
expensed.
The Company's financial statements will reflect significant depletion, which
is a non-cash expense representing amortization of the costs associated with
acquiring or establishing timber stands. Depletion is charged to income as
timber is cut and is determined annually, based upon the relationship of
unamortized timber costs to the estimated volume of merchantable timber. Due
to the acquisition of ATCO under the purchase method of accounting, the
depletion associated with the cutting of timber from the ATCO Timberlands will
significantly reduce the Company's net income. See "--Overview" above.
As a result of the Company's status as a public company, the Company's
future financial statements will reflect various additional expenses that were
not incurred by the Potlatch Southern Timberlands. These are expected to
include executive compensation, office rental and occupancy costs, and other
corporate administration costs. The Company estimates that these expenses will
total approximately $4.0 million in 1998. Potlatch has committed to provide
the Company with certain administrative services, in areas such as human
resources, accounting and tax, at a price equal to Potlatch's cost. See
"Certain Relationships and Transactions." The Company's financial statements
will also include interest expense under its initial indebtedness, which will
have an initial principal amount of approximately $132.1 million (assuming an
initial public offering price of $20.00 per share), and any future borrowings.
The Company's borrowings under its revolving credit facility will bear
interest at variable rates, which will subject the Company to the risk of
rising interest rates. See "--Pro Forma Liquidity and Capital Resources"
below.
Due to the Company's status as a REIT, the historical financial statements
of the Potlatch Southern Timberlands do not reflect any allocation of federal
income tax expense because any such allocation would not be meaningful. The
Company plans to elect to be taxed as a REIT commencing with its taxable year
ending December 31, 1998. As a REIT, the Company generally will not be taxed
on income that it distributes to its stockholders so long as it meets certain
organizational and operational requirements. See "Certain Federal Income Tax
Considerations--Taxation of the Company." In certain situations, the Company
may elect to retain and pay taxes at regular corporate rates on the
undistributed portion of its net capital gains. See "Distribution Policy." The
Company anticipates that it will generally take the steps necessary to cause
its retained capital gains to be deemed distributed to its stockholders.
Although required to take their share of such gains into income, stockholders
(including tax-exempt U.S. stockholders) may file a claim for refund if their
proportionate share of the taxes paid by the Company exceeds their actual tax
liability.
As noted under "Risk Factors--Other Tax Risks--Conformity of States to
Federal Law," the failure of the states in which the Company operates to
conform to recent federal tax law changes relating to REITs could result in
the imposition of a corporate level tax in such states until such time
(currently estimated to be four years) as the Company would be able to qualify
as a REIT under the law in effect prior to 1997. Arkansas has not yet
conformed to such recent changes. Accordingly, the pro forma results of
operations assume that the Company will pay state taxes on its income
attributable to Arkansas.
50
<PAGE>
PRO FORMA DISCUSSION
PRO FORMA RESULTS OF OPERATIONS
The following discussion gives effect to the Formation Transactions and
certain pro forma adjustments described under "Pro Forma Condensed
Consolidated Financial Information." The Company's pro forma operating results
are not indicative of the Company's future results due to anticipated changes
in harvest levels and the other factors discussed above.
The Company's pro forma revenues for the year ended December 31, 1997 were
$70.0 million.
Pro forma depletion, depreciation and amortization for the year ended
December 31, 1997 were approximately $22.8 million, primarily reflecting the
significant depletion due to the application of the purchase method of
accounting to the acquisition of the ATCO Timberlands. Pro forma operating and
general and administrative expenses for the foregoing period were $11.5
million, which includes management's estimate of salaries, legal, accounting
and other recurring administrative costs.
Pro forma other income for the year ended December 31, 1997 was
approximately $5.4 million, which included approximately $2.4 million in
revenue from hunting leases, as well as approximately $2.6 million in income
attributable to approximately 8,000 acres of farmland and interests in six
commercial real estate properties to be acquired from ATCO.
Initially, the Company's financial statements will reflect Potlatch's
interest in Partnership income. As described above under "--Overview," when
timber is cut from the Potlatch Southern Timberlands, or when any of such
timberlands are sold, Potlatch will be allocated all of the accounting income
resulting from such assets' "built-in gain" for financial accounting purposes
(that is, the excess of fair market value over accounting basis when such
assets were contributed to the Partnership), which gain will represent a
component of "minority interest" in the Company's income statement. In the
future, each partner of the Partnership (initially, Potlatch and the Company)
will also be allocated its pro rata share of any accounting gain or loss on
sale or harvesting of the Initial Timberlands that is attributable to
appreciation or depreciation in the value of the Initial Timberlands after the
closing of the Formation Transactions. On a pro forma basis, Potlatch's equity
in Partnership income for the year ended December 31, 1997 was approximately
$30.0 million.
After reflecting Potlatch's pro forma equity in Partnership income, the
Company realized pro forma net earnings for the year ended December 31, 1997
of $2.7 million.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
The net proceeds to the Company from the sale of the 15,000,000 shares of
Common Stock being offered hereby are estimated to be $276.0 million ($317.9
million, if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $20.00 per share and after
deducting estimated underwriting discounts and commissions and offering
expenses. The Company intends to use the net proceeds of the Offering,
together with approximately $113.2 million in debt financing ($71.3 million,
if the Underwriters' over-allotment option is exercised in full) to fund its
acquisition of ATCO. Immediately after the consummation of the Offering and
the Formation Transactions, the Company will have no significant cash balance
and approximately $132.1 million in outstanding indebtedness (assuming the
foregoing initial public offering price and no exercise of the Underwriters'
over-allotment option), including approximately $18.9 million in indebtedness
assumed in the ATCO acquisition, which is secured by six commercial real
estate properties. The Company anticipates that its initial working capital,
together with anticipated cash flow from operations and anticipated borrowings
under the new credit facility described below, will provide adequate liquidity
to fund its activities and allow for distributions to stockholders in
accordance with the Company's initial distribution policy through the quarter
ending June 30, 1999. However, to the extent that these sources
51
<PAGE>
of funds are inadequate, additional funds will be required. In particular, one
of the Company's principal business strategies is to acquire additional
timberlands. The implementation of this strategy will require the Company to
make significant capital expenditures, and may require the Company to obtain
additional external financing beyond its credit facility.
As of December 31, 1997, the Company had no material commitments for capital
expenditures. Capital expenditures are expected to consist primarily of (i)
timberland acquisition costs, (ii) certain reforestation costs, which are
anticipated to increase in the near term due to the Company's planned
conversion of uneven-aged pine stands to even-aged plantations, and (iii) road
building and maintenance. The Company estimates that its capital expenditures
for 1998, excluding any potential acquisitions, will be approximately $5.4
million.
CREDIT FACILITY
The Company has received a loan commitment for, and intends to obtain, a
$200 million unsecured revolving line of credit (the "Credit Facility") from a
syndicate of commercial banks prior to the closing of the Offering. Under the
loan commitment, the Credit Facility will have a term of five years and may be
used for acquisitions, working capital and general corporate purposes. The
loan commitment provides that borrowings under the Credit Facility will bear
interest at a variable interest rate equal to a LIBOR rate for the LIBOR
period selected by the Company, plus a margin of between 40 and 60 basis
points, depending upon the Company's interest coverage ratio, or, at the
Company's election, at the prime rate of the agent bank in effect from time to
time. In addition, the loan commitment states that the Company will be
required to pay a quarterly facility fee equal to between 10 and 15 basis
points of the total amount of the Credit Facility, depending upon the
Company's interest coverage ratio. The loan commitment provides that the
Credit Facility will be payable interest only, quarterly in arrears (or at the
end of a LIBOR period), until the end of its term, at which time all unpaid
principal and interest becomes due and payable. However, if the Company sells
assets with a price in excess of $100 million, the Company will be required to
prepay a portion of the outstanding principal balance of the Credit Facility
equal to 50% of the net cash proceeds received in the sale of the assets sold,
and the amount available for borrowing under the Credit Facility will be
permanently reduced by a like amount unless a specified leverage ratio test
would be met after giving effect to such sale. The Company expects that the
Credit Facility will be subject to an interest coverage ratio covenant, a
timber value to funded debt ratio covenant and other covenants, terms and
conditions of the type customary for similar credit facilities. Upon the
closing of the Offering, the Company intends to borrow approximately $113.2
million under the Credit Facility (based on the assumptions set forth above)
in order to (i) repay $21.4 million of a loan from Potlatch to ATCO,
representing the portion of the loan which the Company assumed in the
Formation Transactions, and (ii) fund the portion of the ATCO acquisition not
funded from the proceeds of the Offering. The Partnership will assume the
Company's obligations under the Credit Facility. The Company intends to use
the remaining available borrowings for acquisitions and, if necessary, to fund
the payment of stockholder distributions. To the extent the Credit Facility is
not extended at the expiration of the initial five-year term, the Company will
be required to obtain additional equity or debt financing. There can be no
assurance that any such financing will be available on acceptable terms or at
all.
LIMITATIONS ON INDEBTEDNESS
In obtaining debt financing, the Company will be required to comply with
certain covenants in the Credit Facility, as described above, and with
contractual provisions in the Partnership Agreement. The Company and the
Partnership have agreed to refrain from taking actions that would cause
Potlatch to breach its debt covenants or any similar covenants in Potlatch's
future debt instruments, so long as they are no more restrictive than the
existing covenants. Potlatch's debt covenants will generally apply to the
Company so long as Potlatch owns more than 50% of the Company's voting power
or consolidates the Company for financial reporting purposes.
Potlatch's debt covenants include financial ratios and other quantitative
tests. Under the most restrictive of these covenants (requiring a ratio of
consolidated net tangible assets to "Funded Debt" (as defined) of at least 2-
to-1), and assuming that the Offering and Formation Transactions had
52
<PAGE>
occurred on December 31, 1997, Potlatch and the Company could together have
incurred approximately $280.0 million in additional Funded Debt as of that
date without breaching such covenant, assuming that the Company had $113.2
million in indebtedness under its Credit Facility as of that date. As
consolidated net tangible assets increase through acquisitions or otherwise,
the amount of Funded Debt permitted under this covenant will increase. In the
future, however, Potlatch will not be prevented from incurring indebtedness or
otherwise utilizing most or all of the available capacity under Potlatch's
debt covenants while they apply to the Company. Potlatch's debt covenants also
include (i) a limitation on liens (subject to certain exceptions including
exceptions for purchase money liens), (ii) a limitation on sale-leaseback
transactions, and (iii) limitations on certain mergers and other fundamental
transactions. The Partnership has also agreed pursuant to the Timber Purchase
Agreement and the Partnership Agreement to obtain Potlatch's consent before
encumbering any of the Potlatch Southern Timberlands, subject to limited
exceptions. See "The Partnership Agreement."
FUNDS FROM OPERATIONS; STOCKHOLDER DISTRIBUTIONS
The Company believes that Funds from Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flow
from operating activities, investing activities and financing activities, it
provides investors with an understanding of the ability of the Company to
incur and service debt and make capital expenditures. The Company calculates
Funds from Operations as net earnings (computed in accordance with GAAP),
excluding significant non-recurring items, gains (or losses) from debt
restructuring and major sales of property, plus minority interest, income
taxes paid on retained capital gains, depletion and real estate-related
depreciation and amortization (including amortization of logging roads) and
after adjustments for unconsolidated partnerships and joint ventures, less any
preferred stock dividends. Depletion is a non-cash expense representing
amortization of the costs associated with acquiring or establishing timber
stands. The Company believes that it is appropriate to include depletion in
calculating Funds from Operations in part because depletion is analogous to
the real estate-related depreciation and amortization typically included in
Funds from Operations by non-timber REITs. The definition of Funds from
Operations approved by NAREIT includes real estate-related depreciation and
amortization but does not specifically address timber-related depletion. In
addition, as explained in footnote (2) under "Distribution Policy," the
Company includes any income taxes paid on retained capital gains in its
calculation of Funds from Operations. The definition of Funds from Operations
approved by NAREIT does not include such taxes. Due to the Company's inclusion
of depletion and any taxes paid on retained capital gains in its calculation,
the Company's Funds from Operations will not be directly comparable to Funds
from Operations reported by other REITs, including REITs that define the term
using the definition of Funds from Operations approved by NAREIT. Funds from
Operations should not be considered as an alternative to net earnings
(computed in accordance with GAAP) as an indication of the Company's financial
performance or to cash flow from operating activities (computed in accordance
with GAAP) as a measure of the Company's liquidity, nor is it indicative of
funds available to fund the Company's cash needs, including its ability to
make distributions. The Company's anticipated initial distribution rate is
based on an estimate of the Company's Funds from Operations for 1998. This
estimate is based on the Company's pro forma Funds from Operations for the
year ended December 31, 1997, with certain adjustments to reflect anticipated
changes in harvest levels. See "Distribution Policy." The Company's estimate
of Funds from Operations is being made solely for the purpose of setting the
initial distribution rate and is not intended to be a projection of the
Company's results of operations or its liquidity, nor is the methodology used
to set the anticipated initial rate necessarily intended to be a basis for
determining future distributions.
Because the Company expects that its income will consist largely of capital
gains, the Company does not believe it will be required to distribute any
material amounts of cash in order to maintain its status as a REIT. See
"Certain Federal Income Tax Considerations--Taxation of the Company" and
"Distribution Policy." The Company's ability to make distributions to
stockholders will be affected by
53
<PAGE>
quarterly fluctuations in timber prices and other factors. See "Risk Factors--
Potential Limitations on Distributions." Due to seasonal limitations on
harvesting in the first quarter, the Company anticipates that it may need to
raise funds in order to make distributions to stockholders in certain periods
to maintain its desired distribution rate. See "--Certain Factors Affecting
Results of Operations and Cash Flow" above.
The Company's ability to make distributions may also be affected by
potential differences between the Company's share of cash distributions from
the Partnership and the amount of taxable income allocated to the Company
under the Partnership Agreement. See "Distribution Policy" and "Risk Factors--
Potential Differences between Taxable Income and Cash Available for
Distribution." If, after giving effect to the Company's distributions for a
tax year, the Company has not distributed 100% of its net taxable income
(including capital gains), then the Company will be required to pay tax on the
undistributed portion of such taxable income at regular federal corporate tax
rates (currently 35%). In such cases, the Company anticipates that it would
generally make an election pursuant to which (i) such taxes would be treated
as having been paid on behalf of the Company's stockholders, who would be
allowed a credit on their tax returns in the amount of their share of the
federal income taxes paid by the Company and (ii) such retained capital gains
would be treated as having been distributed to the Company's stockholders.
Stockholders (including tax-exempt stockholders) will be able to file a claim
for refund if such credit exceeds their actual tax liability (if any). To the
extent the Company has funds available (including from operations, borrowings,
equity issuances, sales of assets or otherwise), the Company may elect to use
such funds to pay taxes on its retained capital gains. If the Company would
not have sufficient funds, after giving effect to expected distributions to
its stockholders, to pay its taxes on such retained capital gains and if, in
the judgment of the Board of Directors, it would not be in the best interests
of the Company and its stockholders to obtain or use funds from borrowings,
equity issuances, sales of assets or other sources to pay such taxes, then the
amount of cash actually distributed to the Company's stockholders may be
reduced to the extent necessary to pay such taxes. See "Distribution Policy"
and "Certain Federal Income Tax Considerations--Taxation of Taxable U.S.
Stockholders--Distributions by the Company."
HISTORICAL RESULTS OF OPERATIONS OF POTLATCH SOUTHERN TIMBERLANDS
The net earnings of the Potlatch Southern Timberlands were $35.3 million,
$21.6 million and $25.6 million for the years ended December 31, 1997, 1996
and 1995, respectively. Summary results for the Potlatch Southern Timberlands
are shown below in thousands of dollars (except for timber volumes and
prices):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
SUMMARY FINANCIAL DATA:
Revenues......................................... $ 29,715 $ 28,318 $ 40,449
Costs and expenses............................... 5,630 7,989 6,471
-------- -------- --------
Earnings from operations......................... 24,085 20,329 33,978
Other income, net................................ 1,537 1,252 1,362
-------- -------- --------
Net earnings..................................... $ 25,622 $ 21,581 $ 35,340
======== ======== ========
OTHER DATA:
Volumes:
Sawtimber (MBF)................................ 81,831 93,498 97,169
Pulpwood (tons)................................ 545,583 624,577 583,061
Average internal transfer prices:
Sawtimber (MBF)................................ $ 311.09 $ 258.03 $ 367.19
Pulpwood (tons)................................ $ 7.81 $ 6.71 $ 8.18
</TABLE>
During the foregoing periods, the Potlatch Southern Timberlands' revenues
consisted primarily of timber sales, predominantly to Potlatch converting
facilities. Historical timber sales have been calculated based on actual
harvest volumes multiplied by internal transfer prices.
54
<PAGE>
In addition to sales of timber, revenues also include minor sales of
timberlands to parties other than Potlatch. The timberlands sold have
generally consisted of smaller tracts that were considered to be less
productive or not as strategically located as the remainder of Potlatch's
southern lands.
The Potlatch Southern Timberlands' historical costs and expenses consist of
depletion, road amortization and maintenance, timberland administration and
property taxes. Because the cash position of the Potlatch Southern Timberlands
has historically been managed by Potlatch through its centralized treasury
system, no interest costs or income has been allocated to the Potlatch
Southern Timberlands. In addition, the Potlatch Southern Timberlands'
operating results do not include general corporate administration expenses
such as legal, tax, public affairs, employee relations, external accounting,
reporting and auditing, corporate secretary functions and general corporate
management costs.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
In 1997, the Potlatch Southern Timberlands generated revenues of $40.4
million on timber sales of approximately 97,169 MBF of sawtimber and 583,061
tons of pulpwood, an increase of 43% from 1996 revenues of $28.3 million on
timber sales of approximately 93,498 MBF of sawtimber and 624,577 tons of
pulpwood. The improvement in revenues primarily reflected a 42% increase in
sawlog prices.
Depletion, depreciation and amortization was $1.7 million, a 51% decrease
from the $3.5 million incurred in 1996. The decrease was primarily
attributable to the lower cost basis of timber harvested in 1997, in
comparison to the timber stands harvested in 1996 (which included mature
stands purchased in 1994 and 1995). Operating expenses were $4.8 million in
1997, a 6% increase from the $4.5 million incurred in 1996.
Other income increased to $1.4 million in 1997 from $1.3 million in 1996,
primarily due to increased timberland sales.
Net earnings in 1997 were $35.3 million, an increase of 64% from the $21.6
million earned in 1996. The increase is primarily due to higher revenues
described above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
In 1996, the Potlatch Southern Timberlands generated revenues of $28.3
million on timber sales of approximately 93,498 MBF of sawtimber and 624,577
tons of pulpwood, a decrease of 5% from 1995 revenues of $29.7 million on
timber sales of approximately 81,831 MBF of sawtimber and 545,583 tons of
pulpwood. Revenues fell largely as a result of lower prices for pine sawlogs
and pulpwood, which more than offset a 14% increase in sawlog harvest volumes.
Depletion, depreciation and amortization was $3.5 million in 1996, a 148%
increase over the $1.4 million incurred in 1995, which is due to harvesting
recently purchased timber stands and an overall increase in harvest activity.
Operating expenses were $4.5 million in 1996, a 7% increase over 1995.
Other income decreased to $1.3 million in 1996 from $1.5 million in 1995,
primarily due to reduced timberland sales.
Net earnings in 1996 were $21.6 million, a decrease of 16% from the $25.6
million earned in 1995. This decrease is attributable to the lower revenues
and higher expenses described above.
QUARTERLY RESULTS OF OPERATIONS
Historically, the Potlatch Southern Timberlands' results of operations have
been depressed in the first quarter and to some extent in the second quarter
of each year, due to limitations on harvesting
55
<PAGE>
caused by Winter weather. The following table summarizes the results of
operations achieved in the eight most recent quarters (dollars in thousands,
other than timber prices):
<TABLE>
<CAPTION>
1996 1997
---------------------------------- ----------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- ------- -------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY FINANCIAL DATA:
Revenues................ $ 4,746 $ 5,640 $ 9,188 $ 8,744 $ 6,004 $ 9,067 $ 12,725 $ 12,653
Costs and expenses...... 1,507 1,983 2,466 2,033 1,463 1,707 1,647 1,654
-------- ------- -------- -------- ------- -------- -------- --------
Earnings from
operations............. 3,239 3,657 6,722 6,711 4,541 7,360 11,078 10,999
Other income, net....... 61 679 426 86 31 1,115 35 181
-------- ------- -------- -------- ------- -------- -------- --------
Net earnings........... $ 3,300 $ 4,336 $ 7,148 $ 6,797 $ 4,572 $ 8,475 $ 11,113 $ 11,180
======== ======= ======== ======== ======= ======== ======== ========
OTHER DATA:
Volumes:
Sawtimber (MBF)........ 15,210 22,589 33,070 22,629 15,942 24,780 28,797 27,650
Pulpwood (tons)........ 124,168 97,017 211,239 192,153 95,265 115,713 192,996 179,087
Average internal
transfer prices:
Sawtimber ($/MBF)...... $ 256.67 $220.48 $ 235.28 $ 329.68 $339.72 $ 348.44 $ 365.50 $ 401.61
Pulpwood ($/tons)...... $ 6.78 $ 6.80 $ 6.67 $ 6.68 $ 6.18 $ 3.74 $ 11.40 $ 8.65
</TABLE>
The foregoing quarterly information is unaudited, but in the opinion of
management reflects all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods presented when read in conjunction with the audited financial
statements of the Potlatch Southern Timberlands and notes thereto. The
operating results for any quarter are not necessarily indicative of results
for any future period.
LIQUIDITY AND CAPITAL RESOURCES OF POTLATCH SOUTHERN TIMBERLANDS
The Potlatch Southern Timberlands' cash flow from operations was $37.0
million, $24.6 million and $27.2 million, respectively, for the years ended
December 31, 1997, 1996 and 1995. Changes in period-to-period cash flow for
the Potlatch Southern Timberlands largely correspond to the changes in net
earnings for the same periods due to the absence of significant noncash
expenses other than depletion expense.
The Potlatch Southern Timberlands' capital expenditures were $2.7 million,
$2.3 million and $3.2 million, respectively, in 1997, 1996 and 1995. The 1995
expenditures included expenditures for timber acquisitions. The remainder of
the expenditures relate to reforestation costs, road building and maintenance.
Historically, capital projects for the Potlatch Southern Timberlands have been
funded by Potlatch's working capital, overall operations and centralized cash
management system.
OTHER MATTERS
IMPACT OF INFLATION
General inflation has not had a significant effect on the Company's
operating results. Inflation has an indirect effect on the Company's results
due to the dependence of timber sales on housing starts, which are affected by
changes in interest rates caused by inflation and other factors.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, and
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information. These standards, which are
effective for fiscal years beginning after December 15, 1997, require
presentation of certain additional information in the financial statements and
accompanying footnotes. The effect of implementing the new standards may
require changes in the format of some of the information that the Company
currently presents, but these changes are not expected to be material.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ATCO
OVERVIEW
Prior to January 1, 1998, ATCO was an integrated hardwood forest products
company with approximately 324,000 acres of hardwood timber located along the
Mississippi River primarily in Mississippi, Arkansas, Louisiana and Tennessee.
ATCO and a related partnership also operated facilities in Vicksburg,
Mississippi that convert sawtimber into premium hardwood lumber used in
furniture, cabinets, architectural moldings and flooring, convert hardwood
sawtimber into veneer used in laminated hardwood flooring, and sell pulpwood
and other sawtimber to third parties. ATCO and its wholly-owned subsidiaries
also operated other businesses not vertically integrated with its hardwood
forests, including a river construction and transportation business and a
laminated truck flooring facility in Memphis, Tennessee, which was sold as of
December 31, 1997. In addition, ATCO holds interests in commercial real estate
and farmland.
In May 1995, Anderson-Tully Veneers, L.P. was formed to construct and
operate a state-of-the-art rotary veneer converting facility which would
purchase certain grades of oak sawtimber from ATCO, with ATCO holding a 1%
interest as managing general partner and the ATCO shareholders holding the
remaining 99% as limited partners. Veneer operations commenced in November
1996. As managing general partner, a wholly owned subsidiary of ATCO controls
the partnership's operations and guarantees its indebtedness. Accordingly,
Anderson-Tully Veneers, L.P.'s assets, liabilities and results of operations
are included in the consolidated financial statements of ATCO with appropriate
recognition of the limited partners' approximately 99% minority interest.
At December 31, 1997, ATCO completed a series of transactions to effect the
separation of ATCO's timberlands and other real estate holdings from its
converting and other operations, which enabled ATCO to qualify as a REIT
effective January 1, 1998. As a result of those transactions, assets and
liabilities of converting and other operations owned by ATCO and its
subsidiaries (along with certain indebtedness) were transferred to Anderson-
Tully Veneers, L.P. or to newly formed operating entities owned by Anderson-
Tully Veneers, L.P. In exchange, ATCO received non-voting preferred stock
representing 82.2% and 95% of the economic interest of the timber harvesting
and lumber operations, respectively. Anderson-Tully Veneers, L.P., directly
and through its wholly-owned subsidiaries, assumed controlling ownership
interests in all converting and other operations. The historical results of
operations of ATCO presented in the consolidated financial statements included
in this Prospectus are not affected by the restructuring transactions
described above.
As described elsewhere in this Prospectus, ATCO has agreed to merge ATCO's
timberlands, commercial real estate and farmland into the Company, and certain
of ATCO's affiliated companies have agreed to sell their timber harvesting and
lumber and veneer converting operations to Potlatch. See "The Formation
Transactions."
BUSINESS AND RESOURCE MANAGEMENT OBJECTIVES
ATCO's operating results have fluctuated due to changes in ATCO's business
objectives and resource management practices and timber harvest levels. ATCO
was formed in 1889 and, throughout most of its history, its business objective
has been to enhance the asset value of its timber resources by maximizing the
growing stock volume of desirable species in good condition for the production
of high quality hardwood sawtimber. Only in the last ten years have the demand
and market prices for hardwood pulpwood reached levels allowing the harvest of
pulpwood to be commercially practicable. As a result, ATCO's historical
resource management practice was to remove trees from stands that were not
likely to enhance the value of the stand or had reached economic maturity in
order to improve the quality of the remaining stand and promote the natural
regeneration of desirable species. From the mid-1960s through the early 1990s,
the average annual harvest was less than 50 MMBF, or less than
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70% of annual growth. Because of this resource management practice, ATCO
purchased outside timber and logs in order to meet the species mix and volume
requirements of its converting facilities.
In the mid-1990s, ATCO achieved its resource management goals for quality
and growing stock volume. Based on timber productivity data accumulated for
approximately 30 years, ATCO concluded that it could increase its timber
growth rates by reducing the stocking levels of large-diameter trees through
an increased overall harvest for several years. Accordingly, in January 1997
ATCO shifted its business objective from enhancing the asset value of its
timber resources to maximizing the productivity of its timber resources and
cash flow and has begun an increased overall harvest with attention given to
reducing the stocking of large-diameter trees. As a result, ATCO has reduced
its purchases of timber and logs from third parties.
TIMBERLANDS REVIEW
ATCO's harvest and timber acquisition volumes for the periods presented are
as follows:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEARS ENDED JULY 31, DECEMBER 31,
----------------------- -----------------
1995 1996 1997 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
SAWTIMBER (MBF)
ATCO lands............................ 54,118 52,068 80,721 29,121 40,439
Purchased timber...................... 10,228 10,583 2,852 2,814 1,907
Purchased logs........................ 15,321 5,123 6,207 1,312 3,738
------- ------- ------- -------- --------
Total............................... 79,667 67,774 89,780 33,247 46,084
PULPWOOD (TONS)
Total............................... 209,725 277,302 363,540 141,554 274,781
</TABLE>
The increase in harvest volumes for the year ended July 31, 1997 and the
five months ended December 31, 1997 compared to the corresponding periods in
the previous year is due to the implementation of ATCO's new resource
management objective. The increase in pulpwood volumes harvested in these
periods also reflects increases in pulpwood demand and is in response to
higher pulpwood prices. Sawtimber volumes harvested for the year ended July
31, 1996 decreased compared to the previous year due to reduced lumber
production resulting from start-up inefficiencies associated with a lumber
conversion facility modernization program begun in 1995 and completed in mid-
1996.
HISTORICAL RESULTS OF OPERATIONS OF ATCO
Historically, ATCO's revenues have consisted of sales of lumber, veneer,
laminated flooring and pulpwood to third parties, as well as revenues from
ATCO's river construction businesses. As a result, ATCO's historical financial
results will not be comparable to the results to be attributable to the ATCO
Timberlands in the future.
FIVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO FIVE MONTHS ENDED DECEMBER
31, 1996 (UNAUDITED)
Net revenues for the five months ended December 31, 1997 were $52.5 million,
an increase of 47% from revenues of $35.8 million for the five months ended
December 31, 1996. The increase was primarily due to a 51% increase in timber
and wood products revenues, which resulted from increased volumes shipped in
all categories of timber and wood products, including lumber, pulpwood, logs
and laminated truck flooring, as well as increased volumes of veneer shipped
resulting from five months of operations at full capacity in 1997 compared to
only three months of start-up operations in 1996. In addition, river
construction revenues increased to $11.7 million in the five months ended
December 31, 1997 from $7.6 million in the comparable period in the previous
year due to favorable Mississippi River levels extending beyond the normal
season.
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<PAGE>
Total costs and expenses for the five months ended December 31, 1997 were
$45.5 million, an increase of 38% from the $33.0 million incurred in the five
months ended December 31, 1996. Timber and wood products expenses were $29.3
million for the five months ended December 31, 1997, an increase of 28%
compared to $22.9 million for the comparable period in the previous year. The
increase is primarily due to increased logging and log transportation costs
resulting from an increased harvest level, increased veneer manufacturing
costs resulting from five months of operations at full capacity and increased
laminated flooring costs resulting from increased production and sales volume.
Lumber manufacturing costs were approximately the same in both periods despite
a 29% increase in lumber volume shipped due to improved production rates and
reduced downtime. River construction expenses were $11.0 million in the five
months ended December 31, 1997, an increase of 73% compared to $6.3 million
for the comparable period in the previous year, due to the increase in river
construction revenues described above.
Interest expense for the five months ended December 31, 1997 was $2.4
million, an increase of 80% from the interest expense of $1.3 million incurred
in the five months ended December 31, 1996. The increase is due to increased
borrowings of approximately $60.0 million to fund the dividend paid in
September 1997 to enable ATCO to qualify as a REIT. Loss on sales of assets
for the five months ended December 31, 1997 was $5.2 million compared to a
gain of $0.3 million in the comparable period of the previous year. In late
1997, ATCO decided to dispose of the laminated truck flooring operations since
there were no vertical synergies with its timberlands. On December 31, 1997,
assets related to the laminated truck flooring plant were sold for $0.1
million in cash and a $4.9 million note receivable, which accounts for
substantially all of the loss incurred.
ATCO recorded an income tax benefit for the five months ended December 31,
1997 of $0.6 million compared to a $0.5 million expense for the five months
ended December 31, 1996. The effective income tax rate for the five-month
periods in 1997 and 1996 reflect $0.5 million and $0.2 million benefits,
respectively, of the absence of federal income taxes payable on net earnings
from Anderson-Tully Veneers, L.P.
Income (loss) before minority interest in Anderson-Tully Veneers, L.P. for
the five months ended December 31, 1997 was ($0.1) million, compared to income
of $1.5 million for the comparable period in 1996. Net income (loss) for the
five months ended December 31, 1997 was ($1.3) million compared to income of
$1.0 million for the comparable period in the previous year. The decrease in
both is due primarily to the loss on the sale of the laminated truck flooring
assets and increased interest expense offset by the increase in income from
operations as described above.
FISCAL YEAR ENDED JULY 31, 1997 COMPARED TO FISCAL YEAR ENDED JULY 31, 1996
Net revenues for the fiscal year ended July 31, 1997 were $96.9 million, an
increase of 10% from revenues of $88.2 million for the fiscal year ended July
31, 1996. The increase was primarily due to the commencement of the veneer
operations in October 1996, which contributed $8.5 million in revenues in
fiscal 1997. Increased volumes shipped and revenues from lumber, pulpwood and
logs were also experienced in fiscal 1997 due to increased lumber production
and increased timber harvest levels but were partially offset by decreases in
laminated trailer flooring sales due to lower volumes of trailers produced and
decreases in river construction revenues due to unfavorable river levels for
extended periods.
Total costs and expenses for the fiscal year ended July 31, 1997 were $85.1
million, an increase of 10% from total costs and expenses of $77.0 million for
the fiscal year ended July 31, 1996. Timber and wood products expenses were
$60.8 million for fiscal 1997, an increase of 22% compared to $49.7 million
for fiscal 1996. The increase is attributable to the veneer start-up, lumber
operations and timber sales. River construction expenses were $15.1 million in
fiscal 1997, a decrease of 22% compared to
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<PAGE>
$19.2 million in fiscal 1996. The decrease is due to decreased river
construction revenues for the same periods.
Interest expense for the fiscal year ended July 31, 1997 was $3.4 million,
an increase of 28% from interest expense of $2.6 million in the year ended
July 31, 1996. The increase was due to increased borrowings primarily for the
construction of the new veneer mill, lumber manufacturing equipment
improvement and the acquisition of commercial real estate. Gain on sales of
assets for fiscal 1997 was $2.4 million compared to $0.4 million for fiscal
1996 due to sales in fiscal 1997 of certain farm and commercial properties.
The effective income tax rate for the fiscal year ended July 31, 1997 was
34.2% compared to 33.2% for the fiscal year ended July 31, 1996. The effective
income tax rate for fiscal 1997 reflects $0.6 million benefit of no federal
income taxes payable on net earnings from Anderson-Tully Veneers, L.P.
Income before a minority interest in Anderson-Tully Veneers, L.P., for 1997
was $7.5 million, an increase of 23% from $6.1 million in 1996. The increase
was due primarily to the earnings from the veneer operations. Net income for
fiscal 1997 was $5.7 million, a decrease of 7% from $6.1 million in 1996.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
Net revenues for the fiscal year ended July 31, 1996 were $88.2 million, a
decrease of 4% from revenues of $91.7 million for the fiscal year ended July
31, 1995. The decrease was due primarily to lower lumber sales from decreased
lumber production which occurred because of start-up inefficiencies associated
with the lumber facility modernization program begun in 1995 and completed in
Spring 1996.
Total costs and expenses for the fiscal year ended July 31, 1996 were $77.0
million, a decrease of 1% from total costs and expenses of $78.1 million for
the fiscal year ended July 31, 1995. Timber and wood products expenses were
$49.7 million for fiscal 1996, a decrease of 4% compared to $52.0 million for
fiscal 1996. The decrease is attributable to the net effect of lower labor
costs and higher depreciation expense due to the lumber facility modernization
program. River construction expenses were $19.2 million in fiscal 1996, an
increase of 6% compared to $18.1 million in fiscal 1995. The increase is due
to the 1% increase in river construction revenues for the same period.
Interest expense for the fiscal year ended July 31, 1996 was $2.6 million,
an increase of 65% from interest expense of $1.6 million in the fiscal year
ended July 31, 1995. The increase was due to increased borrowings primarily
for the construction of the new veneer mill, the lumber facility modernization
program and the acquisition of river construction equipment.
The effective income tax rate for the fiscal year ended July 31, 1996 was
33.2% compared to 34.5% for the fiscal year ended July 31, 1995.
Net income for fiscal 1996 was $6.1 million, a decrease of 21% from $7.7
million in fiscal 1995. The decrease is due primarily to the decrease in
timber and wood products operating income resulting from the start-up
inefficiencies associated with the lumber facility modernization program.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by ATCO's operating activities for the five months ended
December 31, 1997 and 1996 was $9.2 million and $7.1 million, respectively,
and was $18.4 million, $14.2 million and $9.8 million, respectively, for the
fiscal years ended July 31, 1997, 1996 and 1995. Cash provided by operations
has increased despite decreases in net income in each of the fiscal years
presented because a higher percentage of total expenses are non-cash expenses
including depreciation, depletion and amortization, deferred income taxes and
minority interest in earnings.
60
<PAGE>
Substantially all of ATCO's capital expenditures over the five months ended
December 31, 1997 and ATCO's three most recent fiscal years relate to
operations not being acquired by the Company. ATCO's capital expenditures for
the five months ended December 31, 1997 and 1996 were $2.7 million and $6.3
million, respectively, and were $31.1 million, $29.8 million and $19.8
million, respectively, for the fiscal years ended July 31, 1997, 1996 and
1995. Capital expenditures were related to constructing the veneer plant,
modernizing the lumber and laminated trailer flooring facilities, and
acquiring river construction equipment and commercial real estate. Over half
of these capital expenditures were funded from cash flow from operations and
the proceeds from the sales of assets and commercial real estate, with the
remainder funded by the issuance of long term debt and borrowings under line
of credit facilities. The reduction in capital expenditures in the five months
ended December 31, 1997 is due to the completion of the projects described
above. Capital expenditures necessary to maintain ATCO's current facilities
and capacities in future years are currently expected to be less than $4.0
million per year.
In September 1997, ATCO declared a special $100,000 per share dividend to
distribute all accumulated earnings and profits to enable ATCO to qualify as a
REIT effective January 1, 1998. This dividend was financed by a $50.0 million
note payable to Potlatch plus additional line of credit borrowings. The $50.0
million note is due on demand after June 1, 1999. As of December 31, 1997,
ATCO had two lines of credit totaling $16.5 million of which $7.4 million was
available for future borrowing. All outstanding borrowings are either the
direct obligation of, or are unconditionally guaranteed by, ATCO. Management
of ATCO believes that, absent the Formation Transactions described in this
Prospectus, cash flow from operations and access to capital under ATCO's lines
of credit would be adequate to fund required ATCO's REIT distributions, debt
service and capital expenditure needs in the foreseeable future.
61
<PAGE>
BUSINESS
This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed below, under "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company" and elsewhere in this Prospectus.
Unless the context otherwise requires, all references to the timber
ownership and operations of the "Company" and the "Partnership" assume that
the Company's acquisition of ATCO and the divestiture of ATCO's non-timber
assets, the contribution of Potlatch's and ATCO's timberlands to Timberland
Growth Limited Partnership (the "Partnership") and the associated issuances of
partnership interests ("Partnership Units") to Potlatch and the Company have
occurred. See "The Formation Transactions." Certain of the timber industry
terms used herein are defined in the Glossary located elsewhere in this
Prospectus.
OVERVIEW
The Company is the first publicly traded real estate investment trust
("REIT") primarily dedicated to the ownership, management and acquisition of
timberlands. The Company is one of the largest private owners of softwood
timberlands in Arkansas and of high quality hardwood timberlands in North
America. The Company's Initial Timberlands, which are located primarily in
Arkansas and Mississippi, include approximately 364,000 fee acres of softwood
timberlands and approximately 460,000 fee acres of hardwood timberlands, and
represent the consolidation of Potlatch's southeastern timberlands and ATCO's
timberlands into a REIT structure. The Company's aggregate timberland acreage
includes approximately 44,000 acres of roads and other non-productive acreage.
The Company also owns approximately 8,000 acres of farmland and interests in
six commercial real estate properties.
The Company's timberlands contain an estimated total merchantable timber
volume of approximately 2.9 billion board feet ("BBF") of sawtimber and 24.1
million tons of pulpwood. The Company's timber holdings are well diversified
between softwood and hardwoods, with its merchantable sawtimber and pulpwood
inventories consisting of approximately 41% softwoods and 59% hardwoods,
measured in tons. The Company's softwood holdings consist primarily of
loblolly pine, and its hardwood lands contain high-value species such as red
oak and ash, as well as other hardwoods such as hackberry, sweet gum and
pecan. The Company's timberlands are located in close proximity to numerous
conversion facilities operated by Potlatch and others, and are highly
productive. In particular, the Company believes that the lands acquired from
ATCO are among the highest quality and most productive hardwood forests in
North America. The Company estimates that over 40% of ATCO's hardwood
sawtimber is USFS #1 grade, which is more than four times the recent averages
on all hardwood timberlands available for commercial harvesting in ATCO's
operating region, based on USFS data. See "--Competitive Strengths."
Giving effect to the Formation Transactions, the Company's pro forma
revenues and pro forma cash flow from operations totaled $70.0 million and
$54.3 million, respectively, in fiscal 1997.
The Company's customers, which will initially consist only of Potlatch, will
convert the softwood logs harvested from the Initial Timberlands and
timberlands acquired in the future (collectively, the "Timberlands") into
lumber, primarily for use in residential home construction, remodeling and
repair and general industrial applications, and pulp for use in paper
products. Hardwoods from the Company's timberlands will generally be converted
into furniture-grade lumber, veneer and solid flooring, architectural moldings
and cabinets, as well as pulp.
Historically, Potlatch's converting facilities (including those acquired
from ATCO in the Formation Transactions) have relied on the Company's lands
for a substantial portion of their timber
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<PAGE>
requirements. In 1997, approximately 68% of the sawtimber requirements of
Potlatch's mills in the Southeast were met with timber harvested from the
Potlatch Southern Timberlands, and substantially all of the sawtimber
requirements of ATCO's mills were met with timber harvested from the ATCO
Timberlands. Consistent with this historical relationship, Potlatch will
purchase all of the timber to be harvested from Company's Initial Timberlands
pursuant to the Timber Purchase Agreement, which has an initial term of 20
years and may be extended by either party for up to 18 successive ten-year
periods. The agreement covers all of the Initial Timberlands, and may cover
certain additional timberlands that may be acquired by the Company in the
future. Potlatch will be required to purchase and harvest all of the timber
designated in the Company's harvest plans, subject to limited rights of
substitution. Timber from the Company's timberlands will be sold to Potlatch
at prices designed to reflect fair market value on a stumpage basis. The
Company will generally be prohibited from selling the timberlands contributed
by Potlatch without Potlatch's consent. See "Business--Sales and Markets--The
Timber Purchase Agreement."
The ownership, management and operation of the Company's timberlands will be
conducted solely through the Partnership, a Delaware limited partnership in
which the Company will hold a 42.9% interest as the sole general partner and
Potlatch will hold a 57.1% interest as a limited partner. See "The Partnership
Agreement." The Company expects that substantially all of its income will be
characterized as capital gain for federal income tax purposes. See "Certain
Federal Income Tax Considerations--Taxation of the Company--Income Tests."
Accordingly, the Company anticipates that substantially all of its
distributions to stockholders will be characterized as capital gain for
federal income tax purposes.
BUSINESS STRATEGY
The Company's primary objective is to maximize long-term cash flow per share
by pursuing the following strategies:
. Focusing on timberland ownership;
. Aggressively pursuing attractive acquisitions;
. Managing its timberlands to improve their long-term sustainable yield;
and
. Practicing sound environmental stewardship.
FOCUSING ON TIMBERLAND OWNERSHIP. The Company plans to invest primarily in
timberlands. The Company believes that timberland is a unique and attractive
asset, due to the renewable nature of timber resources, timber's long-term
history of price appreciation in excess of inflation, and the continuing
tightening of domestic timber supplies relative to anticipated demand. In
addition, by owning timberlands rather than conversion facilities, the Company
will not be directly exposed to certain risks typically encountered by
integrated forest products companies, such as potential mill overcapacity,
higher capital and maintenance costs and potential shortages of wood fiber.
The Company also believes that timber prices generally have been less volatile
than wood product prices.
AGGRESSIVELY PURSUING ATTRACTIVE ACQUISITIONS. Growth through acquisitions
is an integral part of the Company's business strategy. The Company believes
that there are many potential opportunities to acquire additional timberlands.
Timberland ownership in the United States is highly fragmented, with large
numbers of commercial owners and more than one-half million private non-
industry owners of more than 100 acres of timberland. In the southeastern
United States, where the Company's operations are currently concentrated, non-
government owners hold a majority of all timberlands. The Company believes
that it will enjoy a competitive advantage in competing for acquisition
opportunities, in part due to its ability to offer many potential sellers both
enhanced liquidity and favorable tax treatment through the exchange of
Partnership Units for timberlands. See "Competitive Strengths." Additionally,
the Company believes that, as it consummates further acquisitions in its
existing operating region, its fixed overhead cost structure will not increase
in proportion to the acreage acquired.
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<PAGE>
The critical elements of the Company's acquisition strategy include: (i)
identifying undervalued timberlands throughout North America, including those
that are likely to benefit from the application of sophisticated resource
management techniques; (ii) pursuing timberlands within the Company's existing
and future operating regions that offer potential operational synergies; and
(iii) pursuing strategic alliances with operators of conversion facilities in
North America, including Potlatch, that permit the Company to participate in
acquisitions of timberlands that include or are vertically integrated with
converting facilities.
MANAGING TIMBERLANDS TO IMPROVE LONG-TERM SUSTAINABLE YIELD. The Company
plans to manage its timberlands in a manner designed to optimize the balance
among current cash flow, timber growth and prudent environmental management,
in order to achieve increasing levels of sustainable yield. The Company
believes that opportunities exist to enhance its lands' productivity and yield
through intensive silvicultural management on a species- and site-specific
basis. In particular, the Company plans to accelerate the adoption of state-
of-the-art silvicultural management and reforestation techniques in its
softwood operations, and to pursue ATCO's intensive, selective harvesting
approach throughout the Company's hardwood operations. The Company intends to
continue to manage its timberlands to maximize sustainable yield over the long
term, although, with Potlatch's concurrence with respect to lands subject to
the Timber Purchase Agreement, the Company may choose to harvest timber from
time to time at levels above its then-current estimate of sustainability for
various reasons, including to improve the long-term productivity of certain
timber stands. For example, in the near term, the Company intends to continue
ATCO's recent accelerated harvesting of large-diameter timber on its hardwood
properties, in order to improve long-term growth rates.
PRACTICING SOUND ENVIRONMENTAL STEWARDSHIP. The Company pursues a program of
environmental stewardship and active involvement in federal, state and local
policymaking to maximize its assets' long-term value. Among other things, the
Company intends to manage its lands in a manner consistent with the principles
set forth in the Sustainable Forest Initiative ("SFI"), a program sponsored by
the American Forest & Paper Association which prescribes minimum levels of
reforestation and other "best management practices." The Company will also
seek to exchange timberlands with special environmental significance for
tracts more suitable for commercial timber management, subject in certain
cases to Potlatch's consent.
COMPETITIVE STRENGTHS
Management believes that the Company possesses several competitive strengths
that will enable it to execute its business strategy effectively, including:
.Strategically located, highly productive timberlands;
.High quality timber;
.An experienced senior management team and Board of Directors;
.A structure that will facilitate acquisitions of timberlands;
.A long-term purchase commitment from Potlatch; and
.A diversified species mix.
STRATEGICALLY LOCATED, HIGHLY PRODUCTIVE TIMBERLANDS. The Initial
Timberlands are located in close proximity to numerous conversion facilities
operated by Potlatch and others. In addition, the Company's lands are
generally well consolidated into large blocks, which permits more efficient
management, harvesting and transportation of timber. The Company's timberlands
are also highly productive. In particular, the hardwood lands acquired from
ATCO benefit from excellent growing conditions, resulting in annual growth
exceeding 230 board feet ("BF") per acre, which is
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approximately three times greater than the recent averages on all hardwood
timberlands available for commercial harvesting in ATCO's operating region,
based on USFS data.
HIGH QUALITY TIMBER. The Company's lands contain substantial inventories of
high quality softwood and hardwood timber. In particular, the Company believes
that the lands acquired from ATCO are among the highest quality hardwood
forests in North America. The Company estimates that over 40% of ATCO's
hardwood sawtimber is USFS #1 grade, which is more than four times greater
than recent averages on all hardwood timberlands available for commercial
harvesting in ATCO's operating region, based on USFS data. In addition,
approximately two-thirds of ATCO's sawtimber volume is in trees with DBHs of
at least 21 inches, compared to recent averages of approximately 22% on all
hardwood timberlands available for commercial harvesting in ATCO's operating
region, based on USFS data. The superior grade and size of ATCO's sawtimber
results in better yields of wide lumber and lumber with minimal appearance
defects, which is more suitable for high-end uses such as furniture and
commands premium prices.
EXPERIENCED SENIOR MANAGEMENT TEAM AND BOARD OF DIRECTORS. The Company's
senior management team has an average of more than 15 years in the industry,
including extensive experience in the management and acquisition of
timberlands. The Company's managers and foresters formerly employed by
Potlatch have substantial expertise in intensive silvicultural management
techniques. Additionally, the Company has 22 foresters in the specialized area
of uneven-aged, hardwood timber management. In addition, the Company's Board
of Directors includes members with extensive experience in real estate,
investments and the management of timberland assets. None of the Company's
senior management will be employees of or otherwise affiliated with Potlatch,
and a majority of the Company's Board of Directors will not be employees of or
otherwise affiliated with Potlatch.
STRONG CAPACITY TO PURSUE ACQUISITIONS OF TIMBERLANDS. As the first publicly
traded timber REIT, the Company believes that it will be well positioned to
acquire timberlands due to (i) its ability to offer many potential sellers
both enhanced liquidity and favorable tax treatment through the exchange of
Partnership Units for timberlands (which will permit tax deferral for many
sellers), (ii) its advantage over certain competing acquirers due to its
ability to focus on pre-tax cash flow returns as opposed to after-tax
earnings, and (iii) its ability to provide capital gains treatment on
substantially all initial stockholder distributions. The Company's expertise
in both softwoods and hardwoods should also facilitate acquisitions. For
example, the Company believes that its expertise in hardwoods management,
gained through ATCO's focus on hardwoods, will give the Company a strong
capability to analyze, effect and integrate other hardwood purchases.
LONG-TERM PURCHASE COMMITMENT FROM POTLATCH. The Company's long-term timber
purchase agreement with Potlatch creates an assured level of demand for the
Company's timber from a major forest products company without associated
marketing expenses. The agreement provides for prices designed to reflect fair
market value on a stumpage basis. See "--Sales and Markets--The Timber
Purchase Agreement."
DIVERSIFIED SPECIES MIX. The Company's holdings are well diversified by
timber type and species. The Company's high quality hardwoods are utilized in
different markets than its softwoods, and the Company believes that these two
categories experience different market dynamics. Accordingly, the Company
believes it should experience somewhat reduced volatility in its operating
results and cash flow than it would experience with a less diverse species
mix.
INDUSTRY BACKGROUND
SUPPLY
Nationwide, timber supplies have tightened relative to demand over the last
decade. Particularly in the western United States, the supply of timber has
been significantly affected by reductions in
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timber sales by the United States government, which owns approximately 20% of
all domestic timberland acreage, and by state governments. For example,
federal timber under contract in the United States declined from 21.8 BBF in
1986 to 5.9 BBF in 1997. These reductions have been caused primarily by
increasingly stringent environmental and endangered species laws and by a
change in the emphasis of domestic governmental policy toward habitat
preservation, conservation and recreation, and away from timber management.
Because most timberlands in the southeastern United States are privately
owned, changes in sales of publicly owned timber affect local timber supplies
and prices in the Southeast less immediately than in the western United States
and other regions with large proportions of public timber ownership.
More locally, timber supplies can fluctuate depending upon factors such as
changes in weather conditions and harvest strategies of local forest products
industry participants, as well as occasionally high timber salvage efforts due
to unusual pest infestations or fires. Local timber supplies also change in
response to prevailing timber prices. Rising timber prices often lead to
increased harvesting on private timberlands, including lands not previously
made available for commercial timber operations. Among other things, timber
prices are indirectly affected by lumber imports from Canada. However, imports
of wood products have historically been limited by freight costs and, since
April 1996, by the five-year U.S.-Canada lumber trade agreement.
DEMAND
The demand for timber depends upon the markets for wood products, including
lumber, furniture, panel products, paper and other pulp-based products, which
are affected by changes in domestic and international economic conditions,
global population growth and other demographic factors, and the value of the
U.S. dollar in relation to foreign currencies. The end uses for timber vary
widely, depending on species, size and quality. As described below, softwoods
and hardwoods are utilized in different markets, although their usage overlaps
to some extent. For example, most paper products use a blend of softwood and
hardwood fiber. Historically, timber demand has experienced cyclical
fluctuations, although sometimes at different times and rates within the
markets for solid woods and pulpwood. Locally, timber demand also fluctuates
due to the expansion or closure of individual conversion facilities.
The Company's business includes managing both softwoods and hardwoods. These
two categories are targeted at different customers and experience different
market dynamics. Softwoods such as pine are used primarily for residential
construction, industrial uses and pulp. Accordingly, the demand for softwoods
is significantly dependent upon the level of residential construction and
remodeling activity, which is affected by interest rates and other economic
and demographic factors. Reductions in residential construction and remodeling
activities are generally followed by declining softwood lumber prices, which
are usually followed by declining log prices within two or three months. While
tied to housing starts and home remodeling activity to some extent, the end
uses for hardwoods are not as directly dependent on construction activities as
softwoods, and thus are generally less susceptible to seasonal downturns in
construction. Higher quality hardwoods depend primarily upon the market for
furniture, flooring, cabinets and architectural moldings.
SOUTHEASTERN REGION
All of the Company's operations are currently located in the southeastern
United States, which is a major timber producing region. The Company's
holdings are currently concentrated in Arkansas and Mississippi, which
together account for approximately 94% of the Company's total acreage, with
additional holdings in Louisiana, Tennessee and nearby states bordering the
Mississippi River. Arkansas and Mississippi are heavily wooded states, with a
high percentage of privately owned timberlands. In Arkansas, the forest
products industry currently owns approximately 25% of all timberland and other
private owners hold 57%, with the balance owned by government agencies.
Statewide, hardwoods (primarily oak)
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constitute approximately 58% of all forests, with loblolly and shortleaf pine
being the predominant softwoods. In Mississippi, the forest products industry
owns approximately 18% of all timberlands, other private owners hold 72%, and
government agencies own the remaining 10%. The forest products industry in the
southeastern United States supports a variety of hardwood and softwood
sawmills, veneer and plywood plants, pulp mills and other conversion
facilities.
THE INITIAL TIMBERLANDS
Through the Partnership, the Company currently owns and manages
approximately 824,000 fee acres of timberland and approximately 14,000 leased
acres of timberland located in the southeastern United States containing a
total estimated merchantable timber volume of approximately 2.9 BBF, as well
as approximately 24.1 million tons of pulpwood. The following table depicts
the most common species or usage on a given acre within the Company's fee
acreage:
<TABLE>
<CAPTION>
TIMBERLAND COVER TYPE ACRES PERCENT
--------------------- ------- -------
<S> <C> <C>
Softwood plantations...................................... 81,600 9.9%
Hardwood plantations...................................... 9,000 1.1%
Natural softwood forest................................... 282,300 34.3%
Natural hardwood forest................................... 406,900 49.4%
Non-forest(a)............................................. 44,200 5.3%
------- ------
Total................................................... 824,000 100.0%
======= ======
</TABLE>
- --------
(a) Roads and other non-productive acreage.
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<PAGE>
CURRENT OPERATIONS
The following map depicts the locations of the Initial Timberlands:
[MAP OF INITIAL TIMBERLANDS, INDICATING LANDS HELD IN MISSOURI, ARKANSAS,
LOUISIANA, ILLINOIS, TENNESSEE, KENTUCKY AND MISSISSIPPI]
SOFTWOOD OPERATIONS
The Company owns and manages approximately 364,000 fee acres of softwood
timberlands. These consist primarily of 356,000 acres acquired from Potlatch
in Arkansas, which are concentrated around the towns of Prescott and Warren.
The Company also leases approximately 14,000 acres of softwood timberlands in
Arkansas under leases that generally expire in 14 to 18 years. Growing
conditions are fairly uniform on the Arkansas lands acquired from Potlatch,
which are located in uplands above the Mississippi flood plain. The terrain
around Prescott consists of rolling hills and well drained soils, and the area
around Warren is flat with poorly drained soils. Harvesting is often limited
during the wet season of November through April due to restricted access.
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Loblolly pine is the prevailing softwood species on the Company's lands. The
Company believes that the optimal sawlog harvest rotations for its southern
softwoods are approximately 30 to 35 years.
HARDWOOD OPERATIONS
The Company owns approximately 460,000 fee acres of primarily hardwood
timberlands, comprising approximately 144,000 acres contributed by Potlatch
and 316,000 acres acquired from ATCO. These lands consist of approximately
equal proportions of relatively flat bottomland sites within the Mississippi
River basin, and upland sites with more diverse terrain. The Company's
timberlands contain high-value hardwood species, such as red oak and ash, as
well as other hardwoods such as cottonwood, hackberry, sweet gum and pecan.
Historically, ATCO managed its timberlands with the principal goal of
increasing stocking levels of desired species. As a result, the 316,000 acres
of hardwoods acquired from ATCO are densely stocked with an average volume of
approximately 5,500 board feet per timbered acre. ATCO's timberlands also
benefit from excellent growing conditions, including rich soils, warm climate,
long growing season and ample moisture. These stocking levels and growing
conditions combine to produce annual growth exceeding 230 BF per acre, which
is approximately three times greater than recent averages on all hardwood
timberlands available for commercial harvesting within ATCO's operating
region, based on USFS data. The Company believes that these lands produce
premium quality hardwoods. The Company estimates that over 40% of ATCO's
hardwood sawtimber is USFS #1 grade, which is more than four times the recent
averages on all hardwood timberlands available for commercial harvesting in
ATCO's operating region, based upon USFS data. In addition, approximately two-
thirds of ATCO's hardwood sawtimber is in trees with DBHs of at least 21
inches, compared to recent averages of approximately 22% on all hardwood
timberlands available for commercial harvesting in ATCO's operating region,
based on USFS data. The superior grade and size of ATCO's hardwood sawtimber
results in better yields of wide lumber and lumber with minimal appearance
defects, which is more suitable for high-end uses such as furniture and
commands premium prices.
OTHER OPERATIONS
Potlatch will assign to the Company approximately 875 hunting leases
permitting approximately 11,000 individuals to hunt game on the Company's
Arkansas fee lands. Potlatch received approximately $1.1 million in revenue
under these leases in 1996. The Company will also succeed to approximately 275
hunting leases on ATCO's lands, under which ATCO received approximately $1.5
million in revenue in the 12 months ended July 31, 1997. In addition to ATCO's
timberlands, the Company will also acquire approximately 8,000 acres of
farmland and ownership interests in six commercial real estate properties from
ATCO. These properties, which are located in the Memphis, Tennessee area,
consist of four shopping centers and two warehouses.
TIMBER INVENTORY
The Initial Timberlands include substantial holdings of merchantable timber,
consisting of stands of varying sizes and ages and comprising both of the two
basic types of timber: softwood and hardwood. The Company's estimated softwood
timber inventories are calculated by applying growth formulas to volumes and
tree sizes determined in timber cruises of individual stands (which generally
cover approximately 20% of the Company's acreage per year), subject to
periodic updates to reflect actual volumes harvested or succeeding cruises.
Estimated hardwood inventories on ATCO's former properties are based upon the
continuous forest inventory ("CFI") system implemented by ATCO in the 1960's,
which produces estimated total inventories by measuring more than 700
permanent, one-fifth-acre plots every five years. ATCO concluded its most
recent CFI measurement in January 1998. All of the inventories shown in this
Prospectus are approximations developed by Company personnel, from which
actual quantities of timber may differ.
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<PAGE>
SAWTIMBER
The following tables depict the estimated merchantable sawtimber inventory
by species within the Initial Timberlands.
MERCHANTABLE SOFTWOOD SAWTIMBER INVENTORY
BY SPECIES(a)
(MMBF)
<TABLE>
<CAPTION>
SPECIES MMBF PERCENT
------- ----- -------
<S> <C> <C>
Loblolly Pine............................................... 1,197 90%
Shortleaf Pine.............................................. 128 10%
----- ---
Total..................................................... 1,325 100%
===== ===
</TABLE>
- --------
(a) Estimated as of January 1998, based on Doyle scale.
MERCHANTABLE HARDWOOD SAWTIMBER INVENTORY BY SPECIES(a)
(MMBF)
<TABLE>
<CAPTION>
SPECIES MMBF PERCENT
------- ----- -------
<S> <C> <C>
Oak......................................................... 374 22%
Cottonwood.................................................. 343 21%
Hackberry................................................... 181 11%
Pecan/Hickory............................................... 138 8%
Gum......................................................... 134 8%
Ash......................................................... 94 6%
Other(b).................................................... 395 24%
----- ---
Total..................................................... 1,659 100%
===== ===
</TABLE>
- --------
(a) Estimated as of January 1998.
(b) Includes approximately 20 other species including sycamore, willow and
yellow poplar on lands acquired from ATCO. Also includes approximately 39
MMBF of hardwoods other than oak on lands contributed by Potlatch,
including some of the species listed above.
PULPWOODS
The Company's inventory also includes substantial holdings of softwood and
hardwood pulpwoods, which collectively represent approximately half of the
Company's total timber inventory, measured in tons, but a substantially
smaller proportion of timber values. The following table depicts the estimated
volume of pulpwoods on the Initial Timberlands.
PULPWOOD VOLUMES(a)
(MILLIONS OF TONS)
<TABLE>
<CAPTION>
TIMBER TYPE TONS (MM) PERCENT
----------- --------- -------
<S> <C> <C>
Softwood............................................... 7 29%
Hardwood............................................... 17 71%
--- ---
Total................................................ 24 100%
=== ===
</TABLE>
- --------
(a) Estimated as of January 1998.
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<PAGE>
SIZE AND AGE DISTRIBUTION OF MERCHANTABLE TIMBER
An individual tree's value changes over time, as it progresses through its
life cycle. Beginning as unmerchantable seedlings, trees become increasingly
valuable as they attain merchantable size and quality. They continue to add
volume as they mature, although eventually at declining rates. If not
harvested, trees will ultimately decline in volume and quality due to age and
disease.
Although all trees undergo the same basic pattern of growth and decay, their
growth cycles differ depending upon their species, local growing conditions
and the application of silvicultural treatments. The Company currently
believes that the optimal harvest cycle, or "rotation," for its softwoods and
hardwoods are approximately 30 to 35 years and 40 to 80 years, respectively.
See "--Timber Growth."
The Initial Timberlands are well diversified by species mix and by age and
size distribution. The Arkansas lands acquired from Potlatch consist of
natural stands of varying ages and pine plantations generally comprising trees
under 20 years of age. The hardwoods acquired from ATCO include substantial
quantities of larger diameter timber due to ATCO's historically conservative
harvesting policies. The Company believes that the diversified nature of its
holdings may allow for relatively more stable cash flow than a more uniform
forest, as its various timber stands reach harvestable ages and sizes over
time. The Company currently manages its timberlands on both an "uneven-aged"
and an "even-aged" basis. See "Resource Management."
TIMBER GROWTH
Timber growth rate is an important variable for any forest products company,
as it ultimately determines how much timber can be harvested over the long
term. Growth rates vary depending on species, location, weather conditions,
age and forestry practice. The average annual growth rates of merchantable
timber on the Company's naturally regenerated stands of pine and on its
recently planted Arkansas pine plantations are approximately 2.6 tons and 6.1
tons per acre per year of merchantable inventory, respectively. For hardwoods,
the Company's average annual growth rate of merchantable timber has
historically exceeded 4%. The Company intends to improve its timberlands'
long-term growth rates by planting genetically improved seedlings as it shifts
an increasing percentage of its softwood acreage to even-aged plantations, and
by continuing for approximately five years the accelerated harvesting of
large-diameter hardwood timber that ATCO began in 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company--Harvest Levels." The Company also intends to improve growth rates
over the long term by applying various other silvicultural techniques. See
"Resource Management" and "Operations." However, actual results will vary
depending upon the species, the timing and types of practices utilized, and
local weather, soil and other conditions.
RESOURCE MANAGEMENT
RESOURCE MANAGEMENT OBJECTIVES
Timber is a renewable resource, and the Company's objective is to maximize
cash flow over the long term by managing its timberlands on a "sustainable
yield" basis, reflecting a balance between timber growth and harvesting. To
maximize its timberlands' long-term value, the Company intends to manage them
intensively, based upon timber species and local growing conditions, and will
create harvest plans that take into account changing market conditions,
contribute to the growth of the remaining timber and reflect the Company's
policy of environmental stewardship. See "--Harvest Plans." The Company
intends to reforest its acreage in a timely fashion, to enhance its long-term
value. Several silvicultural techniques will be employed to improve timber
growth rates. In particular, the Company plans to improve the productivity of
its softwood lands through increased vegetation control, fertilization and
thinning. In deciding whether to implement any silvicultural practice, the
Company intends to analyze the size and timing of the associated costs and
long-term benefits, with the goal of achieving an attractive return over time.
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<PAGE>
The Company intends to manage its hardwood tracts in a different manner than
its softwoods. Hardwoods will continue to be managed on an "uneven-aged"
basis, in which stands consist of trees of varying ages and sizes, while an
increasing proportion of the Company's softwoods will be managed on an "even-
aged" basis, in which stands consist of trees of similar ages. The Company
believes that both of these management approaches have silvicultural
advantages, depending upon the species, stand characteristics, and local
growing conditions. Even-aged management provides opportunities to plant
genetically improved trees exhibiting faster growth, disease resistance or
other desirable traits. Under the uneven-aged approach, trees of varying sizes
are removed selectively and more frequently, often every five to ten years,
thus requiring more intensive harvest planning than under even-aged management
but reducing regeneration costs. Hardwoods are generally most suitable for
this management approach, which requires the presence of shade-tolerant trees
capable of regenerating under an existing forest canopy.
HARVEST PLANS
As described above, the Company intends to manage its timberlands on a
"sustainable yield" basis over the long term, and the Timber Purchase
Agreement also requires the Partnership to manage the timberlands subject to
the agreement in a manner consistent with sustainable forestry principles. See
"--Sales and Markets--The Timber Purchase Agreement." In the near term, the
Company plans to harvest at levels exceeding its present estimate of the long-
term sustainable yield from its Initial Timberlands. This is due, in part, to
the need to harvest mature, large-diameter timber on the lands acquired from
ATCO in order to improve long-term growth rates.
The Company's short-term and long-term harvest plans are critical factors in
its long-term management process. Each year, the Company will prepare a
harvest plan designating the timber tracts and volumes to be harvested under
the Timber Purchase Agreement over the subsequent two years. The Company will
also update its long-term harvest plan every five years. Each harvest plan
will reflect the Company's analysis of the age, size and species distribution
of its timber, as well as its expectations about harvest methods, growth
rates, the volume of each species to be harvested, anticipated acquisitions
and dispositions, thinning operations, regulatory constraints and other
relevant information. Among other things, the optimal harvest cycles, or
"rotations," for timber vary by species and tend to change over time as a
result of biological advances, changes in the markets for different sizes and
ages of timber and other factors.
Since harvest plans are based on projections of weather, timber growth
rates, regulatory constraints and other assumptions, many of which are beyond
the Company's control, there can be no assurance that Potlatch will be able to
harvest the volumes projected or the specific stands designated in the
Company's harvest plans.
The Company's harvest planning will be facilitated by its geographic
information system ("GIS") covering the Arkansas lands contributed by
Potlatch. The GIS is a computer software program that includes detailed field
maps and computerized timber inventories. This system is also used to plan and
monitor harvesting operations, road construction and reforestation, as well as
for wildlife and water quality management. The Company intends to develop and
maintain similar information with respect to the ATCO Timberlands. The Company
also intends to develop computer modeling technology that can generate
simulated growth patterns over time and thus facilitate long-term harvest
planning and inventory updates.
MANAGEMENT OF LAND PORTFOLIO
In addition to its efforts to improve the productivity of its timberlands,
the Company seeks to realize the value of land that may have a higher and
better use than for timberland management, such as recreation, or that is
otherwise a candidate for sale or exchange. Sales or exchanges of the Potlatch
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<PAGE>
Southern Timberlands will generally be subject to Potlatch's consent pursuant
to the Timber Purchase Agreement and the Partnership Agreement. The Company
will also acquire approximately 8,000 acres of farmland and interests in six
commercial real properties from ATCO.
OPERATIONS
The Company plans to pursue its resource management objectives and carry out
its harvest plans through a number of operational activities implemented on a
species- and site-specific basis. The Company also integrates environmental
and wildlife management strategies into all of its operations. See "--
Regulation--Background and Approach."
REGENERATION ACTIVITIES
The Company's policy is to reforest all of its acreage in a timely fashion,
in order to enhance the Timberlands' long-term value. Reforestation techniques
vary across the Company's ownership. Based on the geographic and climatic
conditions of a given harvest site and other management considerations such as
whether the site is being managed on an "even-aged" or "uneven-aged" basis,
harvested areas may be regenerated naturally or may be planted with seedlings
after the harvest occurs. The Company anticipates that substantially all
hardwood tracts will be naturally regenerated. Seedlings will be planted on
the Company's softwood lands, after site preparation, as the Company intends
to manage an increasing proportion of those lands on an "even-aged" basis.
These seedlings will be genetically improved trees having desirable traits
such as superior growth rates and disease resistance. The Company intends to
supply its needs for genetically improved seed from its seed orchards in
Arkansas.
SILVICULTURAL TREATMENTS
The Company intends to employ a variety of silvicultural treatments to
improve timber growth rates and quality. Management believes that the benefits
of these activities are often maximized where they are employed in
combination, as part of an integrated effort to maintain good growing
conditions throughout the life of a stand. The benefits of fertilization,
vegetation control and thinning are well documented for softwoods. With
respect to hardwoods, silvicultural activities will generally be limited to
thinning through frequent selective harvesting because the growth response of
hardwoods has not historically justified other treatments.
FERTILIZATION
The Company intends to fertilize selected softwood stands to stimulate
growth. Fertilization is typically conducted through aerial application of
nitrogen, phosphorus and other nutrients after analysis of environmental
considerations such as proximity to streams and lakes.
VEGETATION CONTROL
The Company also plans to control competing vegetation on selected tracts to
allow younger trees to mature more quickly. Competing herbaceous material and
woody underbrush are controlled chemically and through controlled burning. In
1997, Potlatch conducted vegetation control activities on approximately 7,900
acres in Arkansas.
THINNING
Standing timber is typically thinned periodically to improve stand growth,
health and quality. The Company anticipates that it will continue to utilize
"pre-commercial" thinning to remove unmarketable saplings, and that
"commercial" thinning, which generates merchantable material, will also be
conducted. The Company believes that such thinning improves the overall
productivity of its
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<PAGE>
timberlands by enhancing the growth and quality of the remaining trees.
Arkansas pine is typically thinned on a commercial basis at age 12 to 15 and
again at age 22 to 25. In 1997, Potlatch conducted thinning activities on
approximately 6,800 acres in Arkansas.
ACCESS AND LIMITATIONS ON ACCESS
Substantially all of the Initial Timberlands are accessible by a system of
established roadways and low-maintenance roads. Barges also serve certain of
the Company's lands located along the Mississippi River. The Timber Purchase
Agreement requires the Company to construct and maintain primary logging
roads. Third-party road crews typically conduct road and bridge construction
under the supervision of Company personnel. Hunting clubs maintain certain of
the Company's roadways under the terms of some of the Company's hunting
leases. The Company is also party to reciprocal road-use and cost-sharing
agreements with private landowners. Access to the Company's timberlands will
be affected to some extent by weather conditions and regulatory factors. The
loading of logs from the Company's Mississippi River Valley lands onto barges
will require permits from the United States Department of the Army-Corps of
Engineers. Among other things, these permits may require compliance with
certain water quality and other environmental standards when loading and
unloading logs. See "Risk Factors--Seasonality" and "--Federal and State
Regulation."
HARVESTING METHODS
The Company expects that Potlatch and its logging contractors will employ a
variety of harvesting techniques on the Initial Timberlands based on local
terrain, weather, stand characteristics and other site-specific
considerations. Due to their topography, a large portion of the Initial
Timberlands can be harvested using lower-cost mechanical methods.
Harvesting on the Initial Timberlands has historically been conducted using
a variety of methods. Some harvests, including both clear-cuts and more
selective cuts, are designed to remove mature trees in order to regenerate the
stand through planting or natural regeneration. Other harvests are prescribed
to remove dying or defective trees. In its hardwood operations, the Company
devotes significant time and resources to selective harvesting techniques
within its "uneven-aged" stands. Historically, ATCO's foresters have selected
and marked individual hardwood trees for harvest. The Company intends to
continue this practice where justified by the high value of large-diameter
hardwood trees.
The Company intends to maintain the ecosystems within its timberlands while
meeting its harvest plan objectives. For example, Company-prepared harvest
plans under the Timber Purchase Agreement may require Potlatch to leave 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. The agreement
also requires Potlatch to use prudent logging practices (as defined in the
agreement) to minimize site damage, and to abide by environmental laws and
sustainable forestry principles when harvesting Company lands.
SALES AND MARKETS
Although the end use of timber is determined by market conditions, species,
timber size and quality, softwood timber from larger diameter trees is
typically processed into lumber, poles and panel products, while smaller
timber may be used for wood chips. Hardwood sawtimber is typically converted
for use in furniture, flooring, and lumber. Pulpwoods are typically used to
make panel products or pulp, which is processed into paper and other products.
Although many species may be suitable for a particular use, some of the
Company's principal species have characteristics making them particularly
desirable for certain uses. For example, cottonwood is highly valued in
furniture manufacturing due to its creamy white color and light weight.
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<PAGE>
The Timber Purchase Agreement will provide the Company with a long-term
customer for the timber harvested from the lands contributed by Potlatch and
ATCO and from certain lands acquired in the future. See "--The Timber Purchase
Agreement." Currently, Potlatch operates three sawmills and one paperboard
mill within the Company's operating region. In the Formation Transactions,
Potlatch will also acquire certain of ATCO's converting facilities and related
assets, including a hardwood sawmill complex in Mississippi, as well as a
veneer plant in Mississippi currently owned by a partnership affiliated with
ATCO.
Although Potlatch has no right to terminate the Timber Purchase Agreement
before the expiration of its initial term or any renewal period, the loss of
Potlatch as a customer due to its repudiation of the contract or otherwise
could have a materially adverse effect on the Company's results of operations.
It may be difficult for the Company to locate substitute customers promptly.
The availability of local customers other than Potlatch can be expected to
fluctuate due to the opening and closing of individual mills and other
factors.
THE TIMBER PURCHASE AGREEMENT
GENERAL. Potlatch and the Partnership will enter into the Timber Purchase
Agreement upon or prior to the consummation of the Offering. The Timber
Purchase Agreement has an initial term of 20 years and may be extended by
either party for up to 18 successive ten-year periods. In general, neither
Potlatch nor the Partnership may terminate the agreement before the end of the
initial term or the applicable renewal period without the other's consent. The
agreement covers all of the Initial Timberlands. Pursuant to a separate
agreement, the Partnership will have a right of first opportunity to pursue
the acquisition of certain timberlands, so long as Potlatch owns at least 20%
of the Company. See "Certain Relationships and Transactions." So long as the
Partnership's right of first opportunity remains in effect, certain additional
timberlands that may be acquired by the Partnership in the future, consisting
of lands (i) that Potlatch offered to the Partnership in a Potlatch
acquisition consisting primarily of non-timberland assets, or (ii) which are
within specified regions surrounding Potlatch's present conversion facilities
(including the facilities that Potlatch will acquire in the Formation
Transactions), may also become subject to the Timber Purchase Agreement at
Potlatch's election.
The Partnership will generally be prohibited from selling any of the
timberlands contributed by Potlatch without Potlatch's consent. It will be
permitted, however, to transfer parcels within the former Potlatch lands
aggregating up to 5,000 acres per year (up to an aggregate of 20,000 acres in
any 20-year period), and an additional 10,000 acres per year may be
transferred in tax-deferred exchanges for equivalent or more productive
timberlands in the operating region. The Partnership may sell any timberlands
other than the former Potlatch lands. Generally, the parcels sold will remain
subject to the Timber Purchase Agreement. However, the Partnership will have
the right to require Potlatch to release its rights to timber on lands
aggregating up to 5,000 acres per year (up to an aggregate of 20,000 acres in
any 20-year period), and an additional 10,000 acres per year may be
transferred in tax-deferred exchanges for equivalent or more productive
timberlands in the operating region. In addition, the Partnership may sell,
and Potlatch will release from the Timber Purchase Agreement, acreage
containing any incremental volume of timber that had been added to the Timber
Purchase Agreement during its term.
MANAGEMENT AND HARVESTING. Consistent with the Company's strategy of
managing its timberlands on a sustainable basis over the long term, the Timber
Purchase Agreement provides that the Partnership will manage the timberlands
subject to the agreement in accordance with prudent management practices and
in a manner consistent with sustainable forestry principles. As defined in the
agreement, sustainable forestry principles require that the timberlands be
managed (through silvicultural practices, harvest planning and land
management) in a manner designed to assure that, on a long-term basis, the
timberlands will produce a sustainable yield of merchantable timber without
significant environmental impairment and with consideration given to wildlife
conservation and
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<PAGE>
preserving the aesthetic and recreational benefits of the forest. Under the
agreement, the implementation of sustainable forestry principles will involve,
among other things, limitations on the size and location of clear-cuts,
adherence to environmental laws and voluntary "best management practices" and
prompt reforestation (through planting or natural regeneration) of harvested
stands.
Each year, the Partnership will generate a harvest plan designating the
timber which is to be harvested during the ensuing two-year period. See
"Resource Management Objectives--Harvest Plans." Potlatch will be required to
harvest all of the designated timber, subject to limited rights of
substitution which may not materially reduce the volume of timber harvested.
The Partnership will have limited rights to increase the volumes to be
harvested in a given year, subject to compensating volume reductions over the
following five-year period. A shortfall in Potlatch's actual harvest volumes
from the designated volumes will not constitute a breach of the agreement so
long as at least 95% of the designated volume is harvested during the relevant
year or within specified cure periods thereafter. In its harvesting
operations, Potlatch will be required to adhere to the harvest plan and use
prudent logging practices to minimize damage to remaining timber and the
environment.
PRICING. The Timber Purchase Agreement provides that, for the various types
of timber harvested, Potlatch will pay the Partnership the fair market value
of those timber types sold in the relevant harvest region in arm's-length
transactions on a stumpage basis. In determining fair market value, Potlatch
and the Partnership will take into account such factors as they deem relevant.
Initially, pricing will generally take into account prices paid in two types
of transactions: (1) purchasing logs on a "delivered log" basis at the mill,
and (2) stumpage purchases through competitive bidding or otherwise. Where
Potlatch assigns its right to harvest timber at the stump, Potlatch will pay
the Partnership the actual price paid in a competitive bid sale (or such other
price as the Partnership may agree), less an administrative charge.
When delivered log prices are utilized to determine fair market value on a
stumpage basis, the average costs incurred by Potlatch in logging and
transporting logs to its mills will be subtracted from delivered log prices.
Potlatch and the Partnership are expected to take into account delivered log
prices derived from Potlatch's purchases from third parties, Potlatch's sales
to third parties and transactions not involving Potlatch where prices are
verifiable.
In addition to delivered log prices, as discussed above, Potlatch and the
Partnership are also expected to consider the prices paid for the applicable
product in stumpage sales, which will include both Potlatch's winning bids and
the winning bids (if verifiable) in stumpage sale transactions where
Potlatch's bid was unsuccessful. For this purpose, Potlatch and the
Partnership may take into account transactions in which the price paid,
species types and relative volumes are verifiable, even if Potlatch did not
bid in the sale. Stumpage prices will be analyzed on a species-specific basis,
based on the relationship between historical species prices in delivered log
sales and such other information about species prices as the parties may
agree. Volumes in stumpage sales will be estimated because competitive bid
sales are often run on a "lump sum" basis without the seller stating the
volume to be sold. Typically, Potlatch has estimated volumes in competitive
bids by physically cruising the site before bidding. Potlatch's volume
estimates may be used in allocating a lump sum stumpage price among the
various species included in the sale.
Initially, delivered log prices and stumpage sale prices will be treated as
equally relevant so long as the parties agree that there are sufficient
numbers of verifiable transactions of both types. Species for which there is
insufficient data regarding delivered log transactions or stumpage sales will
be priced based upon the type of pricing for which data is available. For
example, certain species of hardwood sawtimber are rarely sold in delivered
log transactions, and are expected to be sold to Potlatch at a price based on
stumpage sale prices.
Prices for each harvested product will be estimated, by mutual agreement or
by a neutral third party absent agreement, at the beginning of each quarter.
Potlatch will make monthly payments to the
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Partnership based on estimated prices and actual harvest volumes. At the end
of each quarter, after actual prices and volumes for that quarter have been
determined, a reconciling payment will be made to the extent necessary.
Both estimated prices and adjustments will be determined by negotiation
between Potlatch and the Partnership. If the parties cannot agree on a price
for any product within specified periods, the issue will be submitted to a
consulting forester for a final and binding decision. If no consulting
forester is serving or if the consulting forester does not reach a
determination within certain time periods, disputes will be resolved through
arbitration.
Where Potlatch and the Partnership attempt to determine the price payable
under the agreements by referring to delivered log prices, Potlatch's expenses
of logging and transportation will affect the prices that Potlatch pays the
Partnership. Thus, the prices payable under the Timber Purchase Agreement may
not be comparable to market prices paid under "stumpage contracts" or that
could otherwise be obtained in sales to parties other than Potlatch. However,
the Company believes that the agreement will set prices each year at a level
reflecting fair market stumpage prices.
RESALES AND ASSIGNMENTS. Potlatch will not be prohibited from reselling
timber that it purchases from the Partnership pursuant to the agreement
(although the price received by Potlatch in such resale may be taken into
account in setting the price payable to the Partnership under the Timber
Purchase Agreement). The Timber Purchase Agreement also permits Potlatch to
assign its rights to the timber in whole or in part. Generally, no such
assignment would release Potlatch from its obligations under the agreement. If
Potlatch assigns to a third party all of Potlatch's rights to timber in an
entire region for the remaining term of the agreement, the agreement will be
divided with the assignee becoming a direct party to a separate agreement as
to the timber in that region, and Potlatch remaining as a party to a separate
agreement governing all of the other timberlands. Both of these agreements
would be on the same terms as the original Timber Purchase Agreement, as
amended. In the event of such a regional division, Potlatch would be released
from its obligations under the Timber Purchase Agreement to the extent
assigned to the third party, but no such release may occur unless Potlatch
establishes the ability of the assignee to perform its obligations, or in any
event before the expiration of the initial 20-year term.
MONITORING OF PROCEDURES. Due to the potential conflicts of interest between
Potlatch and the Partnership, the Company intends to adopt policies and
procedures designed to minimize conflicts of interest with respect to pricing,
harvest planning and other procedures implemented under the agreement, and the
Audit Committee will monitor these procedures. However, there can be no
assurance that these policies and procedures will be successful in reducing
the effects of conflicts of interest.
FEDERAL AND STATE REGULATION
BACKGROUND AND APPROACH
The Company's operations are subject to numerous federal, state and local
laws and regulations, including those relating to the environment, endangered
species, the Company's forestry activities, and health and safety. Due to the
significance of regulation to its business, the Company plans to integrate
wildlife, habitat and watershed management into its resource management
practices. It also intends to take an active approach to regulatory
developments by participating in standard-setting where possible. For example,
the Company plans to work cooperatively with regulators to create voluntary
conservation plans that address environmental concerns while preserving the
Company's ability to operate its Timberlands efficiently. In 1996, Potlatch
and the USF&WS jointly developed and signed a habitat conservation plan with
respect to the red cockaded woodpecker colonies located on the Company's
Arkansas lands. The Company also seeks to maintain a favorable public
reputation for
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environmental stewardship through philanthropic and educational activities
such as its "Classroom in the Forest," a 110-acre site in Arkansas dedicated
to educating the public about forest management, and "The Lost Forty," a
pristine 40-acre forest jointly managed with the Arkansas Heritage Commission.
ATCO has also pursued a variety of wildlife conservation and other
environmental stewardship programs, such as co-founding a committee of
governmental agencies, environmentalists and industry participants dedicated
to the conservation of black bear habitat.
The Company intends to continue efforts to develop an integrated approach to
timberland stewardship in order to positively affect the policy and regulation
processes. The Company has adopted comprehensive stewardship principles, and
will continue to implement water and wildlife resource programs consisting of
research, education, habitat restoration and monitoring, and active
participation in the development of environmental partnerships. The Company
believes that these activities enhance its credibility and facilitate
participation in the policymaking and regulatory process.
Despite the Company's plan to participate actively in governmental
policymaking and regulatory standard-setting, there can be no assurance that
endangered species, environmental and other laws will not restrict the
Company's operations or impose significant costs, damages, penalties and
liabilities on the Company. In particular, the Company anticipates that
endangered species and environmental laws will generally become increasingly
stringent.
ENDANGERED SPECIES LAWS
The Federal Endangered Species Act and similar state laws and regulations
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 and regulations, including the red cockaded woodpecker,
Louisiana Black Bear and bald eagle. The presence of protected species on or
near the Timberlands may restrict or prohibit timber harvesting, road building
and other silvicultural activities on portions of the Company's lands that
contain the affected species or abut their habitats. In addition, the
Timberlands may be affected by regulatory requirements relating to habitats
for threatened and endangered aquatic species. Road building and harvesting
activities near streams containing such aquatic species may be limited or
prohibited due to the perceived impact on sedimentation and water quality.
The Company has identified 44 red cockaded woodpecker nesting colonies on
its timberlands. Under the terms of the recent habitat conservation plan
between Potlatch and the USF&WS, which will be binding upon the Company,
timber harvesting other than for salvage and maintenance is prohibited within
a 10-acre perimeter around each red cockaded woodpecker colony, and the
Company is required to maintain a specified percentage of the surrounding area
as forested land. This constraint does not impose a material burden on the
Company's operations. The Company is also aware of three bald eagle nests, two
of which are active, on the ATCO Timberlands, as well as the presence of
Louisiana Black Bear and certain other threatened or endangered species on its
lands, none of which currently imposes a significant constraint on the
Company's operations.
Consistent with its overall goal of good environmental stewardship, the
Company evaluates each tract of timber designated for thinning, harvesting or
another silvicultural operation in order to determine whether to conduct a
field inspection before commencing operations. These inspections are designed
to monitor the status of existing wildlife sites, identify areas suitable for
endangered species and determine if areas previously identified as containing
suitable habitat are, in fact, supporting endangered species. The Company also
intends to investigate reported sightings of threatened or endangered species.
The Timber Purchase Agreement requires Potlatch to use reasonable precautions
against damage to environmentally sensitive areas and to comply with
applicable environmental laws. However, the Partnership and the Company, as
the direct and indirect owners of the Timberlands, may be held responsible for
compliance with the foregoing laws and regulations by Potlatch and other
customers and contractors.
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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, and that the presence of such species on its
lands will not materially adversely affect the Company's ability to proceed
with its current harvest plans. There can be no assurance, however, that
additional species on or around the Timberlands will not receive protected
status under the Endangered Species Act or similar state laws, or that
currently protected species may not be discovered in significant numbers on or
around 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, its ability to continue its
operations as currently conducted or its ability to implement its business
strategy. Any such changes could materially and adversely affect the Company's
financial condition and results of operations.
FORESTRY REGULATIONS
The operation of the Timberlands will be subject to specialized statutes and
regulations governing forestry operations. These laws address many growing,
harvesting and processing activities on forest lands. For example,
Mississippi's Forest Harvesting Law imposes post-harvest seed tree retention
and re-entry requirements. In Arkansas, the Company has followed local "best
management practices" developed by state agencies in consultation with
industry and environmental groups, which address matters such as harvesting
practices near visually sensitive areas. Operations in Mississippi and the
other states in which the Initial Timberlands are located are currently
subject to similar voluntary practices.
The Company expects to face intensifying forest practices regulations,
particularly as it acquires timberlands in other states. A number of timber
states have forest practices acts that are considerably more restrictive than
the Mississippi Forest Harvesting Law and the best management practices
currently in place in Arkansas. For example, the State of Washington requires
a rigorous regulatory review, taking 30 days or more, prior to harvesting.
Other states are considering or are expected to consider laws and regulations
governing forest practices.
ENVIRONMENTAL LAWS
Timber operations involve the use and storage of various hazardous materials
such as herbicides, pesticides, fertilizers and gasoline, and result in air
emissions or discharges of certain materials into streams and other bodies of
water. Accordingly, the Company's operations are subject to federal, state and
local environmental laws and regulations relating to the protection of the
environment. Environmental laws and regulations have changed substantially and
rapidly over the last 20 years, and the Company anticipates them to become
increasingly stringent. Although the Company believes that it is in
substantial compliance with these requirements, there can be no assurance that
these increasingly burdensome laws and regulations will not lead to
significant costs, penalties and liabilities, including those related to
claims for damages to property or natural resources, as well as restrictions
on timber harvesting and other silvicultural activities. 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 Clean Air Act and Clean Water Act, and their state equivalents,
may affect timber operations through controls on site preparation activities
such as slash burning and regulatory programs designed to reduce nonpoint
source pollution discharged into bodies of water. For example, the
Environmental Protection Agency and its state counterparts have designated
certain bodies of water as "water quality impaired," triggering a requirement
to establish Total Maximum Daily Loads ("TMDLs") for such bodies of water. The
TMDL process could result in additional limitations being placed on harvesting
activities in some or all of the states where the Company operates.
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In addition, the Company's operations will be affected by federal and state
laws designed to protect wetlands. The Federal Clean Water Act authorizes the
regulation of "wetland" areas. Access to timberlands located within a
protected wetlands area may be limited, and the Company may be required to
expend substantial sums for the protection of such wetland areas.
Some environmental statutes impose strict liability, regardless of the
negligence or fault on the part of the person held liable. Under various laws
and regulations, an owner or operator of real property may become liable for
the costs of removal or remediation of certain hazardous substances released
on or in its property, often without regard to whether the owner or operator
knew of, or was responsible for, the release of such substances. The presence
of such substances, or the failure to remediate such substances properly, may
adversely affect the owner's ability to sell such real estate or to use such
real estate as collateral. The Initial Timberlands acquired from Potlatch and
ATCO have not been subjected to a Phase I environmental audit or other similar
investigation or audit by an independent environmental consultant. In
addition, although ATCO will divest all of its converting facilities
concurrent with or prior to the Company's acquisition of ATCO, there can be no
assurance that the Company will not be subject to claims, losses and
liabilities under environmental laws due to ATCO's prior ownership or
operation of such facilities. The Partnership will acquire the Initial
Timberlands subject to environmental liabilities with respect to the Initial
Timberlands and certain other existing or potential liabilities. Although the
Company is not aware of any activities by the Company or any conditions on the
Initial Timberlands that would likely result in the Company being named a
potentially responsible party, there can be no assurance that Potlatch, ATCO
or any other prior owner or operator of the Initial Timberlands, or an owner
or operator of any lands adjacent to the Company's, has not created a material
environmental condition on the Company's lands without the Company's
knowledge. In addition, there can be no assurance that the operations of the
Company and its contractors on the Timberlands will not result in material
liabilities, fines, costs and restrictions on the Company pursuant to current
or future environmental laws and regulations. Potlatch will agree to indemnify
the Company to the extent that such liabilities or expenses are attributable
to Potlatch's operations on the Timberlands.
REGULATORY LIMITATIONS ON ACCESS TO TIMBERLANDS
Currently, logs from the Company's timberlands along the Mississippi River
may be loaded onto barges only pursuant to permits issued by the United States
Department of the Army-Corps of Engineers. These permits may impose various
environmental and other restrictions on log loading activities. In addition,
depending upon the location and scope of future acquisitions, the Timberlands
may include sections of land that are intermingled with or adjacent to
sections of land managed by federal and state agencies. Removal of trees from
those portions of the Timberlands may require additional permits and
reciprocal rights-of-way across public lands, the availability of which cannot
be assured. Among other things, federal agencies may be required to consult
with each other and to consider environmental and other factors in granting or
renewing such permits and rights-of-way.
OTHER REGULATORY MATTERS
The Company's operations will be subject to various other federal and state
regulations. For example, the Federal Insecticide, Fungicide, and Rodenticide
Act regulates the use of pesticides that may be used in forestry practices.
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.
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COMPETITION
Due to transportation costs, domestic timber conversion facilities tend to
purchase raw materials within relatively confined geographic areas. Presently,
the Company and its current competitors all benefit from close proximity to
numerous mills. Additional competitive factors within a market area generally
will include species, quality, and consistency in meeting customers'
specifications and delivery requirements.
The Company competes with numerous private land and timber owners, as well
as foreign imports, primarily (but indirectly) lumber from Canada. In
addition, the Company competes with the USFS and other governmental agencies
with timber holdings. Timber sold by the federal government may be more
mature, and thus larger-diameter and more desirable, due to the government's
longer harvest rotations. The level of competition will also tend to vary
depending upon prevailing timber prices. Rising timber prices often lead to
increased harvesting on private timberlands, including lands not previously
made available for commercial timber operations. The Company will also face
intense competition for acquisition opportunities. See "Risk Factors--Risks
Associated with Acquisition Strategy." Certain of the Company's competitors
have significantly greater financial resources than the Company.
INSURANCE COVERAGE
Certain types of losses (such as damage to the Timberlands and associated
lost revenues due to fires, ice storms, pests, disease and other natural
disasters) are uninsurable at commercially justifiable rates. Accordingly, as
is typical in the industry, the Company does not carry insurance for these
losses. An uninsured loss could result in reduced revenues and cash flow. See
"Risk Factors--Risk of Uninsured Losses."
LEGAL PROCEEDINGS
Although the Company may, from time to time, be involved in litigation and
claims arising out of its operations in the normal course of business, the
Company is not presently a party to any material legal proceedings.
EMPLOYEES
Upon the closing of the Formation Transactions, the employees of the
Partnership will consist primarily of the persons currently employed by
Potlatch's Arkansas timber operation and ATCO's timber operations. As of March
1, 1998, the Company's operations had approximately 55 salaried and ten hourly
employees.
Approximately ten of the employees to be employed by the Partnership are
currently represented by a union, all of whom are currently employed by
Potlatch. Potlatch's collective bargaining agreement with this union expires
in 1998. The Company believes that it has a good relationship with its
employees.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott R. Jones.......... 39 Prospective Chief Executive Officer and Director
Allan F. Trinkwald...... 41 Prospective Chief Financial Officer
Robert M. (Robin)
Jolley, Jr............. 46 Prospective Vice President
John M. Richards........ 60 Director
Christine Garvey........ 52 Prospective Director
Parnell S. Lewis, Jr.... 50 Prospective Director
James F. Rippey......... 66 Prospective Director
Will M. Storey.......... 66 Prospective Director
Frederick T. Weyerhaeu-
ser.................... 66 Prospective Director
</TABLE>
Scott. R. Jones has agreed to become the Chief Executive Officer and a
director of the Company. Mr. Jones has been employed by the Hancock Timber
Resource Group of John Hancock Mutual Life Insurance Company since 1989, where
he served as Director of Business Development since January 1995. Prior to
1995, he served in various capacities for the Hancock Timber Resource Group,
including Manager of Acquisitions and Manager of Portfolio Strategy.
Previously, he was a real estate portfolio manager with Rubloff, Inc., an
institutional real estate services company, and was associated with Container
Corporation of America. Mr. Jones has a B.S. in Forestry from Elizabethtown
College, a Masters of Forestry-Economics from Duke University and a Masters of
Management from Northwestern University.
Allan F. Trinkwald has agreed to become the Chief Financial Officer of the
Company. Mr. Trinkwald has been Vice President and Chief Financial Officer of
Savia International Ltd., a forest products company, since September 1995.
From September 1994 to September 1995, Mr. Trinkwald was Chief Financial
Officer and Treasurer of Crown Pacific Partners, L.P., a forest products
company. He also served as Controller and Treasurer of Plum Creek Timber
Company, L.P., from June 1989 to September 1994. Mr. Trinkwald has a B.S. in
Accounting from the State University of New York and a Masters of Business
Administration from the University of Washington. He is a Certified Public
Accountant.
Robert M. (Robin) Jolley, Jr. has agreed to become a Vice President of the
Company. Mr. Jolley has been the Resource Manager of the Southern Division of
Potlatch since July 1994. Before joining Potlatch, he was the Central
Operations Manager for Scott Paper Company in Mississippi and Alabama from
1975 to 1994. Mr. Jolley is a member of the Board of Directors of the Arkansas
Forestry Association and the Board of Directors of the American Pulpwood
Association. He received his B.S. degree in Biology from Catawba College, and
his M.S. degree in Forestry from Duke University.
John M. Richards has been a director of the Company since its formation. Mr.
Richards is Chairman of the Board and Chief Executive Officer of Potlatch and
has served in that capacity since May 1994. He served as Potlatch's President
and Chief Operating Officer from May 1989 to May 1994. He has been a director
of Potlatch since 1991.
Christine Garvey is expected to become a director of the Company on or prior
to the consummation of the Offering. Ms. Garvey is currently the head of Bank
of America's Commercial Real Estate Services Group, and has been with Bank of
America since 1991. Ms. Garvey is also a member of the National Association of
Corporate Real Estate Executives, the Industrial Development Research Council
and the Urban Land Institute. She also serves on the Board of Directors of
Catellus Development Corporation.
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Parnell S. Lewis, Jr. is expected to become a director of the Company on or
prior to the consummation of the Offering. Mr. Lewis has been the President of
ATCO since 1993, and has served as a director of ATCO since 1979. Before
joining ATCO, Mr. Lewis was a Vice President with National Guard Products from
1982 to 1987. He was employed by Union Planters National Bank from 1971 to
1981, holding several positions including Vice President and Senior Loan
Officer. Mr. Lewis received his B.B.A. from Memphis State University. He is
also a director of Union Planters Corporation.
James F. Rippey is expected to become a director of the Company on or prior
to the consummation of the Offering. Mr. Rippey co-founded Columbia Management
Company, an investment management firm, in 1964. Mr. Rippey was a director of
the Columbia Family of Mutual Funds from 1966 to 1997.
Will M. Storey is expected to become a director of the Company on or prior
to the consummation of the Offering. Mr. Storey was Chief Financial Officer,
Treasurer and director of American President Companies, Ltd. (later renamed
APL Limited) from 1991 through his retirement in 1995. He was director and
Vice Chairman of Manville Inc. from 1989 to 1991, and was Vice Chairman and
Senior Financial Administrative Officer of Federated Department Stores, Inc.
from 1982 to 1988. Prior to that, he was Executive Vice President and Chief
Financial Officer of Boise Cascade Corporation, where he served for 19 years.
He is also a director of Albertsons, Inc.
Frederick T. Weyerhaeuser is expected to become a director of the Company on
or prior to the consummation of the Offering. Mr. Weyerhaeuser has been
Chairman of the Board and Treasurer of Clearwater Investment Trust, a
financial management company, since 1987. He has been a director of Potlatch
since 1960, and also serves as a director of Minnesota Mutual Life Insurance
Company and Clearwater Investment Trust. Previously, Mr. Weyerhaeuser was also
Chairman of the Board and Treasurer of Clearwater Management Co.
Mr. Richards currently serves as the Company's sole director. Prior to or
concurrently with the closing of the Offering, the Company intends to expand
the size of the Board to seven, a majority of whom will be persons not
employed by the Company or the Partnership or employed by or otherwise
affiliated with Potlatch (the "Independent Directors"). Upon expansion, the
Board will be divided into three approximately equal classes serving staggered
three-year terms or until their successors are duly elected and qualified. As
a result, approximately one-third of the total number of directors will be
elected each year. Mr. Richards and Mr. Weyerhaeuser will be members of Class
I, the term of which will expire at the 1999 Annual Meeting of Stockholders,
Ms. Garvey and Mr. Jones will be members of Class II, the term of which will
expire at the 2000 Annual Meeting of Stockholders, and Messrs. Lewis, Rippey
and Storey will be members of Class III, the term of which will expire at the
2001 Annual Meeting of Stockholders.
The Board of Directors will establish an Audit Committee prior to the
closing of the Offering, which will consist of the Independent Directors. The
functions of the Audit Committee will include recommending to the Board of
Directors the retention of independent auditors, reviewing the scope of the
annual audit undertaken by the Company's independent auditors and the progress
and results of their work, and reviewing the Company's financial statements,
internal accounting and auditing procedures and corporate program to ensure
compliance with applicable laws. The Audit Committee will also periodically
review the implementation of the Timber Purchase Agreement, including the
procedures used to determine the prices paid by Potlatch, and will be
responsible for reviewing and approving any transaction in which Potlatch has
a material interest.
The Board of Directors will review and approve executive compensation
policies and practices, reviewing salaries and bonuses for certain officers of
the Company, administering the Company's Stock Incentive Plan and other
benefit plans.
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Officers will be elected at the first Board of Directors' meeting following
the stockholders' meeting at which directors are elected and serve at the
discretion of the Board of Directors. There are no family relationships among
any of the directors or executive officers of the Company.
EXECUTIVE COMPENSATION
The Company was organized in February 1998. The Company anticipates that,
during the fiscal year ending December 31, 1998, its most highly compensated
executive officers will be Messrs. Jones, Trinkwald and Jolley. These officers
will be granted options to purchase shares of Common Stock effective upon the
closing of the Offering under the Company's Stock Incentive Plan. Such options
will have an exercise price equal to the initial public offering price in the
Offering, will vest in 50% increments commencing on the first anniversary of
the grant date and will expire in ten years, or earlier if service with the
Company terminates. See "--Stock Incentive Plan." The following table
summarizes all compensation anticipated to be paid in the remainder of 1998 to
the Company's Chief Executive Officer and to each of the Company's most highly
compensated executive officers other than the Chief Executive Officer whose
total annual salary and bonus is expected to exceed $100,000 for services to
be rendered in all capacities to the Company during the fiscal year ending
December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------- ------------
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION(2)
------------------ ------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Scott R. Jones.......... $ 225,000 $-- (3) 100,000 $10,512
Chief Executive Officer
Allan F. Trinkwald...... 150,000 -- (3) 50,000 7,014
Chief Financial Officer
Robert M. Jolley, Jr.... 85,950 -- (3) 25,000 4,035
Vice President
</TABLE>
- --------
(1) Represents amounts to be paid from April 1, 1998 to December 31, 1998.
(2) Represents estimated health and life insurance premiums to be paid by the
Company.
(3) Incentive bonus compensation will depend upon individual performance in
fiscal 1998 and is not presently determinable.
EMPLOYMENT AGREEMENTS
Mr. Jones has entered into a two-year employment agreement providing for an
annual base salary of no less than $300,000, bonuses of $105,000 payable in
each of 1999 and 2000 plus participation in the Company's incentive bonus
program. The agreement also provides for a grant of options to purchase
100,000 shares of Common Stock in connection with the Offering and a grant of
options to purchase 100,000 shares in 1999.
Mr. Trinkwald has entered into a similar employment agreement providing for
an annual base salary of no less than $200,000 and grants of 50,000 stock
options in connection with the Offering and in 1999.
COMPENSATION OF DIRECTORS
Directors of the Company who are not also employees of the Company, the
Partnership, Potlatch or one of their subsidiaries will be paid an annual
retainer of $16,000 and will receive $1,000 for each Board meeting attended
($500 for telephonic meetings) and $500 for each committee meeting attended
($250 for telephonic meetings). Each committee chair also will receive an
annual retainer of
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$2,000. No other director will receive cash compensation for services as a
director. All directors will, however, be reimbursed for their expenses
incurred in attending meetings.
Directors of the Company who are not also employees of the Company, the
Partnership, Potlatch or one of their subsidiaries are eligible to participate
in the Deferred Compensation Plan for Directors. Each eligible director may
elect to participate in the Deferred Compensation Plan for Directors by filing
a deferral election within the time limits specified in such plan. A
participating director may defer all or a portion of his or her director's
fees, and a Deferred Compensation Account will be established for each
participating director. A director may elect to convert all or a portion of
his or her Deferred Compensation Account into stock units representing the
value of one share of Common Stock ("Stock Units"). Interest will be credited
to each Deferred Compensation Account and, to the extent dividends are paid on
the Common Stock, dividend equivalents will be credited to each Stock Unit
during the period of deferral.
At the time of deferral, the director will indicate the year in which
payment of the Deferred Compensation Account or Stock Units will commence,
which may not be later than age 70. The director will also indicate whether
the payment will be in a lump sum or in installments over a period of years
(but not more than 15). Deferred Compensation Account balances and Stock Units
will be paid in cash. In the event of a participating director's death, all
remaining amounts in his or her Deferred Compensation Account and all of his
or her Stock Units will be distributed to the director's beneficiary.
The Deferred Compensation Plan for Directors will be administered by the
Board of Directors. The Board of Directors may amend, suspend or terminate the
Deferred Compensation Plan for Directors at any time.
Certain directors will also be eligible to receive nondiscretionary awards
of nonstatutory stock options under the 1998 Stock Incentive Plan, as
described below.
STOCK INCENTIVE PLAN
The Board of Directors intends to adopt the 1998 Stock Incentive Plan (the
"Stock Incentive Plan") prior to the consummation of the Offering. A total of
3,000,000 shares of Common Stock will be available for issuance under the
Stock Incentive Plan. An award under this plan may be in the form of stock
options, limited stock appreciation rights, restricted stock or other share-
based awards. The stock options expected to be awarded to certain executive
officers of the Company under the Stock Incentive Plan are listed in the
Summary Compensation Table above. Other potential awards to officers and other
employees are not presently determinable.
Participants in the Stock Incentive Plan will be employees of the Company,
the Partnership or its subsidiaries who are selected by the Board of
Directors. The Company's directors who are not also employees of Potlatch, the
Company, the Partnership or one of their subsidiaries (the "Outside
Directors") will be eligible to receive only nondiscretionary awards of
nonqualified stock options under the plan. These awards will consist of an
option grant of 5,000 shares upon a director's initial election to the Board,
and thereafter an annual option grant of 1,500 shares.
The Stock Incentive Plan will be administered by the Board of Directors. The
Board will determine which employees will participate in the plan and the
terms and conditions of any award under the plan. The maximum number of stock
options, restricted stock or other share-based awards that may be granted to
an employee under the Stock Incentive Plan in any calendar year is 250,000
shares.
The Company's Board of Directors may suspend or discontinue the Stock
Incentive Plan or revise or amend it with respect to any shares not subject to
awards under the plan. However, without the approval of the stockholders of
the Company, no revision or amendment may increase the number of
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shares subject to the plan, change the class of employees eligible to receive
awards under the plan, remove administration of the plan from any committee
appointed by the Board of Directors or amend the plan provision concerning
amendment in order to defeat its purpose.
Stock options granted to employees and Outside Directors will be subject to
terms and conditions specified in the Stock Incentive Plan and stock option
agreements. The exercise price of a stock option will be the fair market value
of a share on the date of grant. The exercise price may be paid in cash or by
the surrender of Common Stock. During the lifetime of the plan participant,
the stock option will be exercisable only by the participant and will not be
assignable or transferable.
Each stock option granted to an employee will become exercisable at the time
or times specified in the applicable stock option agreement. Each stock option
granted to an Outside Director will become exercisable in 50% increments on
the first and second anniversaries of the date of grant, provided that he or
she has continuously been an Outside Director from the date of grant until
such time. In addition, commencing six months after the stock option grant,
each plan participant will have the right to exercise his or her options as
follows:
(i) Within 30 days following the sale or other disposition of all or
substantially all of the assets of the Company;
(ii) Within 30 days prior to the consummation of any transaction
(approved by the stockholders of the Company) in which the Company will
cease to be an independent publicly owned corporation;
(iii) Within 365 days following the date on which more than one-third of
the directors neither (A) were directors on the later of (x) a date three
years earlier or (y) the day following the closing of the Offering nor (B)
are individuals whose election or nomination for election as directors was
approved by at least a majority of those directors described in clause (A)
above;
(iv) Within 365 days following the date on which any "person" (as used in
sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) that acquired Common Stock pursuant to a tender offer subject to
Section 14(d) of such act became entitled to vote 20% or more of the
aggregate voting power of the Company's outstanding stock; or
(v) Within 30 days prior to any dissolution or liquidation of the Company
or any merger or consolidation in which the Company is not the surviving
corporation, but not sooner than required stockholder approval is obtained.
Options not exercised during the 30-day period described in clauses (i),
(ii) and (v) above will terminate upon the last day of such period. Each stock
option granted under the Stock Incentive Plan will include a limited stock
appreciation right that may be exercised only during the periods described in
clauses (i) through (v) above. During any such period, the participant will
have the right, in lieu of exercising an option, to receive an amount equal to
the difference between the aggregate exercise price of the shares subject to
the option surrendered and the fair market value of such shares on the date of
surrender.
If the employment of a participant who is an employee is terminated for any
reason other than death, the employee may exercise within three months after
termination of employment any options that were vested at the date of
termination. The exercise period is 36 months in the event of the employee's
death or termination due to retirement or disability with respect to a
nonqualified stock option. If the employee's employment is terminated due to
misconduct (as defined in the Stock Incentive Plan), then the stock option
will cease to be exercisable.
In the event an Outside Director's services as a director are terminated for
any reason other than cause, the Outside Director may exercise within 36
months of such termination any options that were vested at the date of
termination. If the Outside Director's services are terminated for cause (as
defined in the Company's Charter), his or her stock options will cease to be
exercisable.
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Subject to any required action by the stockholders, the number of shares
covered by the Stock Incentive Plan, the number of shares covered by each
award under the plan and the exercise price of each outstanding option will be
subject to antidilution adjustments upon a stock split or stock dividend and
in certain other circumstances.
Subject to any required action by the stockholders, if the Company is the
surviving corporation in any merger, consolidation or other reorganization,
each outstanding award under the Stock Incentive Plan (whether or not vested)
will apply to the securities to which a holder of the number of shares of
Common Stock subject to the plan award would have been entitled as a result of
such transaction. Subject to the exercise rights set forth in clauses (i)
through (v) above, in the event of a dissolution or liquidation of the Company
or a merger, consolidation or other reorganization in which the Company is not
the surviving corporation, each outstanding option will terminate, unless the
merger, consolidation or reorganization agreement provides otherwise.
INCENTIVE BONUS PROGRAM
The Company intends to establish an incentive compensation plan (the
"Incentive Bonus Plan") for key employees. The Incentive Bonus Plan will
provide for payment of annual cash incentive awards to participating employees
based on the Company's attainment of key annual financial objectives and an
evaluation of the employee's personal performance during the year. The Board
of Directors will determine the awards. Awards will only be paid with respect
to years in which minimum financial objectives, as established annually by the
Board of Directors, are met. The maximum award earned in any year will be 100%
of the employee's base salary in effect for that year.
SEVERANCE PROGRAM FOR EXECUTIVE EMPLOYEES
The Company has established a Severance Program for Executive Employees (the
"Program") which covers the Company's Chief Executive Officer, Chief Financial
Officer and any elected Vice President. The Program provides that if the
Company terminates the services of a covered executive for any reason other
than failure of the Offering, cause or a change of control, the executive will
receive payment of base salary for from four to twelve months, depending on
the executive's length of service with the Company, plus eligibility for an
incentive payment allowance and benefits for the same time period under the
Company's life insurance, accidental death and dismemberment, disability,
medical and dental programs.
Should employment be terminated because of a change in control of the
Company (as defined above with respect to the Stock Incentive Plan), the
executive is entitled to the benefits described above (except that the
severance benefits are in an amount up to 2.5 times base pay), plus the value
of unvested benefits, if any, under the Company's 401(k) savings plan, pension
plan and Supplemental Benefit Plan. In no event will the benefits payable
exceed the amount that would cause them to be categorized as excess parachute
payments under the Code.
If an executive's employment is terminated for cause, no severance benefits
are payable. Termination for "cause" occurs when the executive has engaged in
unfair competition with the Company, induced any customer of the Company to
breach any contract with the Company, made any unauthorized disclosure of any
of the secrets or confidential information of the Company, committed an act of
embezzlement, fraud or theft with respect to the property of the Company or
engaged in conduct which is not in good faith and which directly results in
material loss, damage or injury to the business, reputation or employees of
the Company.
PENSION PLANS
Employees of the Company will be eligible to participate in a tax-qualified
defined benefit pension plan (the "Retirement Plan") and a Supplemental
Benefit Plan which replaces benefits lost because of any limitation placed on
the Company's tax-qualified defined benefit plan or the Company's 401(k)
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savings plan. The following table presents the annual pension benefits
estimated to be payable under the Company's Retirement Plan and Supplemental
Benefit Plan at normal retirement date to a person having the average annual
earnings and years of credited service shown.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
AVERAGE ------------------------------------------------------------------
ANNUAL EARNINGS 15 20 25 30 35
--------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$100,000 $20,165 $26,887 $33,609 $40,331 $47,053
200,000 42,665 56,887 71,109 85,331 99,553
300,000 65,165 86,887 108,609 130,331 152,053
400,000 87,665 116,887 146,109 175,331 204,553
500,000 110,165 146,887 183,609 220,331 257,053
</TABLE>
In calculating years of credited service, the period of time recognized
under Potlatch's Salaried Employees' Retirement Plan is taken into account. In
calculating final average annual earnings, the Retirement Plan and the
Supplemental Benefit Plan recognize overtime, bonuses under the Incentive
Bonus Plan and other salary- or sales-based performance incentive payments, as
reflected in the Summary Compensation Table above. Bonuses are recognized in
the year in which they are paid. The benefits of participants who are required
to retire at age 65 are calculated as if they received a standard bonus under
the Incentive Bonus Plan during each year in their period of average annual
earnings.
For the purpose of calculating retirement benefits, Messrs. Jones and
Trinkwald currently have no years of credited service, and Mr. Jolley has four
years of credited service. Benefits under the plans are computed as straight-
life annuity amounts and are not subject to reduction by Social Security or
other benefits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors will make decisions regarding the compensation of
executive officers. Mr. Richards, who is a director of the Company, is
Chairman of the Board and Chief Executive Officer of Potlatch. Potlatch will
initially be the sole owner of Special Voting Stock and the sole limited
partner of the Partnership, and will have certain other relationships with the
Company. See "Certain Relationships and Transactions."
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CERTAIN POLICIES AND OBJECTIVES
The following discussion summarizes the Company's current investment
objectives and policies, disposition and financing policies and policies with
respect to certain other activities. These policies are determined by the
Board of Directors and may be amended or revised from time to time at the
discretion of the Board of Directors without a vote of the Company's
stockholders.
As the sole general partner of the Partnership, the Company also will
determine the investment policies of the Partnership. Under the Partnership
Agreement, the Company's future investments generally must be made through the
Partnership. See "The Partnership Agreement--Management of the Partnership."
INVESTMENT POLICIES
The Company's investment objective is to maximize its cash flow consistent
with its long-term policy of increasing sustainable yield. The Company will
seek to accomplish its objective through its ownership of the Initial
Timberlands and selective acquisitions of additional timberlands.
The Company may purchase or lease properties for long- or short-term
investment and may cause the Partnership to hold or sell any or all of the
Initial Timberlands when circumstances warrant, subject to the restrictions on
sale in the Partnership Agreement and Timber Purchase Agreement. The Company
also may participate with other entities in property ownership, through joint
ventures or other types of co-ownership. Equity investments may be subject to
existing mortgage financing and other indebtedness that has priority over the
equity interest of the Company in such properties. While the Company intends
to emphasize equity investments, it may, in its discretion, invest in
mortgages, stock of other REITs, partnerships and other real estate interests.
The Partnership Agreement requires that a majority of the Company's voting
power, which Potlatch will initially control through its ownership of Special
Voting Stock, must approve any transaction which would cause 50% or more of
the fair market value of the Company's assets to consist of assets other than
timber, timberlands and related assets, with limited exceptions. There are
presently no limitations on the percentage of the Company's assets that may be
invested in any one property or venture, the number of properties in which the
Company may invest or the concentration of investments in a single geographic
region, based on USFS data. The Board of Directors may establish such
limitations, and other policies, as it deems appropriate from time to time.
DISPOSITIONS
Other than potential sales or exchanges of small parcels, the Company has no
current intention to cause the Partnership to dispose of any of the Initial
Timberlands, although it reserves the right to do so (subject to Potlatch's
consent, in certain cases involving the Potlatch Southern Timberlands) if the
Board of Directors determines that such action would be in the best interests
of the Company. In general, the Company intends to pursue sales or exchanges
of lands which may have a higher and better use for recreational or other
purposes, which have special environmental significance, or which are
geographically isolated from its other timberlands. The Timber Purchase
Agreement and the Partnership Agreement restrict the Partnership's ability to
sell the timberlands contributed to the Partnership by Potlatch. See
"Business--The Timber Purchase Agreement" and "Business--The Partnership
Agreement."
FINANCING
The Company intends to maintain a ratio of debt to total market
capitalization of less than 35%. The Board of Directors may, however,
reevaluate this policy from time to time and reduce or increase such ratio
accordingly. Following the completion of the Offering and the use of net
proceeds therefrom,
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the Company will have approximately $132.1 million of indebtedness ($71.3
million if the Underwriters' over-allotment option is exercised in full),
which will constitute approximately 44.0% of its total market capitalization
after giving effect to the Offering (20.7% if the Underwriters' over-allotment
option is exercised in full), in each case assuming an initial public offering
price of $20.00 per share. The Company will determine its financing policies
in light of then-current economic conditions and timber prices, relative costs
of debt and equity capital, market values of properties, growth and
acquisition opportunities and other factors. If the Board of Directors
determines that additional funding is desirable, the Company may raise such
funds through additional equity offerings, debt financing or retention of cash
flow (subject to provisions in the Code concerning the taxability of
undistributed REIT income and REIT qualification), or a combination of these
methods.
The Partnership Agreement prohibits the Company from taking any action,
including the assumption or incurrence of debt, that would cause Potlatch to
breach its existing debt covenants and future covenants that are no more
restrictive. These covenants generally will apply to the Company so long as
Potlatch owns more than 50% of the Company's voting power or otherwise is
required to consolidate the Company for accounting purposes, and include
limitations on liens and sale-leaseback transactions and certain financial
ratios and other quantitative tests (including a minimum level of consolidated
net tangible assets, and certain leverage and coverage ratios). The Company
will also be restricted from effecting certain other fundamental transactions
as long as it is a "significant subsidiary" for purposes of Potlatch's debt
instruments. The Company's Credit Facility will also restrict the Company's
ability to incur indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company--Liquidity and
Capital Resources."
It is anticipated that borrowings will be made through the Partnership,
although the Company also may incur indebtedness that may be re-loaned to the
Partnership on the same terms and conditions as are applicable to the
Company's borrowing of such funds. Indebtedness may be in the form of purchase
money obligations to sellers of timberlands to the Partnership, publicly or
privately placed debt instruments, or financing from banks, institutional
investors or other lenders, any of which indebtedness may be unsecured or may
be secured by mortgages or other interests in the Company's assets. However,
the Timber Purchase Agreement restricts the use of the Potlatch Southern
Timberlands as collateral, and, as described above, the Company has agreed to
refrain from taking actions that would cause Potlatch to breach its debt
covenants, which include certain limitations on liens. Other than these
limitations, there are presently no limits on the number or amount of
mortgages or other interests which may be placed on any one property or asset.
In addition, such indebtedness may be recourse to all or any part of the
property of the Company or may be limited to the particular property to which
the indebtedness relates. The proceeds from any borrowings may be used for the
payment of distributions, for working capital, to pay the exchange price
payable for Partnership Units under the Partnership Agreement, to refinance
indebtedness, to finance acquisitions or for other purposes deemed appropriate
by the Board of Directors.
In the event that the Board of Directors determines to raise additional
equity capital, the Board has the authority, without stockholder approval, to
issue additional shares of authorized Common Stock or Preferred Stock on such
terms and for such consideration as it deems appropriate, including in
exchange for property. The Company's then-existing stockholders will have no
preemptive right to purchase any of the shares so issued. If the Board of
Directors determines to raise additional equity capital, the Company will
contribute such funds to the Partnership in return for additional Partnership
Units. In addition, under certain circumstances the Company may issue
additional shares of Common Stock in connection with the exchange of
Partnership Units for shares of Common Stock pursuant to the exercise of the
limited partners' exchange rights under the Partnership Agreement. See "The
Partnership Agreement."
The Board of Directors also has the authority to cause the Partnership to
issue additional Partnership Units in any manner (and on such terms and for
such consideration) as it deems
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appropriate, including in exchange for timberlands, subject to the requirement
that any issuance of Partnership interests having rights superior to those of
the then-existing limited partnership interests will require the prior consent
of a majority of the limited partnership interests for so long as all limited
partnership interests would, if exchanged for Common Stock, represent at least
20% of the then outstanding Common Stock. See "The Partnership Agreement--
Issuance of Additional Limited Partnership Interests."
WORKING CAPITAL RESERVES
The Company plans to maintain working capital reserves (and when not
sufficient, access to borrowings) in amounts that the Board of Directors
determines to be adequate to meet normal contingencies in connection with the
operation of the Company's business and investments and to facilitate the
payment of anticipated distributions to stockholders.
CONFLICT OF INTEREST POLICIES
The Independent Directors' Committee will periodically review the
implementation of the Timber Purchase Agreement, including the procedures used
to determine the prices paid by Potlatch, and will be responsible for
reviewing and approving other transactions in which Potlatch has a material
interest. The Company, the Partnership and Potlatch will also enter into an
Opportunities Agreement designed to allocate their respective rights to pursue
certain timberland acquisitions and other business opportunities. See "Certain
Relationships and Transactions." However, there can be no assurance that these
procedures and contractual provisions will eliminate the influence of
potential conflicts of interest, and their failure to do so could permit
actions to be taken that fail to reflect fully the interests of all
stockholders. See "Risk Factors--Conflicts of Interest."
Pursuant to Delaware law, each of the Company's directors is required to
discharge his or her duties in good faith, with the care an ordinarily prudent
person in a like position would exercise under similar circumstances and in a
manner which he or she reasonably believes to be in the best interests of the
Company. In addition, under Delaware law, a contract or transaction between
the Company and any of its directors or between the Company and a corporation,
firm or other entity in which one of its directors has a financial interest or
of which such person is an officer or director is not void or voidable solely
because of (a) such interest or position, (b) the presence or participation of
the director at the meeting of the Board or a committee of the Board that
authorizes or approves or ratifies the contract or transaction or (c) the
counting of the vote of the director for the authorization of the contract or
transaction, if (i) after disclosure of the material facts concerning such
person's interest and concerning the contract or transaction, the contract or
transaction is approved by a majority of the disinterested directors or a
majority of the stockholders, or (ii) the transaction is fair to the Company.
OTHER POLICIES
The Company intends to operate in a manner that will permit the Company to
qualify for taxation as a REIT under the Code unless, because of changes in
circumstances, the Code or the Treasury Regulations, the Board of Directors
determines that it is no longer in the Company's best interests to qualify as
a REIT. The Company also intends to operate in a manner that will not subject
it to regulation under the Investment Company Act of 1940, as amended. The
Company does not intend (i) to invest in the securities of other issuers
(other than the Partnership) for the purpose of exercising control over such
issuer, (ii) to underwrite securities of other issuers or (iii) to trade
actively in loans or other investments.
The Company may make investments other than as previously described,
although it currently does not intend to do so. The Company has authority to
repurchase or otherwise reacquire Common Stock or any other securities it may
issue and may engage in such activities in the future. The Board
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of Directors has no present intention of causing the Company to repurchase any
of the shares of Common Stock, and any such action would be taken only in
conformity with applicable federal and state laws and the requirements for
qualifying as a REIT under the Code and the Treasury Regulations. Although it
may do so in the future, except in connection with the Formation Transactions,
the Company has not issued Common Stock or any other securities in exchange
for property, nor has it reacquired any of its Common Stock or any other
securities. See "The Formation Transactions." The Company may make loans to
third parties, including, without limitation, to its officers and directors.
The Company has not engaged in trading, underwriting or agency distribution or
sale of securities of other issuers, nor has the Company invested in the
securities of other issuers other than the Partnership for the purpose of
exercising control.
INFORMATION REGARDING POTLATCH
This Prospectus relates only to the Common Stock offered hereby and does not
relate to any securities of Potlatch. Potlatch, incorporated in 1903, is an
integrated forest products company engaged principally in the growing and
harvesting of timber and the manufacture and sale of wood products, printing
papers and other pulp-based products. Potlatch will own approximately 343,000
acres of timberland in Minnesota, approximately 672,000 acres of timberland in
northern Idaho and a 22,000-acre hybrid poplar plantation in Oregon after the
consummation of the Formation Transactions. Potlatch's manufacturing
facilities are located in Idaho, Arkansas, Minnesota and Nevada, and in
connection with the Formation Transactions, Potlatch will acquire additional
facilities in Mississippi.
Potlatch is subject to the informational requirements of the Exchange Act
and is required to file reports and other information with the Commission.
Copies of such reports and other information may be inspected and copied at
certain offices of the Commission located at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices located at
Citicorp Center, 500 West Madison, 14th Floor, Chicago, IL 60661 and Seven
World Trade Center, 13th Floor, New York, NY 10048. Copies of such material
can be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material
may also be accessed electronically at the Commission's World Wide Web site at
http://www.sec.gov and at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, NY 10015, and the Pacific Stock Exchange, 301 Pine
Street, San Francisco, CA 94104. Potlatch is not required to, and will not,
provide annual or other reports to holders of the Company's Common Stock.
THE FORMATION TRANSACTIONS
The Company was formed in February 1998, and the Partnership was formed in
May 1998. Substantially contemporaneously with the consummation of the
Offering, the Company, Potlatch and ATCO will engage in the transactions
described below (the "Formation Transactions"), which are designed to
consolidate the ownership of the Initial Timberlands in the Partnership, to
facilitate the Offering and to enable the Company to qualify as a REIT for
federal income tax purposes commencing with the year ending December 31, 1998.
. Potlatch will contribute its timberlands in Arkansas to the Partnership
in exchange for 20,000,000 Partnership Units.
. Potlatch will acquire the sole share of the Company's Special Voting
Stock.
. The Company will sell 15,000,000 shares of Common Stock in the Offering
and will use the net proceeds of the Offering to fund a portion of the
purchase price for the acquisition of ATCO, which will be effected
through the merger of a newly formed subsidiary of the Company into
ATCO, with ATCO initially surviving as a wholly owned subsidiary of the
Company.
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. Potlatch will acquire all of ATCO's timber converting assets, consisting
primarily of two hardwood sawmills and a veneer plant located near
Vicksburg, Mississippi, as well as ATCO's headquarters building in
Memphis, Tennessee (which Potlatch will contribute to the Partnership,
as described above), and a portion of its log transportation business,
for approximately $60 million (including the assumption of
indebtedness). The veneer plant will be acquired from a partnership
affiliated with ATCO.
. The Company will contribute to the Partnership the ATCO Timberlands and
certain farmlands and interests in commercial real estate formerly owned
by ATCO; the Company will become the sole general partner of the
Partnership, and the Partnership will issue 15,000,000 Partnership Units
to the Company pursuant to the Partnership Agreement, which will be
amended and restated in the form described under "The Partnership
Agreement."
. The Partnership and Potlatch will enter into the Timber Purchase
Agreement.
. The Company and Potlatch will enter into an Administrative Services
Agreement, the Opportunities Agreement and a Registration Rights
Agreement providing Potlatch with registration rights, as described
under "Certain Relationships and Transactions."
. The Company will enter into the $200 million Credit Facility.
. The Company will borrow approximately $113.2 million under the Credit
Facility assuming a public offering price of $20.00 per share (which
amount will be increased or decreased if the net proceeds to the Company
of the Offering are less than or greater than the assumed amount of $276
million), part of which will be applied toward the portion of the
purchase price for the ATCO acquisition not funded through the Offering,
and $21.4 million will be used to repay the Company's assumed portion of
a $50 million loan that Potlatch extended to ATCO in October 1997. See
"Certain Relationships and Transactions."
. The Partnership will assume the Company's obligations under the Credit
Facility.
As a result of the Formation Transactions, (i) the Company will be the sole
general partner of the Partnership and will own 15,000,000 Partnership Units,
which will represent an approximately 42.9% economic interest in the
Partnership, (ii) Potlatch will own 20,000,000 Partnership Units, which will
represent an approximately 57.1% economic interest in the Partnership, (iii)
Potlatch will own the sole share of Special Voting Stock, initially entitling
Potlatch to approximately 57.1% of the total voting power of the Company, (iv)
the Partnership will own a fee interest in the Initial Timberlands, and (v)
the Partnership and Potlatch will be parties to the Timber Purchase Agreement.
In the Formation Transactions, the Company will acquire ATCO, and the
Partnership will own the timberlands, standing timber and other real estate
assets previously owned by ATCO. For federal income tax purposes, the
difference between the value of the assets contributed to the Partnership by
ATCO and their basis for federal income tax purposes must be taken into
account by ATCO (and thus, the Company) when the Partnership sells timber from
the lands contributed by ATCO or otherwise disposes of such assets. The assets
contributed to the Partnership which are attributable to ATCO are expected to
have a low tax basis. Accordingly, upon a disposition of such assets (such as
the harvesting of the ATCO Timberlands), the Company will generally be
allocated more taxable income than the amount of cash it will be entitled to
receive from the Partnership due to such disposition. On the other hand,
Potlatch will be allocated all of the gain attributable to the difference
between the value of the Potlatch Southern Timberlands as of their
contribution to the Partnership and their basis for federal income tax
purposes. Thus, the Company's share of cash distributed from the Partnership
is expected to differ from the amount of taxable income allocated to it by the
Partnership. This may impair the Company's ability to make distributions. See
"Risk Factors--Potential Differences Between Taxable Income and Cash Available
for Distribution."
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No independent third party appraisals, valuations or fairness opinions have
been obtained by the Company in connection with the Formation Transactions.
Accordingly, there can be no assurance that the amount to be paid by the
Partnership for the Potlatch Southern Timberlands is equal to the fair market
value of such timberlands.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
In addition to its ownership of Special Voting Stock and Partnership Units
and its commitment to purchase timber pursuant to the Timber Purchase
Agreement, Potlatch will have certain other relationships and transactions
with the Company, as described below and elsewhere in this Prospectus.
ADMINISTRATIVE SERVICES AGREEMENT
In connection with the Offering, Potlatch and the Company have entered into
an administrative services agreement whereby Potlatch has committed to provide
the Company with certain administrative services, in areas such as human
resources, accounting and tax, for up to five years following the Offering at
a price equal to Potlatch's cost. The Company will be entitled to terminate
this arrangement at any time, upon nine months' notice.
OPPORTUNITIES AGREEMENT
In connection with the Formation Transactions, Potlatch, the Company and the
Partnership will enter into an Opportunities Agreement which gives the
Partnership the first opportunity to pursue any acquisition of timberlands in
the United States, subject to certain limited exceptions. In the event that
Potlatch desires to acquire any interest in timberlands, the Opportunities
Agreement requires that Potlatch give prior notice to the Partnership, which
then has the exclusive right to negotiate and consummate the proposed
acquisition. Potlatch may not make the acquisition unless the Partnership
rejects or terminates its pursuit of the opportunity.
The Partnership's right of first opportunity does not apply in certain
limited circumstances. Potlatch will have a right of first opportunity to
negotiate and consummate acquisitions of timberlands located exclusively
within specified regions surrounding Potlatch's present converting facilities
in northern Idaho or northern Minnesota. In addition, Potlatch is not
prevented from making an acquisition in which non-timberland assets represent
a majority of the fair market value of the assets being acquired. Upon
Potlatch's completion of such an acquisition, however, the Opportunities
Agreement requires that Potlatch offer (unless it is legally or contractually
prohibited from doing so) the timberland assets to the Partnership at fair
market value and otherwise on terms substantially similar to those applicable
to Potlatch's acquisition. Potlatch's offer must indicate whether the purchase
price will be payable in cash, Partnership Units (valued based on average
closing prices of the Company's Common Stock immediately prior to consummation
of the acquisition by Potlatch) or a combination thereof. Potlatch is
obligated to provide to the Partnership any information reasonably requested
by the Partnership to facilitate its evaluation of the offer, which must be
accepted (if at all) within 30 days after receipt. The fair market value of
the timberlands will be determined in accordance with an appraisal procedure
commencing immediately after the Partnership accepts the offer.
The Opportunities Agreement will terminate when Potlatch beneficially owns
less than 20% of the Company's voting power.
REGISTRATION RIGHTS AGREEMENT
Pursuant to a Registration Rights Agreement, Potlatch will be entitled to
"piggyback" registration rights commencing on the second anniversary of the
consummation of the Offering, under which it may
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include shares of Common Stock acquired in exchange for Partnership Units in
certain Securities Act registrations effected by the Company in the future.
Potlatch will also be granted the right, commencing on the second anniversary
of the consummation of the Offering, to demand the registration of shares
acquired by Potlatch in exchange for Partnership Units no more than twice per
year, so long as each such registration covers shares having a value of at
least $50.0 million.
OTHER MATTERS
In October 1997, Potlatch loaned $50.0 million to ATCO under a promissory
note maturing in five years. Approximately $21.4 million of this note's
outstanding balance will be assumed by the Company in connection with its
acquisition of ATCO in the Formation Transactions, and will be repaid
immediately thereafter through borrowing under the Company's credit facility.
Potlatch has advanced the Company's expenses associated with the Offering,
which are estimated at $3,000,000, and will be repaid by the Company promptly
after the consummation of the Offering.
THE PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement describes the material
provisions of such agreement as it will be in effect immediately after the
Formation Transactions. This summary is qualified in its entirety by reference
to the Partnership Agreement, a form of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
MANAGEMENT
The Partnership was organized as a Delaware limited partnership in May 1998.
The Company is the sole general partner of, and upon consummation of the
Offering will hold approximately 42.9% of the economic interests in, the
Partnership. The Company will hold all of its interests in the Partnership as
a general partner interest, and will conduct all of its business through the
Partnership.
Pursuant to the Partnership Agreement, the Company, as the sole general
partner of the Partnership, generally has full and exclusive responsibility
and discretion in the management, operation and control of the Partnership,
including the ability to cause the Partnership to enter into certain major
transactions, including acquisitions and dispositions of properties. No
limited partner may take part in the operation, management or control of the
business of the Partnership by virtue of being a holder of Partnership Units.
Certain restrictions apply to the Company's ability to take or to cause the
Partnership to take certain actions that would cause Potlatch to breach its
debt covenants and to change the nature of the Company's business, as
described below. The Partnership Agreement also restricts the Company's
ability to engage in certain business combinations, as described more fully
under "--Extraordinary Transactions" below.
The Partnership Agreement provides that all business activities of the
Company, including all activities pertaining to the acquisition and operation
of properties, must be conducted through the Partnership.
The Partnership Agreement provides that, for financial accounting purposes,
gain and loss will be allocated among the partners in a manner determined by
the general partner in good faith, and which follows as closely as practicable
the "remedial method" of allocating gain and loss for federal income tax
purposes. This method is outlined in Section 704 of the Code and the related
regulations.
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NO REMOVAL OF THE GENERAL PARTNER; TRANSFER OF THE GENERAL PARTNER'S INTEREST
The Partnership Agreement does not permit the limited partners to remove the
Company as general partner of the Partnership. The Company may not transfer
any of its interests in the Partnership (defined to include mergers and other
business combinations involving the Company) except (i) with the prior consent
of a majority of the limited partnership interests, (ii) in connection with a
merger, sale of all or substantially all of its assets or a reclassification
and certain other changes in the Company's shares for which it has obtained
the approval of a majority of the limited partnership interests, or (iii) in
connection with a consolidation or merger in which the Company is not the
surviving entity if (A) such transaction does not result in a materially
adverse tax consequence for a majority in interest of the limited partners,
(B) upon consummation the surviving entity contributes its assets to the
Partnership in exchange for Partnership Units, (C) stockholders of the Company
immediately prior to such transaction own at least 70% of the voting power of
the surviving entity upon consummation and (D) the surviving entity assumes
the obligations of the Company as general partner.
AMENDMENTS OF THE PARTNERSHIP AGREEMENT
Generally, the Partnership Agreement may be amended with the approval of the
Company, as general partner, and limited partners holding a majority of the
limited partnership interests. Certain amendments that would, among other
things, convert a limited partner's interest into a general partner's
interest, modify the limited liability of a limited partner, alter the
interest of a partner in profits or losses or the right to receive
distributions, or alter or modify the exchange right described below, must be
approved by each partner that would be adversely affected by such amendment.
In addition, the prior consent of Potlatch, in its sole discretion, is
required for the amendment of certain provisions (i) providing Potlatch with
the right to maintain its percentage ownership interest in the Company as
described under "Certain Relationships and Transactions," (ii) restricting the
Partnership's sale or pledge of the Potlatch Southern Timberlands and certain
transactions between the Partnership and the partners, (iii) requiring the
Company to conduct its business through the Partnership and to refrain from
taking actions that would cause Potlatch to breach its debt covenants, and
(iv) providing for the transfer of the Potlatch Southern Timberlands to
Potlatch upon the Partnership's dissolution or its repudiation of the Timber
Purchase Agreement.
TRANSFER OF PARTNERSHIP UNITS; SUBSTITUTE LIMITED PARTNERS
The Partnership Agreement provides that limited partners generally may
transfer their Partnership Units without the consent of any other person, but
may substitute a transferee as a limited partner only with the prior written
consent of the Company as the general partner of the Partnership. In addition,
limited partners may not transfer Partnership Units in violation of certain
regulatory and other restrictions set forth in the Partnership Agreement.
EXCHANGE OF PARTNERSHIP UNITS
On and after the second anniversary of the completion of the Offering, the
Partnership will be obligated to exchange each Partnership Unit at the request
of the holder thereof for cash equal to the fair market value of one share of
Common Stock at the time of such exchange (as determined in accordance with
the provisions of the Partnership Agreement), provided that the Company may
elect to acquire any such Partnership Unit presented for exchange for one
share of Common Stock (subject to antidilution adjustments) or an amount of
cash of the same value. The exchange right will also become immediately
exercisable if a third party makes a tender or exchange offer for more than
10% of the outstanding shares of Common Stock and in the event of a sale of
all or substantially all of the Company's assets, certain extraordinary
dividends and certain mergers and other business combinations involving the
Company. In addition, upon a termination of the Timber Purchase Agreement due
to the Partnership's repudiation of that agreement, then so long as Potlatch
or its successor and their subsidiaries hold more than 50% of the Partnership
Units initially held by Potlatch,
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Potlatch and any affiliate of Potlatch holding Partnership Units may cause the
Partnership to exchange all such Partnership Units for a price equal to the
cash exchange price, payable by the transfer of title to all of the
timberlands that were contributed to the Partnership by Potlatch (or lands
acquired in exchange therefor) with a cash adjustment payable by Potlatch or
the Partnership, as the case may be, for any difference between such exchange
price and the fair market value of the transferred timberlands. With each
exchange of Partnership Units, the Company's percentage ownership interest in
the Partnership will increase. Potlatch will have certain rights, pursuant to
a separate Registration Rights Agreement, to cause the Company to register
under the Securities Act the shares of Common Stock that may be issued to
Potlatch in exchange for its Partnership Units or the resale of such shares by
Potlatch. See "Certain Relationships and Transactions."
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS
The Company is authorized, without the consent of the limited partners, to
cause the Partnership to issue additional Partnership Units to the Company, to
the limited partners or to other persons for such consideration and on such
terms and conditions as the Company deems appropriate, subject to the
requirement that, for so long as all limited partnership interests would
represent at least 20% of the then-outstanding Common Stock if exchanged for
Common Stock, a majority of the limited partnership interests must consent to
the issuance of any partnership interests having rights superior to those of
the then-existing limited partnership interests. If additional Partnership
Units are issued to the Company, then the Company must (i) issue additional
shares of Common Stock and must contribute to the Partnership the entire
proceeds received by the Company from such issuance or (ii) issue additional
Partnership Units to all partners in proportion to their respective interests
in the Partnership. In addition, the Company may cause the Partnership to
issue to the Company additional partnership interests in different series or
classes, which may be senior to the Partnership Units, in conjunction with an
offering of securities of the Company having substantially similar rights, in
which the proceeds thereof are contributed to the Partnership. Consideration
for additional partnership interests may be cash or other property or assets.
No limited partner has preemptive, preferential or similar rights with respect
to additional capital contributions to the Partnership or the issuance or sale
of any partnership interests therein.
EXTRAORDINARY TRANSACTIONS
The Partnership Agreement provides that the Company may not generally engage
in any merger, consolidation or other combination with or into another person
or sale of all or substantially all of its assets, or any reclassification,
recapitalization or other change of outstanding shares without the prior
consent of at least a majority of the limited partnership interests.
Notwithstanding the foregoing, the Company may merge into another entity
without obtaining such consent if, among other things, the Company's
stockholders own at least 70% of the voting power of the surviving entity (or
the entity in control of the surviving entity) and the surviving entity
expressly assumes the obligations of the Company as general partner of the
Partnership. See "--No Removal of the General Partner; Transfer of the General
Partner's Interest" above. This provision of the Partnership Agreement may
deter third parties from making acquisition proposals and may prevent the
Company from engaging in transactions that would otherwise be permissible
under its Charter.
OTHER COVENANTS
The Partnership Agreement provides that following the Offering, the
Partnership may not sell or otherwise transfer any of the Potlatch Southern
Timberlands without the prior written consent of Potlatch, in its sole
discretion, subject to limited annual exceptions for the sale of up to 5,000
acres (up to an aggregate of 20,000 acres in any 20-year period) and the
exchange of up to an additional
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10,000 acres for reasonably equivalent parcels. The agreement also restricts
the Company's ability to pledge or encumber the Potlatch Southern Timberlands.
In addition, the agreement provides that without the approval of at least a
majority of the Company's voting power, the Partnership may not effect any
transaction that would cause a majority of the fair market value of its assets
to be attributable to any business other than the timberlands business.
The Partnership Agreement prohibits the Company and the Partnership from
incurring, assuming or guaranteeing any indebtedness, or taking any other
action, that would cause Potlatch to breach its existing debt covenants or
future debt covenants that are no more restrictive. See "Risk Factors--
Conflicts of Interest" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company--Liquidity and Capital
Resources."
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Partnership Agreement generally provides that the Company, as general
partner of the Partnership, will not be liable for monetary damages to the
Partnership or any limited partner for losses sustained or liabilities
incurred as a result of any act or omission taken or permitted by the Company
in connection with the Partnership's business that is determined by the
Company, in good faith, to be in or not against the Partnership's best
interests, unless such act or omission constitutes willful misconduct, fraud,
gross negligence or a knowing violation of law or the Partnership Agreement.
In addition, the Company is not responsible for any misconduct or negligence
on the part of its agents, provided that it appointed them in good faith. The
limited partners of the Partnership have agreed that, in fulfilling the
fiduciary duties owed by the Company to the limited partners, the Company is
not required to consider the separate interests of the limited partners
(including tax consequences to the limited partners), unless the Partnership
Agreement specifies otherwise.
The Partnership Agreement also provides for indemnification of the Company,
the limited partners, the directors and officers of the Company and the
limited partners, and such other persons as the Company may from time to time
designate, against any losses, claims, damages, liabilities, judgments, fines,
settlements and expenses arising from the operations of the Partnership so
long as the indemnitee acted in good faith and in a manner it reasonably
believed to be in, or not opposed to, the best interests of the Partnership,
and in the case of any criminal proceeding, the indemnitee had no reasonable
cause to believe that its conduct was unlawful.
TAX MATTERS
The Company will be the tax matters partner of the Partnership and, as such,
will generally have the authority to make tax elections under the Code on
behalf of the Partnership.
TERM
The Partnership will continue in full force and effect until December 31,
2198 or until sooner dissolved pursuant to the terms of the Partnership
Agreement.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary discusses the federal income tax considerations
reasonably anticipated to be material to a prospective stockholder of the
Company in connection with his or her ownership of shares of Common Stock. The
discussion does not address the tax consequences that may be relevant to a
particular stockholder subject to special treatment under certain federal
income tax laws, such as dealers in securities, banks, insurance companies,
tax-exempt organizations (except to the extent discussed under the heading
"Taxation of Tax-Exempt Stockholders of the Company") or non-United States
person (except to the extent discussed under the heading "Taxation of Non-
United States Stockholders of the Company"). This discussion does not address
any consequences arising under the laws of any state, locality or foreign
jurisdiction.
The information in this section and the opinions of Pillsbury Madison &
Sutro LLP expressed herein (including specifically the opinions of such firm
set forth under "Taxation of the Company--General," "Taxation of the Company--
Income Tests," and "Tax Aspects of the Company's Ownership of Interests in the
Partnership--Entity Classification"), as well as the opinion of Skadden, Arps,
Slate Meagher & Flom LLP as to the qualification of ATCO as a REIT, are based
on current provisions of the Code, existing, temporary and currently proposed
Treasury Regulations thereunder, the legislative history of the Code, existing
administrative interpretations and practices of the Internal Revenue Service
(the "Service"), and judicial decisions, all of which are subject to change
either prospectively or retroactively. No assurance can be given that future
legislation, Treasury Regulations, administrative interpretations and judicial
decisions will not significantly change the current law or adversely affect
existing interpretations of current law. Except as expressly set forth in this
discussion, neither the Company nor ATCO has requested, or plans to request,
any rulings from the Service concerning the tax consequences of the
transactions described herein. Thus, no assurance can be provided that the
statements set forth herein (which do not bind the Service or the courts) will
not be challenged by the Service or will be sustained by a court if so
challenged.
As used in this section, the term "Company" refers solely to Timberland
Growth Corporation.
Each prospective purchaser of shares of Common Stock is advised to consult
with his or her own tax advisor regarding the specific tax consequences to him
or her of the ownership and disposition of shares of Common Stock in light of
his or her specific tax and investment situations and the specific federal,
state, local and foreign tax laws applicable to him or her.
TAXATION OF THE COMPANY
GENERAL
The Company plans to make an election to be taxed as a REIT under Sections
856 through 860 of the Code, commencing with its taxable year ending December
31, 1998. The Company believes that, commencing with its taxable year ending
December 31, 1998, it will be organized and will operate in such a manner as
to qualify for taxation as a REIT. The Company intends to operate in such a
manner as to qualify for taxation as a REIT under Sections 856 through 860 of
the Code for each of its tax years ending subsequent to December 31, 1998. No
assurance can be given, however, that the Company will operate in a manner so
as to qualify, or remain qualified, as a REIT.
The sections of the Code and the corresponding Treasury Regulations relating
to the taxation of REITs and their stockholders are highly technical and
complex. The following sets forth the material aspects of the rules that
govern the Federal income tax treatment of a REIT and its stockholders. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
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Pillsbury Madison & Sutro LLP has acted as counsel to the Company in
connection with the Offering, the Company's acquisition of ATCO (the
"Merger"), and the Company's election to be taxed as a REIT. Skadden, Arps,
Slate, Meagher & Flom LLP has acted as special tax counsel to ATCO in
connection with the Merger and ATCO's election to be taxed as a REIT beginning
with its taxable year commencing on January 1, 1998. In the opinion of
Pillsbury Madison & Sutro LLP, commencing with the Company's tax year ending
December 31, 1998, the Company will be organized in conformity with the
requirements for qualification as a REIT, and the Company's proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT provided that (i) the elections and other procedural steps
described in this discussion of "Certain Federal Income Tax Considerations"
are completed in a timely fashion and (ii) the Company and the Partnership
operate in accordance with various assumptions and factual representations
made by the Company and the Partnership concerning their organization,
business, properties and operations (and the organization, business,
properties and operation of ATCO prior to the Merger). In addition, in
providing its opinion, Pillsbury Madison & Sutro LLP is relying upon an
opinion of Skadden, Arps, Slate, Meagher & Flom, LLP as to the qualification
of ATCO as a REIT. In providing its opinion, Skadden, Arps, Slate, Meagher &
Flom LLP is relying upon certain representations received from ATCO.
Qualification and taxation as a REIT depend upon the Company's ability to meet
on a ongoing basis (through actual annual operating results, distribution
levels and diversity of share ownership) the various qualification tests
imposed under the Code discussed below, the results of which will not be
reviewed by Pillsbury Madison & Sutro LLP on a continuing basis. No assurance
can be given that the actual results of the Company's operations for any
particular taxable year will satisfy such requirements. Further, the
anticipated income tax treatment described in this Prospectus may be changed,
perhaps retroactively, by legislative, administrative or judicial action at
any time. See "--Failure of the Company to Qualify as a REIT."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its ordinary
income or capital gain that is currently distributed to stockholders. The REIT
provisions of the Code generally allow a REIT to deduct dividends paid to its
stockholders. This deduction for dividends substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax as follows: First, the Company will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. See, however, "Distribution Policy" with
respect to the Company's ability to elect to treat as having been distributed
to its stockholders certain of its capital gains upon which the Company has
paid taxes, in which event so much of the taxes as have been paid by the
Company with respect to such income would also be treated as having been
distributed to stockholders. Second, under certain circumstances, the Company
may be subject to the "alternative minimum tax" on certain of its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is described in Section 1221(1) of
the Code (generally, property held primarily for sale to customers in the
ordinary course of the Company's trade or business) or (ii) other
nonqualifying income from foreclosure property, the Company will be subject to
tax at the highest corporate rate on such income. Fourth, if the Company has
net income from prohibited transactions (which are, in general, certain sales
or other dispositions of property described in Section 1221(1) of the Code),
such income will be subject to a 100% tax. Fifth, if the Company should fail
to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, the Company will be subject
to a 100% tax on an amount equal to (i) the gross income attributable to the
greater of the amount by which the Company fails the 75% or 95% test
multiplied by (ii) a fraction intended to reflect the Company's profitability.
Sixth, if the Company should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain net income for such year (other than capital gain
income the Company elects to retain and pay tax on) and (iii) any
undistributed taxable income from prior periods (other than capital
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gains from such years which the Company elected to retain and pay tax on), the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, with respect to
any asset (a "Built-In Gain Asset") acquired by the Company from a corporation
which is or has been a C corporation (i.e., generally a corporation subject to
full corporate-level tax) in a transaction in which the basis of the Built-In
Gain Asset in the hands of the Company is determined by reference to the basis
of the asset in the hands of the C corporation, if the Company recognizes gain
on the disposition of such asset during the ten-year period (the "Recognition
Period") beginning on the date on which such asset was acquired by the
Company, then pursuant to regulations that have not yet been promulgated, to
the extent of the Built-In Gain (i.e., the excess of (a) the fair market value
of such asset over (b) the Company's adjusted basis in such asset, determined
as of the beginning of the Recognition Period), such gain will be subject to
tax at the highest regular corporate rate.
The results described above with respect to the recognition of Built-in-Gain
assume that the Company will make an election pursuant to Notice 88-19 issued
by the Service. In this regard, the Built-In Gain rules would apply with
respect to any assets of ATCO deemed acquired by the Company as a result of
the Merger. For federal income tax purposes, the Merger is expected to be
treated as though the Company purchased the stock of ATCO from the former ATCO
stockholders for cash and then liquidated ATCO into the Company. The Company
believes that ATCO will qualify as a REIT during the period commencing on
January 1, 1998 and ending on the date of the Merger, and has obtained an
opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special tax counsel to
ATCO, that ATCO will qualify as a REIT during such period, based in part on
certain assumptions and factual representations made to such firm by ATCO.
ATCO, in connection with its first REIT tax return for the short tax year
ending on the date of the Merger, expects to file an election under Notice 88-
19. ATCO has submitted a request for a ruling from the Service to the effect
that gain derived by ATCO from the disposal of its timber pursuant to an
agreement which qualifies for treatment under Section 631(b) will not be
subject to the Built-In Gain tax. Accordingly, the Company does not anticipate
that the disposal of ATCO's timber pursuant to an agreement which qualifies
under Section 631(b) will result in the imposition of the Built-In Gain tax.
If ATCO does not timely file an election under Notice 88-19, or if ATCO does
not qualify as a REIT at all times during the period commencing on January 1,
1998 and ending on the date of the Merger, and, in either such case, the
Company does not make an election pursuant to Notice 88-19 (or if that
election was no longer available due to a change in applicable law), then ATCO
would recognize taxable gain as a result of the Merger under the Built-In Gain
rules. The Company intends to make a protective election under Notice 88-19
relating to the assets of ATCO in order to avoid the adverse tax consequences
that could otherwise result.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must elect to be so treated and must meet
the requirements, discussed below, relating to the Company's organization,
sources of income, nature of assets and distributions of income.
ORGANIZATIONAL REQUIREMENTS
The Code defines a REIT as a corporation, trust or association (i) which is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) which would be taxable as a domestic corporation
but for Sections 856 through 859 of the Code; (iv) which is neither a
financial institution nor an insurance company subject to certain provisions
of the Code; (v) the beneficial ownership of which is held by 100 or more
persons; and (vi) during the last half of each taxable year not more than 50%
in value of the outstanding stock of which is owned, directly or indirectly
through the application of certain attribution rules, by five or fewer
individuals (as defined in the Code to include certain
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entities). In addition, certain other tests, described below, regarding the
nature of its income and assets must also be satisfied. The Code provides that
conditions (i) to (iv) above, inclusive, must be met during the entire taxable
year and that condition (v) must be met during at least 335 days of a taxable
year of twelve months, or during a proportionate part of a taxable year of
less than twelve months. Conditions (v) and (vi) will not apply until after
the first taxable year for which an election is made to be taxed as a REIT.
The Company believes that it will have issued sufficient Common Stock with
sufficient diversity of ownership in the Offering to allow it to satisfy
conditions (v) and (vi) above. In addition, the Company's Charter provides for
restrictions intended to assist the Company in continuing to satisfy the share
ownership requirements described in (v) and (vi), above, regarding the
transfer and ownership of Common Stock. Such ownership and transfer
restrictions are described in "Description of Capital Stock--Restrictions on
Ownership and Transfer." As more fully described in "Description of Capital
Stock--Restrictions on Ownership and Transfer," the Charter provides that
stock in excess of the Ownership Limit owned by, or deemed to be owned or
transferred to, a stockholder will automatically be converted into Excess
Stock and transferred to a charity for resale, with the original stockholder
entitled to receive certain proceeds from such a resale. However, because of
the absence of authority on this issue, there is no assurance that the
operation of the Excess Stock or other provisions contained in the Charter
will, as a matter of law, prevent a concentration of ownership of stock in
excess of the Ownership Limit thereby causing the Company to violate the share
ownership requirement described in (vi), above. If the Company fails to
satisfy such share ownership requirement, the Company's status as a REIT will
terminate. See "--Failure of the Company to Qualify as a REIT." In rendering
its opinion that the Company is organized in a manner that permits the Company
to qualify as a REIT, Pillsbury Madison & Sutro LLP is relying on the
representations of the Company that the ownership of its stock (without regard
to the Excess Stock provisions of the Charter) satisfies the stock ownership
requirements set forth in clause (vi) above.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company will have a calendar taxable year.
In order to qualify as a REIT, the Company cannot have at the end of any
taxable year any undistributed "earnings and profits" that are attributable to
a "C corporation" taxable year. The Company itself will be a newly formed
entity and will make a REIT election for its first taxable year. Hence, the
Company itself will not have any undistributed "C corporation earnings and
profits." As a result of the Merger and the related deemed liquidation of ATCO
for federal income tax purposes, however, the Company will succeed to certain
tax attributes of ATCO. ATCO expects to have distributed all of its "C
corporation earnings and profits" on or prior to December 31, 1997. ATCO
expects to qualify as a REIT during the short tax year commencing on January
1, 1998 and ending on the date of the Merger, and has obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom LLP, special tax counsel to ATCO, to the
effect that, based on certain assumptions and factual representations, ATCO
will qualify as a REIT for such short tax year. If ATCO does not, for any
reason, qualify as a REIT during such short tax year, or if ATCO has any
accumulated earnings and profits from any year prior to such short tax year,
then the Company will succeed to such earnings and profits. If the Company
does not distribute such earnings and profits by the end of its first tax
year, it will fail to qualify as a REIT. The Company and ATCO each believe
that ATCO will qualify as a REIT during the short tax year ending on the date
of the Merger and that ATCO has no accumulated "C corporation earnings and
profits" attributable to any year prior to the short tax year with respect to
which ATCO elected REIT status. There can be no assurance, however, that the
Service would not contend otherwise on a subsequent audit of ATCO.
In the event that ATCO were determined not to qualify as a REIT, the
Company, if the Company were considered a "successor" to ATCO, would not be
eligible to elect REIT status for up to five years after the year in which
ATCO first failed to qualify as a REIT. The Company would be considered a
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"successor" for these purposes, however, only if (i) persons who own more than
50% of the Common Stock of the Company at any time during the taxable year
ending after the Merger occurs owned, directly or indirectly, 50% or more in
value of the shares of ATCO during the first year in which it ceased to
qualify as a REIT and (ii) a significant portion of the Company's assets were
assets owned by ATCO. The Company does not believe that it will be considered
a successor to ATCO since it does not expect that persons who owned, directly
or indirectly, 50% or more in value of the shares of ATCO during the first
year in which ATCO ceased to qualify as a REIT will own more than 50% of the
Common Stock of the Company.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership shall retain the
same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income tests and the asset tests. A
summary of the rules governing the federal income taxation of partnerships and
their partners is provided below in "--Tax Aspects of the Company's Ownership
of Interests in the Partnership."
INCOME TESTS
In order to maintain qualification as a REIT, the Company annually must
satisfy two gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and "gain from the sale or other disposition of real property" other
than property described in Section 1221(1) of the Code) or from certain types
of temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from "prohibited transactions") for each taxable year
must be derived from such real property investments, dividends, interest and
gain from the sale or disposition of stock or securities (or from any
combination of the foregoing).
The Company believes that the income it will receive under the Timber
Purchase Agreement will be characterized for federal income tax purposes as
gain from the sale or other disposition of real property which is not property
described in Section 1221(1) of the Code. In the opinion of Pillsbury Madison
& Sutro LLP, counsel to the Company in connection with its election to be
taxed as a REIT, income realized by the Partnership from the disposal of
timber held (or deemed held pursuant to the Code) for more than one year
pursuant to the Timber Purchase Agreement: (i) will be characterized as gain
from the sale or other disposition of real property, and (ii) will not
constitute income from the sale or other disposition of property described in
Section 1221(1) of the Code, provided that: (a) the Company, the Partnership
and Potlatch comply with the terms and conditions of the Timber Purchase
Agreement and (b) the Company, the Partnership and Potlatch operate in
accordance with various assumptions and factual representations made by the
Company, the Partnership and Potlatch. Investors should be aware that there
are no controlling Treasury Regulations, published rulings or judicial
decisions involving agreements with terms substantially the same as the Timber
Purchase Agreement that discuss whether income from such an agreement will be
characterized as gain from the sale or other disposition of real property
which is not described in Section 1221(1) of the Code. The opinion of
Pillsbury Madison & Sutro LLP discussed above is based on all of the facts and
circumstances and upon legislative history, judicial decisions, rulings,
regulations and other regulatory pronouncements involving analogous
situations. Opinions of counsel are not binding upon the Service or any court,
and there can be no complete assurance that the Service will not successfully
assert a contrary position. If the income realized by the Partnership from the
disposal of timber held (or deemed held pursuant to the Code) for more than
one year pursuant to the Timber Purchase Agreement is not characterized as
gain from the sale or other disposition of real property, or if such income is
considered to be income from the sale or other disposition of property
described in Section 1221(1) of the Code, then the Company may not be able to
satisfy either the 75% or the 95% gross income tests and, as a result, may
lose its REIT status.
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Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely because it is based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the REIT,
or an actual or constructive owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under
the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, for rents received to
qualify as "rents from real property," the REIT generally must not operate or
manage the property or furnish or render services to the tenants of such
property, other than through an independent contractor from whom the REIT
derives no revenue. The REIT may, however, directly perform certain services
that are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant" of the property. To the extent that services (other than those
customarily furnished or rendered in connection with the rental of real
property) are rendered to the tenants of the property by an independent
contractor, the cost of the services must be borne by the independent
contractor. The Company does not and will not (i) charge rent for any property
that is based in whole or in part on the income or profits of any person
(except by reason of being based on a percentage of receipts or sales, as
described above), (ii) rent any property to a Related Party Tenant (unless the
Board determines in its discretion that the rent received from such Related
Party Tenant is not material and will not jeopardize the Company's status as a
REIT), (iii) derive rental income attributable to personal property (other
than personal property leased in connection with the lease of real property,
the amount of which is less than 15% of the total rent received under the
lease), or (iv) perform services considered to be rendered to the occupant of
the property, other than through an independent contractor from whom the
Company derives no revenue.
The Company anticipates that the only rental income it will receive will be
from certain farmlands and commercial properties acquired from ATCO and from
certain hunting leases. The Company believes that the income from such hunting
leases and properties will constitute "rents from real property" under the
rules discussed above.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will generally be available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its federal income
tax return, and any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--General," even if these relief provisions
apply, a tax would be imposed with respect to the excess net income.
Any net income realized by the Company from the sale or other disposition of
property described in Section 1221(1) of the Code (including the Company's
share of any such gain realized by the Partnership) will be treated as income
from a "prohibited transaction" and will be subject to a 100% penalty tax.
Property is described in Section 1221(1) of the Code if it is held as
inventory or primarily for sale to customers in the ordinary course of a trade
or business. Such prohibited transaction income may also have an adverse
effect upon the Company's ability to satisfy the income tests for
qualification as a REIT. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of a trade
or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction.
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As discussed above, in "--Income Tests," in the opinion of Pillsbury Madison
& Sutro LLP, counsel to the Company in connection with the Offering, the
Merger and the Company's election to be taxed as a REIT, income realized by
the Partnership from the disposal of timber pursuant to the Timber Purchase
Agreement will not constitute income from the sale or other disposition of
property described in Section 1221(1) of the Code, provided that: (a) the
Company, the Partnership and Potlatch comply with the terms and conditions of
the Timber Purchase Agreement and (b) the Company, the Partnership and
Potlatch operate in accordance with various assumptions and factual
representations made by the Company, the Partnership and Potlatch. It should
be emphasized, however, that such opinion does not relate to any income
received by the Partnership which is not realized from the disposal of timber
pursuant to the Timber Purchase Agreement. In addition, investors should be
aware that there are no controlling Treasury Regulations, published rulings or
judicial decisions involving agreements with terms substantially the same as
the Timber Purchase Agreement that discuss whether income from such an
agreement will be characterized as gain from the sale or other disposition of
property which is not described in Section 1221(1) of the Code. The opinion of
Pillsbury Madison & Sutro LLP discussed above is based on all of the facts and
circumstances and upon legislative history, judicial decisions, rulings,
regulations and other regulatory pronouncements involving analogous
situations. Opinions of counsel are not binding upon the Service or any court,
and there can be no complete assurance that the Service will not successfully
assert a contrary position. If the income realized by the Partnership from the
disposal of timber pursuant to the Timber Purchase Agreement is considered to
be income from the sale or other disposition of property described in Section
1221(1) of the Code, then the Company would be subject to the 100% penalty tax
on such income and, as noted above, in such a situation the Company may not be
able to satisfy the 75% or 95% of income tests necessary for it to qualify as
a REIT.
The Partnership intends to hold the Timberlands and its other properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning and operating the Timberlands and its other
properties and to make such occasional sales of the Timberlands or its other
properties as are consistent with the Partnership's investment objectives.
There can be no assurance, however, that the Service might not contend that
one or more of such sales is a prohibited transaction and subject to the 100%
penalty tax.
ASSET TESTS
The Company, at the close of each quarter of its taxable year, must satisfy
three tests relating to the nature of its assets. First, at least 75% of the
value of the Company's total assets must be represented by real estate assets
including (i) its allocable share of real estate assets held by partnerships
in which the Company owns an interest (including its allocable share of the
assets held directly or indirectly through the Partnership) and (ii) stock or
debt instruments held for not more than one year purchased with the proceeds
of a stock offering or long-term (at least five years) debt offering of the
Company, cash, cash items and government securities. Second, not more than 25%
of the Company's total assets may be represented by securities other than
those in the 75% asset class. Third, of the investments included in the 25%
asset class, the value of any one issuer's securities owned by the Company may
not exceed 5% of the value of the Company's total assets, and the Company may
not own more than 10% of any one issuer's outstanding voting securities.
The Company anticipates that, as of the closing of the Formation
Transactions, substantially more than 75% of the fair market value of the
assets indirectly owned by the Company through the Partnership will consist of
timberlands owned in fee. The Company anticipates that, at all times,
substantially more than 75% of the assets indirectly owned by the Company
through the Partnership will consist of fee ownership of timberland.
Accordingly, the Company believes that it should be able to meet the 75% test
described above at the time of the Offering and on a going forward basis.
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The Company anticipates that, upon the closing of the Formation
Transactions, the Partnership will own 100% of the nonvoting stock and none of
the voting stock of two corporations (the "Preferred Stock Subsidiaries"). By
virtue of its ownership of Partnership Units, the Company is considered to own
its pro rata share of stock of such Preferred Stock Subsidiaries. Neither the
Company nor the Partnership owns any outstanding voting securities of the
Preferred Stock Subsidiaries. In addition, the Company and its senior
management do not believe that the Company's pro rata share of the value of
the securities of either of the Preferred Stock Subsidiaries held by the
Partnership exceeds 5% of the total value of the Company's assets. The
Company's belief is based in part upon its analysis of the value of the
securities of the Preferred Stock Subsidiaries owned by the Partnership
relative to the other assets owned by the Partnership. No independent
appraisals have been obtained to support this conclusion, however, and
Pillsbury Madison & Sutro LLP, in rendering its opinion as to the
qualification of the Company as a REIT, is relying on the conclusions of the
Company and its senior management as to the value of the securities of the
Preferred Stock Subsidiaries. There can be no assurance that the Service might
not contend that the value of the securities of either of the Preferred Stock
Subsidiaries held by the Company (through the Partnership) exceeds the 5%
value limitation.
The 5% test described above must generally be met for any quarter in which
the Company acquires securities of the issuer. Thus, this requirement must be
satisfied not only on the date the Company acquires securities of each of the
Preferred Stock Subsidiaries but also each time the Company increases its
ownership of securities of any Preferred Stock Subsidiary (including as a
result of its interest in the Partnership, of the exercise by the partners of
their exchange rights or otherwise). Although the Company plans to take steps
to ensure that it satisfies the 5% value test for any quarter with respect to
which testing will occur, there can be no assurance that such steps will
always be successful or will not require a reduction in the Company's overall
interest in one or more of the Preferred Stock Subsidiaries.
The Company intends to liquidate the Preferred Stock Subsidiaries (whose
assets are expected to consist, subsequent to the Formation Transactions, of
cash, debt and liquid assets) shortly after the consummation of the Offering
and the Merger.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset requirements either did not exist immediately after the acquisition
of any particular asset or was not wholly or partly caused by such an
acquisition (i.e., the discrepancy arose from changes in the market values of
its assets). If the condition described in clause (ii) of the preceding
sentence were not satisfied, the Company could still avoid disqualification by
eliminating any discrepancy within 30 days after the close of the quarter in
which it arose.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (a) 95% of the Company's "REIT taxable
income" (computed without regard to the dividends paid deduction and the
Company's net capital gain) and (b) 95% of the net income (after tax), if any,
from foreclosure property, minus (ii) the sum of certain items of noncash
income. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment date after such declaration. To the extent that the Company
does not distribute (or is not treated as having distributed) all of its net
capital gain or distributes (or is treated as having distributed) at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gain corporate tax
rates. If the Company should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain
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income for such year (other than capital gain income which the Company elects
to retain and pay tax on as provided for below) and (iii) any undistributed
taxable income from prior periods (other than capital gains from such years
which the Company elected to retain and pay tax on), the Company would be
subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. Pursuant to recently enacted legislation,
the Company may elect to retain rather than distribute its net long-term
capital gains. The effect of such an election is that (i) the Company is
required to pay the tax on such gains at regular corporate tax rates, (ii) its
stockholders, while required to include their proportionate share of the
undistributed long-term capital gain in income, will receive a credit or
refund for their share of the tax paid by the Company; and (iii) the basis of
a stockholder's stock would be increased by the amount of the undistributed
long-term capital gains (minus the amount of capital gains tax paid by the
Company) included in income by such stockholder. In addition, if the Company
disposes of any Built-In Gain Asset during the applicable Recognition Period,
the Company will be required, pursuant to guidance issued by the Service, to
distribute at least 95% of the Built-In Gain (after tax), if any, recognized
on the disposition of such asset. The Company intends to make timely
distributions sufficient to satisfy these annual distribution requirements.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet these distribution requirements due to
timing or other differences between (i) the actual receipt of income and
actual payment of deductible expenses, (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company and
(iii) the Company's percentage interest in the Partnership's cash flow and the
Company's share of taxable income arising upon a disposition of property
contributed to the Partnership where the fair market value of such property
exceeds its tax basis. If such differences occur, in order to meet the
distribution requirements, the Company may find it necessary to arrange for
short or possibly long-term borrowings, equity issuances or asset sales to pay
dividends in the form of taxable stock dividends (if it is practicable to do
so), or elect to retain and pay tax on a portion of its net long-term capital
gains in the manner provided for in the preceding paragraph.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
FAILURE OF THE COMPANY TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable year
and if the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which
the Company fails to qualify as a REIT will not be deductible by the Company
nor will they be required to be made. As a result, the cash available for
distribution by the Company to its stockholders would be significantly
reduced. In addition, if the Company fails to qualify as a REIT, all
distributions to stockholders will be taxable as ordinary income, to the
extent of the Company's current and accumulated earnings and profits, and,
subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
such qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS OF THE COMPANY
As used herein, the term "U.S. Stockholder" means a holder of Common Stock
who (for United States federal income tax purposes) is (i) an individual who
is a citizen or resident of the United States;
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(ii) an entity which is a corporation or partnership for United States federal
income tax purposes and which is created or organized in the United States or
under the laws of the United States or any political subdivision thereof
(although certain partnerships so created or organized may be treated, under
regulations not yet published, as not a United States person); (iii) any
estate whose income is includible in gross income for United States federal
income tax purposes regardless of its source; or (iv) a "Domestic Trust." A
Domestic Trust is any trust with respect to which a court within the United
States is able to exercise primary supervision over the administration of such
trust, and as to which one or more United States fiduciaries have the
authority to control all substantial decisions of such trust (although certain
trusts classified for United States federal income tax purposes as a United
States person prior to August 20, 1996 may, under regulations not yet
published, elect to retain their classification as a Domestic Trust).
DISTRIBUTIONS BY THE COMPANY
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction in the case of U.S. Stockholders
that are corporations. Distributions made by the Company that are properly
designated by the Company as capital gain dividends will be taxable to taxable
U.S. Stockholders as long-term capital gains (to the extent that they do not
exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which a U.S. Stockholder has held his Common Stock.
U.S. Stockholders that are corporations may, however, be required to treat up
to 20% of certain capital gain dividends as ordinary income pursuant to
Section 291(d) of the Code. Individuals are generally subject to differing
rates of tax on various transactions giving rise to long-term capital gains or
losses. In general, the long-term capital gains rate is (i) 28% on capital
gain from the sale or exchange of assets held more than one year but not more
than 18 months, (ii) 20% on capital gain from the sale or exchange of assets
held for more than 18 months, and (iii) 25% on capital gain from the sale or
exchange of certain depreciable real estate otherwise eligible for the 20%
rate, up to the amount of depreciation deductions previously taken with
respect to such real estate. Subject to certain limitations concerning the
classification of the Company's long-term capital gains, the Company may
designate a capital gain dividend as a 28% rate distribution, a 25% rate
distribution or a 20% rate distribution. If the Company elects to retain
capital gains rather than distribute them, a U.S. Stockholder will be deemed
to receive a capital gain dividend equal to the amount of such retained
capital gains. Such gains are subject to apportionment among the three rate
groups set forth above. In such a case, a stockholder will receive certain tax
credits and basis adjustments reflecting the deemed distribution and deemed
payment of taxes by the stockholder. To the extent that the Company makes
distributions in excess of its current and accumulated earnings and profits,
such distributions will be treated first as a tax-free return of capital to
each U.S. Stockholder, reducing the adjusted basis which such U.S. Stockholder
has in its Common Stock for tax purposes by the amount of such distribution
(but not below zero), with distributions in excess of a U.S. Stockholder's
adjusted basis in its Common Stock taxable as capital gains (provided that the
Common Stock has been held as a capital asset). Dividends declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by the Company on or
before January 31 of the following calendar year. Stockholders may not include
in their own income tax returns any net operating losses or capital losses of
the Company. The Company will notify each stockholder after the close of the
Company's taxable year as to the portions of the distributions attributable to
that year which constitute ordinary income, capital gain or a return of
capital.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required
to be distributed in order to avoid imposition of
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the 4% excise tax discussed under "--Taxation of the Company--General" and "--
Taxation of the Company--Annual Distribution Requirements." As a result,
stockholders may be required to treat as taxable dividends certain
distributions that would otherwise result in tax-free returns of capital.
Moreover, any "deficiency dividend" will be treated as a "dividend" (an
ordinary dividend or a capital gain dividend, as the case may be), regardless
of the Company's earnings and profits.
Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Stockholder of Common Stock will not be treated as passive activity
income, and, as a result, U.S. Stockholders generally will not be able to
apply any "passive losses" against such income or gain. Dividends from the
Company (to the extent they do not constitute a capital gain dividend or a
return of capital) will generally be treated as investment income for purposes
of the investment interest limitation. Net capital gain from the sale or other
disposition of shares of Common Stock and capital gain dividends will
generally not be considered investment income for purposes of the investment
interest limitation.
SALE OF COMMON STOCK
Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to
the difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such Common Stock for tax purposes. Such gain or loss will
be capital gain or loss if the Common Stock has been held by the U.S.
Stockholder as a capital asset and will be long-term gain or loss if such
Common Stock has been held for more than one year. In general, any loss
recognized by a U.S. Stockholder upon the sale or other disposition of Common
Stock that has been held for six months or less (after applying certain
holding period rules) will be treated as a long-term capital loss to the
extent of distributions received by such U.S. Stockholder from the Company
which were required to be treated as long-term capital gains.
BACKUP WITHHOLDING FOR COMPANY DISTRIBUTIONS
The Company will report to its U.S. Stockholders and the Service the amount
of dividends paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Stockholder that does not provide the Company
with his correct taxpayer identification number may also be subject to
penalties imposed by the Service. Any amount paid as backup withholding will
be creditable against the stockholder's federal income tax liability. In
addition, the Company may be required to withhold a portion of capital gain
distributions to any stockholders who fail to certify their non-foreign status
to the Company. See "--Taxation of Non-U.S. Stockholders of the Company."
TAXATION OF TAX-EXEMPT STOCKHOLDERS OF THE COMPANY
The Service has ruled that amounts distributed as dividends by a qualified
REIT do not constitute unrelated business taxable income ("UBTI") when
received by a tax-exempt entity so long as the Common Stock is not otherwise
used in an unrelated trade or business. Based on that ruling, provided that a
tax-exempt stockholder (except certain tax-exempt stockholders described
below) has not held its Common Stock as "debt financed property" within the
meaning of the Code and such Common Stock is not otherwise used in an
unrelated trade or business, the dividend income from the Company will not be
UBTI to a tax-exempt stockholder. Similarly, income from the sale of Common
Stock will not constitute UBTI unless such tax-exempt stockholder has held
such Common Stock as "debt
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financed property" within the meaning of the Code or has used the Common Stock
in an unrelated trade or business.
For tax-exempt stockholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501(c)(7), (9), (17) and (20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective stockholders should consult their own tax advisors concerning
these set aside and reserve requirements.
In addition, in certain circumstances a pension trust that owns more than
10% of the Company's stock will be required to treat a percentage of the
dividends received from the Company as UBTI (the "UBTI Percentage"). The UBTI
Percentage is the gross income derived by the Company from an unrelated trade
or business (determined as if the Company were a pension trust) divided by the
gross income of the Company for the year in which the dividends are paid. The
UBTI Percentage rule will apply to a pension trust holding more than 10% of
the Company's stock only if (i) the UBTI Percentage is at least 5%, (ii) the
Company qualifies as a REIT by reason of the modification of the 5/50 Rule
that allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interests in the
pension trust and (iii) either (A) one pension trust owns more than 25% of the
value of the Company's stock or (B) a group of pension trusts individually
holding more than 10% of the value of the Company's stock collectively owns
more than 50% of the value of the Company's stock. Based on the anticipated
ownership of the shares of Common Stock immediately after the Offering and the
Merger, and as a result of certain limitations on transfer and ownership of
Common Stock contained in the Certificate of Incorporation of the Company, the
Company does not expect the UBTI Percentage rule to apply to any tax-exempt
stockholders of the Company.
TAXATION OF NON-UNITED STATES STOCKHOLDERS OF THE COMPANY
The rules governing United States federal income taxation of the ownership
and disposition of common stock by persons that are, for purposes of such
taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "Non-U.S.
Stockholders") are complex, and no attempt is made herein to provide more than
a brief summary of such rules. Accordingly, the discussion does not address
all aspects of United States federal income tax and does not address state,
local or foreign tax consequences that may be relevant to a Non-U.S.
Stockholder in light of its particular circumstances. IN ADDITION, THIS
DISCUSSION IS BASED ON CURRENT LAW, WHICH IS SUBJECT TO CHANGE, AND ASSUMES
THAT THE COMPANY QUALIFIES FOR TAXATION AS A REIT. PROSPECTIVE NON-U.S.
STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE
IMPACT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
DISTRIBUTIONS BY THE COMPANY
Under the Foreign Investment in Real Property Tax Act ("FIRPTA")
distributions to a Non-U.S. Stockholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests
will cause the Non-U.S. Stockholder to be treated as recognizing such gain as
income effectively connected with a United States trade or business. Non-U.S.
Stockholders would thus generally be taxed at the same rates applicable to
domestic stockholders (subject to a special alternative minimum tax in the
case of nonresident alien individuals). Also, such gain may be subject to a
30% branch profits tax in the hands of a Non-U.S. Stockholder that is a
corporation. The Company is generally required to withhold 35% of any such
distribution. That amount is creditable against the Non-U.S. Stockholder's
United States federal income tax liability. It should be noted that the 35%
withholding tax rate on capital gain dividends is higher than the maximum rate
(which may be 20%,
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25% or 28% depending upon the facts and circumstances) on long-term capital
gains of individuals. It should also be emphasized that the Company believes
that the income it will receive under the Timber Purchase Agreement will be
characterized for federal income tax purposes as gain from the sale or other
disposition of real property.
Distributions by the Company to a Non-U.S. Stockholder that are neither
attributable to gain from sales or exchanges by the Company of United States
real property interests nor designated by the Company as capital gains
dividends will be treated as dividends of ordinary income to the extent that
they are made out of current or accumulated earnings and profits of the
Company. Such distributions ordinarily will be subject to U.S. withholding tax
on a gross basis (that is, without allowance of deductions) at a 30% rate,
unless the withholding tax rate is reduced under an applicable income tax
treaty between the United States and the country of tax residence of the Non-
U.S. Stockholder.
In general, for purposes of determining whether tax is to be withheld at a
30% rate or at a reduced rate as specified in an applicable tax treaty, the
Company will presume that dividends paid on or before December 31, 1998 to a
holder with an address in a foreign country will be paid to a resident of such
foreign country absent knowledge that such treatment is not warranted.
Similarly, the Company will ordinarily presume that dividends paid on or prior
to December 31, 1998 to a holder with an address in the United States are paid
to a holder who is a United States person and will not be subject to 30%
withholding tax, unless the Company has knowledge that the holder is a non-
United States person.
Recently finalized United States Treasury Regulations applicable to
dividends paid after December 31, 1998 (the "Final Regulations") provide for
certain presumptions (which are different than the ones described above) upon
which the Company may generally rely to determine whether, in the absence of
certain documentation, a stockholder should be treated as a Non-U.S.
Stockholder for purposes of the 30% withholding tax described above. The
presumptions would not apply for purposes of granting a reduced rate of
withholding under a treaty to a Non-U.S. Stockholder. Under the Final
Regulations, to obtain a reduced rate of withholding under a treaty, a Non-
U.S. Stockholder will be required to either (i) provide an Internal Revenue
Service Form W-8 certifying such Non-U.S. Stockholder's entitlement to
benefits under a treaty together with, in certain circumstances, additional
information, or (ii) satisfy certain other applicable treaty certification
requirements. The Final Regulations also provide special rules to determine
whether, for purposes of determining the applicability of a tax treaty and for
purposes of the 30% withholding tax described above, dividends paid to a Non-
U.S. Stockholder that is an entity should be treated as paid to the entity or
to those persons or entities holding an interest in such entity.
In addition, under recently enacted legislation, a Non-U.S. Stockholder will
not be entitled to claim the benefit of any reduced rate of withholding tax
under any income tax treaty between the United States and a foreign country on
an item of income derived through an entity which is treated as a partnership
or is otherwise fiscally transparent if: (i) such item is not treated for
purposes of the tax laws of such foreign country as an item of income of such
Non-U.S. Stockholder; (ii) the treaty does not contain a provision addressing
the applicability of the treaty in the case of an item of income derived
through a partnership, and (iii) the foreign country does not impose tax on a
distribution of such item of income from such entity to such holder.
The 30% withholding tax will not apply if the dividends are treated as
effectively connected with the conduct by the Non-U.S. Stockholder of a United
States trade or business (or, alternatively, where an income tax treaty
applies, if the dividend is effectively connected with a permanent
establishment maintained within the United States by the Non-U.S.
Stockholder). Such dividends will be subject to tax on a net basis (that is,
after allowance of deductions) at graduated rates, in the same manner as U.S.
Stockholders are taxed with respect to such dividends. Any such Non-U.S.
Stockholder that is a corporation may also be subject to an additional branch
profits tax imposed on its effectively connected earnings and profits within
the meaning of Code Section 884(d) at a 30% rate or at such lower rate as
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may be specified by an applicable income tax treaty. In general, a foreign
stockholder will not be considered engaged in a U.S. trade or business solely
as a result of its ownership of Common Stock.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's Common Stock, but
rather will reduce the adjusted basis of such Common Stock. To the extent that
such distributions exceed the adjusted basis of a Non-U.S. Stockholder's
Common Stock, they will give rise to gain from the sale or exchange of its
Common Stock, the tax treatment of which is described below. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that the Company will be required to withhold 10% of any distribution
in excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or a lower applicable treaty rate)
will be subject to withholding at a rate of 10%. However, a Non-U.S.
Stockholder may seek a refund of such amounts from the Service if it
subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Company, and the amount
withheld exceeded the Non-U.S. Stockholder's United States tax liability, if
any, with respect to the distribution.
Distributions to a Non-U.S. Stockholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those
arising from the disposition of a United States real property interest)
generally will not be subject to United States federal income taxation, unless
(i) investment in the Common Stock is effectively connected with the Non-U.S.
Stockholder's United States trade or business (or, where an income tax treaty
applies, if such investment is effectively connected with a permanent
establishment maintained within the United States by the Non-U.S.
Stockholder), in which case the Non-U.S. Stockholder will be subject to the
same treatment as domestic stockholders with respect to such gain (except that
a stockholder that is a foreign corporation may also be subject to the branch
profits tax, as discussed above), or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, in
which case the nonresident alien individual will be subject to a 30% tax on
the individual's capital gains.
SALE OF COMMON STOCK
Gain recognized by a Non-U.S. Stockholder upon the sale or exchange of
Common Stock generally will not be subject to United States taxation unless
such shares constitute a "United States real property interest" within the
meaning of FIRPTA. The Common Stock will not constitute a "United States real
property interest" so long as the Company is a "domestically controlled REIT."
A "domestically controlled REIT" is a REIT in which, at all times during a
specified testing period, less than 50% in value of its stock is held directly
or indirectly by Non-U.S. Stockholders. The Company believes that at the
closing of the Merger and this Offering it will be a "domestically controlled
REIT," and therefore that the sale of Common Stock will not be subject to
taxation under FIRPTA. However, because the Common Stock is expected to become
publicly traded, no assurance can be given that the Company will continue to
be a "domestically controlled REIT." Notwithstanding the foregoing, gain from
the sale or exchange of Common Stock not otherwise subject to FIRPTA will be
taxable to a Non-U.S. Stockholder if the Non-U.S. Stockholder is a nonresident
alien individual who is present in the United States for 183 days or more
during the taxable year and has a "tax home" in the United States. In such
case, the nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
If the Company does not qualify as or ceases to be a "domestically-
controlled REIT," whether gain arising from the sale or exchange by a Non-U.S.
Stockholder of Common Stock would be subject to United States taxation under
FIRPTA as a sale of a "United States real property interest" will depend
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on whether the Common Stock is "regularly traded" (as defined by applicable
Treasury Regulations) on an established securities market (e.g., the New York
Stock Exchange) and on the size of the selling Non-U.S. Stockholder's interest
in the Company. In general, if (as expected) the Common Stock is "regularly
traded" on an established securities market during the quarter in which the
Common Stock were sold and the selling Non-U.S. Stockholder holds, directly or
indirectly, 5% or less of the Common Stock of the Company during the five-year
period ending on the date of disposition, then such sale will not be subject
to United States taxation under FIRPTA. The applicable Treasury Regulations
may be interpreted to provide that a security is not "regularly traded" for
these purposes if during the applicable calendar quarter 100 or fewer persons
(treating related parties as one person) in the aggregate own 50% or more of
such security or the quarterly trading volume is less than 7.5% of the average
number of the issued and outstanding shares of such security (2.5% if there
are 2,500 or more stockholders of record). If gain on the sale or exchange of
Common Stock were subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to regular United States income tax with respect to such gain
in the same manner as a U.S. Stockholder (subject to any applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals and the possible application of the 30% branch
profits tax in the case of foreign corporations), and the purchaser of the
Common Stock would be required to withhold and remit to the Service 10% of the
purchase price.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The Company must report annually to the Service and to each Non-U.S.
Stockholder the amount of dividends paid to, and the tax withheld with respect
to, such stockholder, regardless of whether any tax was actually withheld.
That information may also be made available to the tax authorities of the
country in which a Non-U.S. Stockholder resides.
Backup withholding tax (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish certain information under the
United States information reporting requirements) will generally not apply:
(1) if distributions are paid on or prior to December 31, 1998 to a Non-U.S.
Stockholders at an address outside the United States (provided that the payor
does not have actual knowledge that the payee is a United States person), (ii)
if such distributions are subject to the 30% (or lower treaty rate)
withholding tax discussed above, (iii) if the distribution is a capital gains
distribution, or (iv) if the distribution is attributable to gain from the
sale or exchange by the Company of United States real property interests. For
distributions paid after December 31, 1998, the Final Regulations provide
certain presumptions and other rules under which non-United States holders may
be subject to backup withholding and related information reporting in the
absence of required certifications. As a general matter, backup withholding
and information reporting will not apply to a payment of the proceeds of a
sale of Common Stock by or through a foreign office of a foreign broker.
However, information reporting (but not backup withholding) will apply to a
payment of the proceeds of a sale of Common Stock by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its
gross income for certain periods from the conduct of a trade or business in
the United States or (c) is a "controlled foreign corporation" (generally, a
foreign corporation controlled by United States stockholders) for United
States tax purposes, or (d) effective after December 31, 1998, certain brokers
that are foreign partnerships with U.S. partners or that are engaged in a U.S.
trade or business, unless in each such case the broker has documentary
evidence in its records that the holder is a Non-U.S. Stockholder and certain
other conditions are met, or the stockholder otherwise establishes an
exemption. Payment to or through a United States office of a broker of the
proceeds of a sale of Common Stock is subject to both backup withholding and
information reporting unless the stockholder certifies under penalty of
perjury that the stockholder is a Non-U.S. Stockholder, or otherwise
establishes an exemption.
The backup withholding tax is not an additional tax and may be credited
against a Non-U.S. Stockholder's United States federal income tax liability or
refunded to the extent excess amounts are withheld, provided that the required
information is supplied to the Service.
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TAX ASPECTS OF THE COMPANY'S OWNERSHIP OF INTERESTS IN THE PARTNERSHIP
GENERAL
Substantially all of the Company's investments will be held indirectly
through the Partnership. In general, partnerships are "pass-through" entities
which are not subject to federal income tax. Rather, partners are allocated
their proportionate shares of the items of income, gain, loss, deduction and
credit of a partnership, and are potentially subject to tax thereon, without
regard to whether the partners receive a distribution from the partnership.
The Company will include in its income its proportionate share of the
foregoing partnership items for purposes of the various REIT income tests and
in the computation of its REIT taxable income. Moreover, for purposes of the
REIT asset tests, the Company will include its proportionate share of assets
held through the Partnership. See "--Taxation of the Company--Ownership of
Partnership Interests by a REIT."
The Company's interest in the Partnership may involve special tax
considerations. Such considerations include (i) the allocation of items of
income and expense, which could affect the computation of taxable income of
the Company, (ii) the status of the Partnership as a partnership (as opposed
to an association taxable as a corporation) for federal income tax purposes,
and (iii) the taking of actions by the Partnership which could adversely
affect the Company's qualification as a REIT.
ENTITY CLASSIFICATION
An organization formed as a partnership will be treated as a partnership,
rather than as a corporation, for federal income tax purposes if (i) it is not
expressly classified as a corporation under Section 301.7701-2(b)(1) through
(8) of the Treasury Regulations; (ii) it does not elect to be classified as an
association taxable as a corporation; and (iii) it is not treated as a
corporation by virtue of being classified as a "publicly traded partnership."
Under Section 7704 of the Code, a partnership is treated as a corporation
for federal income tax purposes if it is a "publicly traded partnership"
(except in situations in which 90% or more of the partnership's gross income
is of a specified type). A partnership is deemed to be publicly traded if its
interests are either (i) traded on an established securities market or (ii)
readily tradable on a secondary market (or the substantial equivalent
thereof). While the Partnership Units will not be traded on an established
securities market, they could be deemed to be traded on a secondary market or
its equivalent due to the limited partners' exchange rights.
The Treasury Department recently issued regulations (the "PTP Regulations")
governing the classification of partnerships under Section 7704. These
regulations provide that the classification of partnerships is generally based
on a facts and circumstances analysis. However, the regulations also provide
limited "safe harbors" which preclude publicly traded partnership status.
Pursuant to one of those safe harbors, interests in a partnership will not be
treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all interests in the partnership were issued in a
transaction (or transactions) that was not required to be registered under the
Securities Act and (ii) the partnership does not have more than 100 partners
at any time during the partnership's taxable year. In determining the number
of partners in a partnership for this purpose, a person owning an interest in
a flow-through entity (i.e., a partnership, grantor trust, or S corporation)
that owns an interest in the partnership is treated as a partner in such
partnership only if (x) substantially all of the value of the person's
interest in the flow-through entity is attributable to the flow-through
entity's interest (direct or indirect) in the partnership and (y) a principal
purpose of the use of the tiered arrangement is to permit the partnership to
satisfy the 100-partner limitation.
The Partnership is expected to have less than 100 partners (including
persons owning interests through flow-through entities). The Partnership has
not issued any Partnership Units required to be
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registered under the Securities Act. Thus, the Partnership presently qualifies
for the safe harbors provided in the PTP Regulations. If the Partnership were
to have more than 100 partners (including, in certain circumstances, persons
owning interests through flow-through entities), it nevertheless would be
treated as a partnership for federal income tax purposes (rather than an
association taxable as a corporation) if at least 90% of its gross income in
each taxable year (commencing with the year in which it is treated as a
publicly traded partnership) consists of "qualifying income" with the meaning
of Section 7704(c)(2) of the Code (including interest, dividends, certain real
property rents, gains from the disposition of real property, and certain
income or gains from the exploitation of natural resources, including timber
(the "90% Passive-Type Income Exception")).
In the opinion of Pillsbury Madison & Sutro LLP, based upon certain
assumptions and factual representations made by the Company and the
Partnership, the Partnership will be treated as a partnership for federal
income tax purposes and not as an association taxable as a corporation.
If for any reason the Partnership were taxable as a corporation, rather than
as a partnership, for federal income tax purposes, the Company would not be
able to satisfy the income and asset requirements for REIT status. See "--
Taxation of the Company--Income Tests" and "--Taxation of the Company--Asset
Tests." In addition, any change in the Partnership's status for tax purposes
might be treated as a taxable event, in which case the Company might incur a
tax liability without any related cash distribution. See "--Taxation of the
Company--Annual Distribution Requirements." Further, items of income and
deduction of the Partnership would not pass through to its partners, and its
partners would be treated as stockholders for tax purposes. Consequently, the
Partnership would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute dividends that
would not be deductible in computing the Partnership's taxable income.
The following discussion assumes that the Partnership will be treated as a
partnership for federal income tax purposes.
PARTNERSHIP ALLOCATIONS
Although a partnership agreement will generally determine the allocation of
income and loss among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of Section 704(b) of the
Code and the Treasury Regulations promulgated thereunder. Generally, Section
704(b) and the Treasury Regulations promulgated thereunder require that
partnership allocations respect the economic arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The Partnership's allocations of taxable
income and loss are intended to comply with the requirements of Section 704(b)
of the Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property which has been contributed
to a partnership in exchange for an interest in the partnership must be
allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such
unrealized gain or unrealized loss is generally equal to the difference
between the fair market value of contributed property at the time of
contribution and the adjusted tax basis of such property at such time (a
"Book-Tax Difference"). Such allocations are solely for federal income tax
purposes and do not affect the book capital accounts or other economic
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or legal arrangements among the partners. The Partnership will be formed by
way of contributions of appreciated property by both Potlatch and the Company
(through ATCO). Consequently, the Partnership Agreement requires that such
allocations be made in a manner consistent with Section 704(c) of the Code.
In the event of the disposition of any of the contributed assets which have
a Book-Tax Difference (including as a result of the disposition of Timber
pursuant to the Timber Purchase Agreement), all income attributable to such
Book-Tax Difference generally will be allocated to the partner contributing
such property. These allocations will tend to eliminate the Book-Tax
Difference over the life of the Partnership. However, the special allocation
rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed
assets in the hands of the Partnership may cause the Company to be allocated
lower depletion and other deductions, or an amount of taxable income in the
event of a sale or other disposition of such contributed assets, in excess of
the economic or book income allocated to it as a result of such sale. Such an
allocation might cause the Company to recognize taxable income in excess of
cash proceeds, which could adversely affect the Company's ability to comply
with the REIT distribution requirements. See "--Taxation of the Company--
Annual Distribution Requirements."
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the "traditional method" or the election of certain
methods, such as the "traditional method with curative allocations" or the
"remedial method," which would permit certain distortions caused by a Book-Tax
Difference to be rectified on an annual basis or with respect to a specific
taxable transaction such as a sale. The Partnership and the Company have
determined to use the "remedial method" for accounting for Book-Tax
Differences with respect to the properties initially contributed to the
Partnership. The Partnership has not determined which of the alternative
methods of accounting for Book-Tax Differences will be elected with respect to
any properties contributed to it in the future.
With respect to any property purchased by the Partnership subsequent to the
Offering, such property will initially have a tax basis equal to its fair
market value, and Section 704(c) of the Code will not apply.
BASIS IN PARTNERSHIP INTEREST
The Company's adjusted tax basis in its interest in the Partnership
generally (i) will be equal to the amount of cash and the basis of any other
property contributed to the Partnership by the Company (including through
ATCO), (ii) will be increased by (a) its allocable share of the Partnership's
income and (b) its allocable share of indebtedness of the Partnership and
(iii) will be reduced, but not below zero, by the Company's allocable share of
(a) losses suffered by the Partnership, (b) the amount of cash distributed to
the Company and (c) by constructive distributions resulting from a reduction
in the Company's share of indebtedness of the Partnership.
If the allocation of the Company's distributive share of the Partnership's
loss exceeds the adjusted tax basis of the Company's partnership interest in
the Partnership, the recognition of such excess loss will be deferred until
such time and to the extent that the Company has adjusted tax basis in its
interest in the Partnership. To the extent that the Partnership's
distributions, or any decrease in the Company's share of the indebtedness of
the Partnership (such decreases being considered a cash distribution to the
partners), exceeds the Company's adjusted tax basis, such excess distributions
(including such constructive distributions) constitute taxable income to the
Company. Such taxable income will normally be characterized as capital gain,
and if the Company's interest in the Partnership has been held for longer than
the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain.
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UNCERTAIN IMPACT OF BUDGET PROPOSAL
The Budget Proposal submitted by the President to Congress on February 2,
1998 contains a number of provisions which, if adopted in their present form,
could affect REITs in general and the Company in particular. The proposal
requests four changes to the rules applicable to REITs. The proposal would (i)
restrict the ability of any person (including any corporation) from owning
more than 50% of the vote or value of all classes of equity securities of a
REIT, effective for companies electing REIT status for tax years beginning on
or after the date of "first committee action" on the budget bill; (ii)
restrict the ability of a REIT to own more than 10% of the vote or value of
all equity securities of a corporation (in contrast to current rules, which
provide that a REIT may not own more than 10% of the vote of all equity
securities of a corporation), effective for acquisitions of stock on or after
the date of "first committee action" on the budget bill; (iii) require the
immediate taxation of all built-in-gains on the conversion of a subchapter C
corporation into a REIT (excluding conversions where the corporation at issue
had a value of $5 million or less), effective for conversions after January 1,
1999; and (iv) eliminate certain tax benefits for the few existing "paired
share" REITs. The Company does not believe that the proposed legislation, in
its current form (including the proposed effective dates), would have a
material adverse impact on the Company if it were passed in substantially the
same form as set forth in the Budget Proposal. The Company cannot presently
predict whether one or more of the provisions of such proposal will pass, what
form any final legislative language will take if so passed, or the effective
date of any such legislation.
OTHER TAXES
The Company, any of its subsidiaries, the Partnership or the Company's
stockholders may be subject to foreign, state and local tax in various
countries, states and localities, including those countries, states and
localities in which it or they transact business, own property, or reside. The
state, local or foreign tax treatment of the Company and the stockholders in
such jurisdictions may differ from the federal income tax treatment described
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of foreign, state and local tax laws upon an
investment in the Common Stock.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of section 4975 of the Code that may be
relevant to a prospective purchaser of Common Stock (including, with respect
to the discussion contained in "--Status of the Company and the Partnership
under ERISA," to a prospective purchaser that is not an employee benefit plan,
another tax-qualified retirement plan, or an individual retirement account
("IRA")). The discussion does not purport to deal with all aspects of ERISA or
section 4975 of the Code that may be relevant to particular stockholders
(including plans subject to Title I of ERISA, other retirement plans and IRAs
subject to the prohibited transaction provisions of section 4975 of the Code,
and governmental plans or church plans that are exempt from ERISA and section
4975 of the Code but that may be subject to state law requirements) in light
of their particular circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING A DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF A
PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF THE
COMMON STOCK BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit plan
(an "ERISA Plan") subject to Title I of ERISA should consider carefully
whether an investment in the Common Stock is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of
Part 4 of Title I of ERISA require a ERISA Plan's investments to be (i)
prudent and in the best interests of the ERISA Plan, its participants, and its
beneficiaries, (ii) diversified in order to minimize the risk of large losses,
unless it is clearly prudent not to do so, and (iii) authorized under the
terms of the ERISA Plan's governing documents (provided the documents are
consistent with ERISA). In determining whether an investment in the Common
Stock is prudent for purposes of ERISA, the appropriate fiduciary of a ERISA
Plan should consider all of the facts and circumstances, including whether the
investment is reasonably designed, as a part of the ERISA Plan's portfolio for
which the fiduciary has investment responsibility, to meet the objectives of
the ERISA Plan, taking into consideration the risk of loss and opportunity for
gain (or other return) from the investment, the diversification, cash flow,
and funding requirements of the ERISA Plan's portfolio. A fiduciary also
should take into account the nature of the Company's business, the management
of the Company, the length of the Company's operating history, the fact that
certain investment properties may not have been identified yet, and the
possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it
does not cover common law employees (a "Non-ERISA Plan") should consider that
such an IRA or Non-ERISA Plan may only make investments that are authorized by
the appropriate governing documents and under applicable state law.
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Fiduciaries of ERISA Plans and persons making the investment decision for an
IRA or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to an
ERISA Plan or with respect to a Non-ERISA Plan or IRA subject to Code section
4975 is subject to (i) an initial 15% excise tax on the amount involved in any
prohibited transaction involving the assets of the plan or IRA and (ii) an
excise tax equal to 100% of the amount involved if any prohibited transaction
is not corrected. If the disqualified person who engages in the transaction is
the individual on behalf of whom an IRA is maintained (or his beneficiary),
the IRA will lose its tax-exempt status and its assets will be deemed to have
been distributed to such individual in a taxable distribution (and no excise
tax will be imposed) on account of the prohibited transaction. In addition, a
fiduciary who permits an ERISA Plan to engage in a transaction that the
fiduciary knows or should know is a prohibited transaction may be liable to
the ERISA Plan for any loss the ERISA Plan incurs as a result of the
transaction or for any profits earned by the fiduciary in the transaction.
STATUS OF THE COMPANY AND THE PARTNERSHIP UNDER ERISA
The following section discusses certain principles that apply in determining
whether the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and the Code apply to an entity because one or more
investors in the equity interests in the entity is an ERISA Plan or is a Non-
ERISA Plan or IRA subject to section 4975 of the Code. An ERISA Plan fiduciary
also should consider the relevance of those principles to ERISA's prohibition
on improper delegation of control over or responsibility for "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates
in, permits (by action or inaction) the occurrence of, or fails to remedy a
known breach by another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA, (i)
the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving the Company's assets, (ii)
persons who exercise any authority over the Company's assets, or who provide
investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each ERISA Plan that
acquires Common Stock, and transactions involving the Company's assets
undertaken at their direction or pursuant to their advice might violate their
fiduciary responsibilities under ERISA, especially with regard to conflicts of
interest, (iii) a fiduciary exercising his investment discretion over the
assets of an ERISA Plan to cause it to acquire or hold the Common Stock could
be liable under Part 4 of Title I of ERISA for transactions entered into by
the Company that do not conform to ERISA standards of prudence and fiduciary
responsibility, and (iv) certain transactions that the Company might enter
into in the ordinary course of its business and operations might constitute
"prohibited transactions" under ERISA and the Code.
Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations")
generally provide that when an ERISA Plan or Non-ERISA Plan or IRA acquires a
security that is an equity interest in an entity and the security is neither a
"publicly-offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the ERISA or Non-ERISA
Plan's or IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the issuer of such equity
interest, unless one or more exceptions specified in the Plan Asset
Regulations are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Exchange Act, or sold pursuant to an effective
registration statement under the Securities Act (provided the securities are
registered under the Exchange Act within 120 days after the end of the fiscal
year of the issuer during which the offering occurred). The shares of Common
Stock offered hereby are being sold in an offering registered under the
Securities Act and will be registered under the Exchange Act. The Plan Asset
Regulations provide that a security is "widely held" only if it is part of a
class of securities that is owned
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by 100 or more investors independent of the issuer and of one another. A
security will not fail to be widely held because the number of independent
investors falls below 100 subsequent to the initial public offering as a
result of events beyond the issuer's control. The Company anticipates that
upon completion of the Offering, the Common Stock will be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment
is $10,000 or less (as is the case with this Offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or
state tax purposes, or that otherwise would violate any federal or state law
or court order, (ii) any requirement that advance notice of a transfer or
assignment be given to the issuer, (iii) any administrative procedure that
establishes an effective date, or an event (such as completion of an
offering), prior to which a transfer or assignment will not be effective, and
(iv) any limitation or restriction on transfer or assignment that is not
imposed by the issuer or a person acting on behalf of the issuer. The Company
believes that the restrictions imposed under the Charter on the transfer of
the Company's shares of Common Stock will not result in the failure of the
Common Stock to be "freely transferable." The Company also is not aware of any
other facts or circumstances limiting the transferability of the Common Stock
that are not enumerated in the Plan Asset Regulations as those not affecting
free transferability, and the Company does not intend to impose in the future
(or to permit any person to impose on its behalf) any limitations or
restrictions on transfer that would not be among the enumerated permissible
limitations or restrictions. The Plan Asset Regulations only establish a
presumption in favor of a finding of free transferability, and no assurance
can be given that the DOL or the Treasury Department will not reach a contrary
conclusion.
Assuming that the Common Stock will be "widely held" and that no other facts
and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Stock, the Common Stock
should be publicly offered securities and the assets of the Company should not
be deemed to be "plan assets" of any ERISA Plan, IRA, or Non-ERISA Plan that
invests in the Common Stock.
The Plan Asset Regulations also will apply in determining whether the assets
of the Partnership will be deemed to be "plan assets." The partnership
interests in the Partnership will not be publicly-offered securities.
Nevertheless, if the shares of Common Stock constitute publicly-offered
securities, the indirect investment in the Partnership by ERISA Plans, IRAs,
or Non-ERISA Plans subject to section 4975 of the Code through their ownership
of Common Stock will not cause the assets of the Partnership to be treated as
"plan assets" of such stockholders.
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PRINCIPAL STOCKHOLDERS OF THE COMPANY AND
PARTNERS OF THE PARTNERSHIP
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock and Special Voting Stock as of March
31, 1998, and as adjusted to reflect the sale by the Company of the shares
offered hereby (assuming no exercise of the Underwriters' over-allotment
option), by: (i) each person who is known by the Company to own beneficially
more than 5% of the Company's Common Stock or Special Voting Stock, and each
person who is expected to own more than 5% of the Partnership Units (other
than the Company), (ii) each of the Company's directors and prospective
directors, (iii) each of the Company's officers named under "Management--
Summary Compensation Table," and (iv) all directors, prospective directors and
executive officers of the Company as a group. After the Offering, Potlatch
will beneficially own 20,000,000 Partnership Units, initially representing a
57.1% interest in the Partnership (53.7%, if the Underwriters' over-allotment
option is exercised), in each case assuming an initial public offering price
of $20.00 per share.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(2) AFTER OFFERING(2)(4)
-------------------------------- ------------------------------
NUMBER OF NUMBER OF
NUMBER OF SHARES OF NUMBER OF SHARES OF PERCENT OF
SHARES OF SPECIAL PERCENT OF SHARES OF SPECIAL TOTAL
COMMON VOTING TOTAL VOTING COMMON VOTING VOTING
NAME AND ADDRESS(1) STOCK STOCK POWER(3) STOCK STOCK POWER (3)
------------------- --------- --------- ------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Potlatch Corporation.... 100 0 100% 0 1 57.1%
Scott R. Jones.......... 0 0 0 0 0 0
Allan F. Trinkwald...... 0 0 0 0 0 0
Robert M. Jolley, Jr.... 0 0 0 0 *
John M. Richards........ 0 0 0 0 0 0
Christine Garvey........ 0 0 0 0 0 0
Parnell S. Lewis, Jr.... 0 0 0 0 0 0
James F. Rippey......... 0 0 0 0 0 0
Will M. Storey.......... 0 0 0 0 0 0
Frederick T.
Weyerhaeuser........... 0 0 0 0 0 0
All directors and
executive officers as a
group (nine persons)... 0 0 0 0 *
</TABLE>
- --------
*Less than 1%.
(1) The address for Potlatch is 601 West Riverside Avenue, Suite 1100,
Spokane, WA 99201 and for each other listed person is c/o Timberland
Growth Corporation, 1242 North Second Street, Memphis, TN 38101. To the
Company's knowledge, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes to this table.
(2) The percentage of beneficial ownership is calculated assuming 100 shares
of Common Stock outstanding on March 31, 1998 and 15,000,000 shares
outstanding immediately following the completion of the Offering (assuming
no exercise of the Underwriters' over-allotment option). Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares subject to stock options presently
exercisable or exercisable within 60 days of March 31, 1998 are deemed to
be beneficially owned by the holder but are not treated as outstanding for
the purpose of computing the beneficial ownership of any other person.
This table assumes that all outstanding Partnership Units held by
Potlatch, as the initial limited partner of the Partnership, have been
exchanged for shares of Common Stock. The Partnership Units held by the
limited partners (initially Potlatch) are exchangeable for cash or, at the
Company's discretion, shares of Common
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Stock, commencing two years after the consummation of the Offering, or
earlier under certain circumstances involving the repudiation of the Timber
Purchase Agreement, a third-party tender or exchange offer for the
Company's stock and certain extraordinary dividends, mergers and other
fundamental transactions involving the Company. See "The Partnership
Agreement."
(3) In calculating the percentage of total voting power, the voting power of
shares of Common Stock (one vote per share) and Special Voting Stock (one
vote for each share of Common Stock for which the Partnership Units held
by the holder of Special Voting Stock could be exchanged) has been
aggregated.
(4) If the Underwriters exercise their overallotment option in full, the
persons named above will beneficially own the following percentages of the
Common Stock and total voting power after the Offering: Potlatch, 53.7%
and 53.7%, respectively, and all directors and executive officers as a
group, less than 1%.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the form of Amended and Restated
Certificate of Incorporation (the "Charter") and Bylaws of the Company, a copy
of each of which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
The authorized capital stock of the Company consists of 250,000,000 shares
of Common Stock, par value $.01 per share("Common Stock"), one share of
Special Voting Common Stock, par value $.01 per share ("Special Voting
Stock"), 250,000,000 shares of Excess Stock, par value $.01 per share ("Excess
Stock"), and 50,000,000 shares of Preferred Stock, par value $.01 per share
("Preferred Stock"). Upon the consummation of the Offering, 15,000,000 shares
of Common Stock will be issued and outstanding (17,250,000 shares if the
Underwriters' over-allotment option is exercised in full), one share of
Special Voting Stock will be issued and outstanding and held by Potlatch and
no shares of Preferred Stock will be issued and outstanding.
COMMON STOCK AND SPECIAL VOTING STOCK
VOTING RIGHTS. The holders of Common Stock and Special Voting Stock
generally have identical rights except that holders of Common Stock are
entitled to one vote per share while the holder of the Special Voting Stock is
entitled to, at any time, a number of votes equal to the number of shares of
Common Stock that such holder would hold if, as of such time, all of the
Partnership Units then held by such holder were exchanged for shares of Common
Stock in accordance with the Partnership Agreement. The holders of Common
Stock are not entitled to cumulative voting rights. Generally, all matters to
be voted on by stockholders must be approved by a majority (or, in the case of
election of directors, by a plurality) of the votes entitled to be cast by all
shares of Common Stock and Special Voting Stock present in person or
represented by proxy, voting together as a single class, subject to any voting
rights granted to holders of any Preferred Stock.
Following the consummation of the Offering, Potlatch, as the holder of the
sole share of Special Voting Stock and of Partnership Units exchangeable under
certain circumstances for 20,000,000 shares of Common Stock, will control
approximately 57.1% of the total voting power of all classes of Common Stock.
Potlatch's voting control as the holder of the Special Voting Stock will limit
significantly the ability of holders of Common Stock to effect a change in
management or other significant corporate transaction. Such voting control may
prevent a proposed acquisition or defer the making of a proposal for an
acquisition, which acquisition might result in stockholders receiving
consideration in excess of the then current market price of their shares.
DIVIDENDS. If any dividend or other distribution in cash or other property
is paid with respect to Common Stock or Special Voting Stock, a like dividend
or other distribution in cash or other property will also be paid with respect
to shares of the other class in an amount equal per share; provided, however,
that no distribution will be made with respect to the Special Voting Stock in
the event of a split of the Common Stock. The Special Voting Stock may not be
reclassified, subdivided or combined.
CONVERSION. The share of Special Voting Stock shall automatically convert
into one share of Common Stock if (i) the holder of the Special Voting Stock,
solely by virtue of holding such stock, possesses less than 1% of the total
voting power of the shares of outstanding Common Stock or (ii) by virtue of a
transfer of the Special Voting Stock or other event, such stock is not
beneficially owned by Potlatch or any of its subsidiaries. The share of
Special Voting Stock is convertible at the holder's option into one share of
Common Stock.
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BUSINESS COMBINATION TRANSACTIONS. In the event that any shares of Common
Stock are converted into or exchanged for cash, securities or other property
in connection with any merger or consolidation of the Company with another
person, each holder of a share of Common Stock shall receive the same
consideration as a holder of a share of Special Voting Stock and vice-versa;
provided, however, that the foregoing shall not apply if, following such
merger or consolidation and resulting solely from the ownership of securities
issued in connection therewith, a majority of the total voting power of the
surviving entity is held by persons who were stockholders of the Company
immediately prior to such merger or consolidation.
OTHER RIGHTS. In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of shares of Common
Stock and Special Voting Stock would be entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights and payment of any distributions owing to holders of shares of
Preferred Stock then outstanding, if any. Holders of the shares of Common
Stock or Special Voting Stock have no preemptive rights. Shares of Common
Stock or Special Voting Stock are not subject to further calls or assessment
by the Company, and there are no redemption or sinking fund provisions
applicable to the shares of Common Stock or Special Voting Stock. Upon
consummation of the Offering, all of the outstanding shares of Common Stock
and Special Voting Stock will be legally issued, fully paid and non-
assessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue Preferred Stock in one or more series and to fix the
rights, designation, preferences, privileges, limitations and restrictions
thereof, including dividend rights, conversion rights, terms and rights of
redemption, liquidation preferences and sinking fund terms (any or all of
which may be greater than the rights of the Common Stock or the Special Voting
Stock). The Board of Directors, without stockholder approval, can issue shares
of Preferred Stock with conversion, voting and other rights which could
adversely affect the rights of the holders of shares of Common Stock. Under
the Partnership Agreement, the issuance of Preferred Stock requires the
approval of the holders of a majority of the limited partnership interests if
the Partnership Units held by limited partners are exchangeable for at least
20% of the Company's then outstanding Common Stock (assuming that all limited
partners' Partnership Units are exchanged for Common Stock).
RESTRICTIONS ON SIZE OF HOLDINGS OF SHARES
The Charter contains certain restrictions on the number of shares of capital
stock that individual stockholders may own. In order for the Company to
qualify as a REIT under the Code, among other things, not more than 50% in
value of its outstanding capital stock may be owned, directly or indirectly,
by five or fewer individuals (defined in the Code to include certain entities)
during the last half of a taxable year (other than the first year) (the "Five
or Fewer Requirement"), and such shares of capital stock must be beneficially
owned by 100 or more persons during at least 335 days of a taxable year of 12
months (other than the first year) or during a proportionate part of a shorter
taxable year. See "Certain Federal Income Tax Considerations."
In order to protect the Company against the risk of losing its status as a
REIT and to otherwise protect the Company from the consequences of a
concentration of ownership among its stockholders, the Charter, subject to
certain exceptions, provides that no single person (which includes any "group"
of persons) may "beneficially own" more than 9.8% (the "Ownership Limit") of
the aggregate number of outstanding shares of Common Stock or any series of
Preferred Stock ("Equity Stock"). Under the Charter, a person generally
"beneficially owns" shares for such purpose if such person would be treated as
an owner of Equity Stock either directly or indirectly under Section 542(a)(2)
of the Code, taking into account, for this purpose, constructive ownership
under Section 544 of the Code, as modified by Section 856(h)(1)(B) of the
Code. The Charter excludes Potlatch and its successors from
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the Ownership Limit. In addition, the Board of Directors, upon receipt of a
ruling from the Internal Revenue Service or an opinion of counsel or other
evidence acceptable to the Board and upon such other conditions as may be
imposed by the Board, may also waive the Ownership Limit as to any person.
Any transfer of shares of Equity Stock that would (i) cause any person to
beneficially own shares of Equity Stock in excess of the Ownership Limit not
otherwise permitted as provided above, (ii) result in the shares of Equity
Stock being owned by fewer than 100 persons, within the meaning of Section
856(a)(5) of the Code, (iii) result in the Company being "closely held" within
the meaning of Section 856(h) of the Code, (iv) result in the Company
constructively owning 10% or more of the ownership interests in a tenant of
the real property of the Company or any of its direct or indirect subsidiaries
within the meaning of Section 856(d)(2)(B) of the Code, (v) result in the
Company failing to qualify as a "domestically controlled REIT" within the
meaning of Section 897(h)(4)(B) of the Code, or (vi) otherwise cause the
Company to fail to qualify as a REIT, shall be null and void, and the intended
transferee will acquire no rights to the shares of Equity Stock. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Directors adopts a resolution recommending that the Company terminate its
status as a REIT, and such resolution is approved by at least two-thirds of
the total voting power.
If any purported transfer of Equity Stock or other event resulting in an
increase in any holder's percentage interest in Equity Stock would cause a
purported transferee or holder to be in violation of the Ownership Limit or
would cause the Company to be disqualified as a REIT, then the purported
transferee or holder (the "Prohibited Owner") shall not acquire or shall cease
to own, as the case may be, such number of shares in excess of the Ownership
Limit or in excess of the highest number of shares which would allow the
Company to remain qualified as a REIT. Any such excess shares described above
will be converted automatically into an equal number of shares of Excess Stock
(the "Excess Shares") and transferred automatically, by operation of law, to a
trust, the beneficiary of which will be a qualified charitable organization
selected by the Company (the "Beneficiary"). Such automatic transfer shall be
deemed to be effective as of the close of business on the Trading Day (as
defined in the Charter) prior to the date of such violative transfer or event.
As soon as practical after the transfer of shares to the trust, the trustee
of the trust (who shall be designated by the Company and be unaffiliated with
the Company and any Prohibited Owner) will be required to sell such Excess
Shares to a person or entity who could own such shares without violating the
Ownership Limit or causing the Company to be disqualified as a REIT, and in
the case of Excess Shares resulting from a transfer for value, distribute to
the Prohibited Owner an amount equal to the lesser of the price paid by the
Prohibited Owner for such Excess Shares or the sales proceeds received by the
trust for such Excess Shares. In the case of any Excess Shares resulting from
any event other than a transfer for value, the trustee will be required to
sell such Excess Shares to a qualified person and distribute to the Prohibited
Owner an amount equal to the lesser of the Market Price (as defined in the
Charter) of such Excess Shares as of the date of such event or the sales
proceeds received by the trust for such Excess Shares. In either case, any
proceeds in excess of the amount distributable to the Prohibited Owner will be
distributed to the Beneficiary. Prior to a sale of any such Excess Shares by
the trust, the trustee will be entitled to receive, in trust for the
Beneficiary, the same per share dividends and other distributions paid by the
Company with respect to the Equity Stock which was converted into Excess
Shares. A holder of Excess Shares shall not be entitled to any voting rights
other than those required by Delaware law.
In addition, Excess Shares held in the trust shall be deemed to have been
offered for sale to the Company, or its designee, at a price per share equal
to the lesser of (i) in the case of Excess Shares resulting from a transfer
for value, the price per share in the transaction that resulted in such
transfer
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to the trust or, in the case of Excess Shares resulting from any event other
than a transfer for value, the Market Price on the date of such event and (ii)
the Market Price on the date the Company, or its designee, accepts such offer.
The Company shall have the right to accept such offer for a period of 90 days.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
Any person who beneficially owns more than 5% of the outstanding shares of
any class or series of Equity Stock (or such lower percentages as are then
required pursuant to the regulations under the Code) is required to provide a
written statement containing certain information to the Company by January 31
of each year. In addition, each record and beneficial owner of Equity Stock
shall upon demand be required to disclose to the Company in writing such
information as the Company may request in order to determine the Company's
status as a REIT and to ensure compliance with the Ownership Limit.
The ownership limitations described above could have the effect of delaying,
deferring or preventing a change of control of the Company in which holders of
Common Stock might receive a premium for their shares over the then prevailing
market price.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.
NEW YORK STOCK EXCHANGE LISTING
Prior to the date of this Prospectus, there has been no public trading
market for the Common Stock. Application has been made to list the Common
Stock on the New York Stock Exchange under the symbol "TGC."
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CERTAIN PROVISIONS OF DELAWARE LAW AND
THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of Delaware law and the
Company's Charter and Bylaws does not purport to be complete and is subject to
and qualified in its entirety by reference to Delaware law and to the
Company's Charter and Bylaws, copies of which have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part.
CLASSIFICATION OF THE BOARD AND REMOVAL OF DIRECTORS
Pursuant to the Company's Charter, the directors are divided into three
classes. One class will hold office initially for a term expiring at the first
annual meeting of stockholders to be held in 1999, another class will hold
office initially for a term expiring at the second annual meeting of
stockholders to be held in 2000 and another class will hold office initially
for a term expiring at the third annual meeting of stockholders to be held in
2001. As the term of each class expires, directors in that class will be
elected to serve for a term expiring at the annual meeting of stockholders
held in the third year following the year of their election and until their
successors are duly elected and qualify. The Company believes that
classification of the Board will help to assure the continuity and stability
of the Company's business strategies and policies as determined by the Board.
Holders of Common Stock will have no right to cumulative voting in the
election of directors. Consequently, at each annual meeting of stockholders,
subject to the rights of holders of any series of Preferred Stock, the holders
of a majority of the voting power of the Common Stock and Special Voting
Stock, voting together as a single class, will be able to elect all of the
successors of the class of directors whose terms expire at that meeting.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
a majority of the Board. Thus, the classified board provision could increase
the likelihood that incumbent directors will retain their positions.
The Charter provides that a director may be removed only for cause (as
defined in the Charter) and only by the affirmative vote of the holders of at
least 66 2/3% of the total voting power of the Common Stock entitled to vote
at a meeting of stockholders called for that purpose. The Charter further
provides that all vacancies on the Board of Directors, however occurring,
including, without limitation, by reason of the removal of a director or an
increase in the size of the Board, shall be filled by a majority of the
remaining directors. These provisions, taken together, preclude stockholders
from removing incumbent directors and filling the vacancies created by such
removal with their own nominees except upon the existence of cause for removal
and a substantial affirmative vote.
BUSINESS COMBINATIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a business combination with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
by the Board of Directors and the holders of at least 66 2/3% of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder). A "business combination" includes a merger, asset
sale or other transaction resulting in financial benefit to the stockholder.
An "interested stockholder" is a person who, together with affiliates and
associates, owns (or within the three prior years, did own) 15% or more of the
corporation's voting stock. This statutory prohibition does not apply if, upon
consummation of the transaction in which any person becomes an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock of the corporation (excluding shares held by persons who are both
directors and officers or by certain stock option plans).
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MEETINGS OF STOCKHOLDERS
The Bylaws of the Company provide for annual meetings of stockholders to
elect directors and transact such other business as may properly be brought
before the meeting. The Charter provides that special meetings of stockholders
may be held at any time upon the call of the Chairman of the Board of
Directors, any Vice Chairman of the Board, the President or, at the request in
writing of a majority of the Board of Directors, any officer. Stockholders of
the Company will not have the right to call a special meeting of stockholders.
The Charter provides that during the period in which Potlatch and its
subsidiaries continue to beneficially own 50% or more of the total voting
power of the shares of Common Stock outstanding, any corporate action which
may be taken at an annual or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, upon delivery to
the Company of written consents signed by the holders of capital stock having
not less than the minimum number of votes that would be necessary to authorize
such corporate action at a meeting of stockholders. After such period, any
corporate action which may be taken at an annual or special meeting of
stockholders may be taken only at a duly called annual or special meeting of
stockholders and not by written consent of stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Charter that limit the liability
of its directors for monetary damages for breach of their fiduciary duty as
directors, except for liability that cannot be eliminated under the Delaware
Law. The Delaware Law provides that directors of the Company will not be
personally liable for monetary damages for breach of their fiduciary duty as
directors, except for liability resulting from (1) any breach of their duty of
loyalty to the Company or its stockholders, (2) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(3) unlawful payment of dividend or unlawful stock repurchase or redemption,
as provided in Section 174 of the Delaware Law or (4) any transaction from
which the director derived an improper personal benefit.
The Company's Bylaws also provide that the Company shall indemnify its
directors and officers to the fullest extent permitted by the Delaware Law.
The Company intends to enter into separate indemnification agreements with its
directors and certain of its officers that could require the Company, among
other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as directors and officers and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. The Company believes that the limitation of
liability provision in its Charter and these indemnification agreements will
facilitate the Company's ability to continue to attract and retain qualified
individuals to serve as directors and officers of the Company.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Company's Bylaws contain provisions requiring advance notice to the
Company of (i) nominations of candidates for election to the Board of
Directors who are not nominated by the Board of Directors and (ii) business to
be conducted at the Company's annual meeting of stockholders (other than such
business as may be brought by or at the direction of the Board of Directors).
Without compliance with these provisions, any such nominations or business may
not be considered by the stockholders.
AMENDMENT OF THE CHARTER AND BYLAWS
The Company's Charter may not be amended without the affirmative vote of at
least 66 2/3% of the total voting power of the outstanding capital stock of
the Company. The Company's Bylaws may not be amended without the affirmative
vote of at least 66 2/3%of the directors of the Company then in office or at
least 66 2/3% of the total voting power of the outstanding capital stock of
the Company.
128
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock
of the Company, and no predictions can be made regarding the effect, if any,
that market sales of shares or the availability of shares for sale will have
on the market price prevailing from time to time. As described below, only a
limited number of shares will be available for sale shortly after the Offering
due to certain contractual and legal restrictions on resale. Nevertheless,
sales of substantial amounts of Common Stock of the Company in the public
market after the restrictions lapse could adversely affect the prevailing
market price. Potlatch and any other limited partners of the Partnership may
be entitled under certain circumstances to exchange Partnership Units for
substantial numbers of shares of Common Stock and to cause the Company to
register such shares for resale in the public market. See "The Partnership
Agreement--Exchange of Partnership Units."
Upon completion of the Offering, the Company will have outstanding
15,000,000 shares of Common Stock. The 15,000,000 shares of Common Stock being
sold hereby will be freely tradable (other than by an "affiliate" of the
Company as such term is defined in the Securities Act) without restriction or
registration under the Securities Act. All remaining shares were issued and
sold by the Company in private transactions ("Restricted Shares") and are
eligible for public sale if registered under the Securities Act or sold in
accordance with Rule 144 thereunder (as described below).
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the first anniversary of the
date of this Prospectus (the "Lockup Period"), it will not offer, sell,
contract to sell or otherwise dispose of any securities of the Company (other
than pursuant to employee stock option plans existing, or on the conversion or
exchange of convertible or exchangeable securities outstanding, on the date of
this Prospectus) which are substantially similar to the shares of Common Stock
or which are convertible into or exchangeable for securities which are
substantially similar to the shares of Common Stock without the prior written
consent of Goldman, Sachs & Co., except for the shares of Common Stock offered
in connection with the Offering.
On and after the second anniversary of the completion of the Offering, the
Partnership will be obligated to exchange each Partnership Unit at the request
of the holder thereof for cash equal to the fair market value of one share of
Common Stock at the time of such exchange (as determined in accordance with
the provisions of the Partnership Agreement), provided that the Company may
elect to acquire any such Partnership Unit presented for exchange for one
share of Common Stock (subject to antidilution adjustments) or an amount of
cash of the same value. The exchange right will also become immediately
exercisable if a third party makes a tender or exchange offer for more than
10% of the outstanding shares of Common Stock and in the event of a sale of
all or substantially all of the Company's assets, certain extraordinary
dividends and certain mergers and other business combinations involving the
Company. Potlatch, which upon consummation of the Offering will own
Partnership Units exchangeable under the foregoing circumstances for
20,000,000 shares of Common Stock, has agreed not to sell any Common Stock
owned by it without the prior written consent of Goldman, Sachs & Co. during
the Lockup Period. Following the expiration of the Lockup Period, all such
shares will be available for resale, subject to compliance with Rule 144. In
addition, the Company's directors and executive officers, who will initially
hold stock options to purchase approximately 200,000 shares of Common Stock,
have agreed that, should they exercise such options, they will not sell any
Common Stock owned by them during the Lockup Period without the prior written
consent of Goldman, Sachs & Co. Following the expiration of such one-year
period, such shares of Common Stock issuable upon the exercise of options will
be available for sale in the public market subject to compliance with Rule
144. See "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an affiliate of the Company, or a holder of
Restricted Shares who owns beneficially shares that were not acquired from the
Company or an affiliate of the Company within the previous one year,
129
<PAGE>
would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of
Common Stock (approximately 150,000 shares immediately after the Offering,
assuming no exercise of the Underwriters' over-allotment option) or the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission (the "Commission"). Sales under Rule 144
are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. However, a
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who owns beneficially Restricted Shares is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above, so long as at least two years have elapsed since the later of the date
the shares were acquired from the Company or from an affiliate of the Company.
The foregoing is a summary of Rule 144 and is not intended to be a complete
description of it.
The Company intends to file one or more registration statements under the
Securities Act to register up to 3,000,000 shares of Common Stock reserved for
issuance pursuant to the Stock Incentive Plan. Each such registration
statement will become effective immediately upon filing. Commencing two years
after the Offering, the Company will also be obligated to file one or more
registration statements under the Securities Act to register the shares of
Common Stock issuable upon exchange of Partnership Units for shares of Common
Stock. See "Certain Relationships and Transactions" and "The Partnership
Agreement--Exchange of Partnership Units." The resale in the public market of
such registered shares by non-affiliates will be permitted without restriction
under the Securities Act, unless such shares are subject to vesting
restrictions imposed by the Company or the contractual restrictions described
above.
130
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters, for whom Goldman, Sachs & Co., A.G. Edwards & Sons,
Inc., Legg Mason Wood Walker, Incorporated, Prudential Securities Incorporated
and BancAmerica Robertson Stephens are acting as representatives, has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
OF SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co. ...........................................
A.G. Edwards & Sons, Inc. ......................................
Legg Mason Wood Walker, Incorporated............................
Prudential Securities Incorporated..............................
BancAmerica Robertson Stephens..................................
----------
Total......................................................... 15,000,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain other brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be raised by the representatives.
The Company has granted the several Underwriters an option exercisable for
30 days after the date of this Prospectus to purchase up to an aggregate of
2,250,000 additional shares of Common Stock to cover over-allotments, if any.
The Underwriters may exercise such option only to cover over-allotments in
connection with the sale of the 15,000,000 shares of Common Stock. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 15,000,000 shares of
Common Stock offered.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the first anniversary of the
date of this Prospectus, it will not offer, sell, contract to sell or
otherwise dispose of any securities of the Company (other than pursuant to
employee stock option plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
Prospectus) which are substantially similar to the shares of Common Stock or
which are convertible into or exchangeable for securities which are
substantially similar to the shares of Common Stock without the prior written
consent of Goldman, Sachs & Co., except for the shares of Common Stock offered
in connection with the Offering. Potlatch, which upon consummation of the
Offering will own Partnership Units exchangeable under certain circumstances
for 20,000,000 shares of Common Stock, has agreed not to sell any Common Stock
owned by it without the prior written consent of Goldman, Sachs & Co. during
the foregoing one-year period.
The representatives have informed the Company that they do not expect sales
to accounts over which the Underwriters exercise discretionary authority to
exceed five percent of the total number of shares of Common Stock offered by
them.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Company and the representatives. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
131
<PAGE>
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and cash flow prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
The Underwriters may purchase and sell the Common Stock in the open market.
These transactions may include over-allotment and stabilizing transactions and
purchases to cover syndicate short positions created in connection with the
Offering. Stabilizing transactions consist of certain bids or purchases for
the purpose of preventing or retarding a decline in the market price of the
Common Stock, and syndicate short positions involve the sale by the
Underwriters of a greater number of shares than they are required to purchase
from the Company in the Offering. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other broker-
dealers in respect of the securities sold in the offering for their account
may be reclaimed by the syndicate if such shares are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market. These activities, if commenced, may be discontinued at any time. These
transactions may be affected on the New York Stock Exchange, in the over-the-
counter market or otherwise.
The Common Stock will be listed on the NYSE under the symbol "TGC." In order
to meet one of the requirements for listing the Common Stock on the NYSE, the
Underwriters have undertaken to sell lots of 100 or more shares to a minimum
of 2,000 beneficial holders.
The Company will pay an advisory fee equal to 0.5% of the gross proceeds of
the Offering (including any exercise of the Underwriters' over-allotment
option) to Goldman, Sachs & Co. for advisory services in connection with the
evaluation, analysis and structuring of the Company's formation and the
Offering. The Underwriters have agreed to reimburse the Company for certain
expenses incurred by it in connection with the Offering.
Goldman, Sachs & Co. has served as the financial adviser to ATCO in
connection with the Merger and Potlatch's purchase of certain converting
assets from certain entities related to ATCO and as customary compensation for
a transaction of this type received a fee of $3.5 million.
The Company, the Partnership and Potlatch have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Pillsbury Madison &
Sutro LLP, San Francisco, California, and for the Underwriters by Andrews &
Kurth L.L.P., Houston, Texas. The description of certain federal income tax
matters set forth herein under the caption "Certain Federal Income Tax
Considerations" is based upon the opinion of Pillsbury Madison & Sutro LLP.
Such opinion will rely, as to the qualification of ATCO as a REIT, upon the
opinion of Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. In
addition to providing services to the Company, Pillsbury Madison & Sutro LLP
has also provided legal services to Potlatch Corporation, including, without
limitation, in connection with certain of the Formation Transactions.
EXPERTS
The financial statements of the Potlatch Southern Timberlands as of December
31, 1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997, and the consolidated balance sheet of the Company as of
February 27, 1998, have been included herein in reliance upon the reports of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
132
<PAGE>
The consolidated financial statements of ATCO as of July 31, 1996 and 1997
and December 31, 1997 and for each of the three years in the period ended July
31, 1997 and for the five-month period ended December 31, 1997 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act with respect
to the Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to such Registration
Statement, exhibits and schedules. Statements contained in this Prospectus
regarding the contents of any contract or other document are not necessarily
complete; with respect to each such contract or 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 shall be
deemed qualified in its entirety by such reference. A copy of the Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of such material may be obtained from
such office upon payment of the fees prescribed by the Commission. Such
documents may also be accessed electronically at the Commission's home page on
the Internet at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent certified public
accountants and quarterly reports containing unaudited financial information
for the first three quarters of each fiscal year.
133
<PAGE>
GLOSSARY
BOARD FOOT (BF): A standard unit of measure for logs and lumber that is 12
inches square and one inch thick.
BOTTOMLANDS: The flood plains of streams, creeks and rivers that generally
support quality hardwood stands.
CLEAR-CUT: Harvesting all merchantable trees in a stand of timber at the
same time. In practice, some unsalable material may be left standing.
CONTROLLED BURNING: Setting fire to the forest floor to reduce the
accumulation of logging debris, dead and fallen timber, weeds and underbrush
that pose a wildfire hazard or compete with the trees for water and nutrients.
CONVERSION: The process of sawing or otherwise changing the shape of timber,
or transforming timber into any other type of wood product.
CONVERTING FACILITY: A sawmill, pulp mill or other facility at which timber
conversion occurs.
CORD: A unit of measure equal to a stack of wood 4X4X8 feet, or 128 cubic
feet of wood, bark and air.
CRUISE: Field sampling procedures used to provide quantitative and
qualitative information for estimating the volume and quality of standing
timber on a tract.
CUTTING CONTRACT: A contractual right to cut certain described timber over a
specified period of time on a specified tract of property.
DBH: The abbreviation means "diameter at breast height," a term frequently
used to describe a tree measurement taken 4 1/2 feet above the average ground
level.
DOYLE SCALE: A mathematical scale for converting log dimensions into
estimated board feet of dry lumber volumes, commonly used in the southern and
eastern United States.
EVEN-AGED FOREST: A forested area containing trees of a single age class.
FEE TIMBER: Timber located on property owned in fee, as opposed to timber
located on property owned by others and acquired under cutting contracts.
GREEN TONS: Tons of wood product including natural moisture.
HARDWOODS: Trees that usually have broad leaves and are deciduous (losing
leaves every year).
INITIAL TIMBERLANDS: The timberlands acquired by the Company in the
Formation Transactions, consisting of approximately 824,000 fee acres and
approximately 14,000 leased acres, which include approximately 44,200 acres of
roads, levees and other non-productive areas.
MBF: One thousand board feet. A common unit of measure for pricing standing
timber as well as lumber.
MERCHANTABLE TIMBER: Minimum size timber for which there might be a
commercial market. It should be recognized that timber of minimum merchantable
size has not yet reached its optimal economic value.
134
<PAGE>
MMBF: One million board feet.
NATURAL REGENERATION: The process of a forest regenerating itself with seeds
from mature trees or sprouts from stumps as roots. Natural regeneration
results in new tree growth without regard to the genetic quality of the trees.
NATURAL STAND: A forest stand resulting from natural regeneration.
NON-FOREST LANDS: Lands consisting of or containing roads, water or
easements, such as gas and electric transmission lines, timbered buffers not
harvested due to environmental concerns, currently non-commercially viable
acreage and certain wastelands.
PLANTATION: A timber stand established by planting seedlings after the land
has been prepared. Trees in a plantation are of the same age and size, which
tends to simplify harvesting.
POLES: Straight, tall trees suitable for manufacturing telephone poles,
wharf pilings or the like. Trees suitable for use as poles generally command a
superior price.
PULPWOOD: Wood used to produce pulp in the manufacture of paper and other
cellulose products.
SALVAGE: Logging or removing dead or high-risk trees.
SAWTIMBER: Trees containing logs of sufficient size and quality to be
suitable for conversion into lumber or plywood.
SEEDLINGS: Live trees less than one inch in diameter at ground level.
SILVICULTURE: The practice of cultivating forest crops based on the
knowledge of forestry; more particularly, controlling the establishment,
composition and growth of forests.
SLASH: Debris left after logging, thinning or brush cutting, or debris
caused by wind or fire.
SOFTWOODS: Conifers such as Douglas fir, spruce, loblolly pine and shortleaf
pine.
STAND: An area of trees possessing sufficient uniformity of age, size and
composition to be distinguishable from adjacent areas so as to form a
management unit.
STOCKING: An indication of the number of trees in a stand as compared to the
desirable number for best growth and management, such as well-stocked, over-
stocked or partially stocked.
STUMPAGE PRICE: The price paid for standing timber (timber as it stands
uncut in the woods).
SUSTAINABLE YIELD: A method of forest management that implies a balance over
time between timber growth and harvest.
THINNING: Removal of selected trees, usually to eliminate overcrowding, to
remove dying or diseased trees and to promote more rapid growth of desired
trees. "Pre-commercial thinning" refers to thinning that does not produce
merchantable timber.
TIMBERLANDS: As used in this Prospectus, references to "the Timberlands" are
to the Initial Timberlands (as defined herein) and any other timberlands that
the Company may acquire in the future. Other references to "timberlands" are
to commercial forest land generally capable of producing more than 20 cubic
feet of wood per acre per year. The Company's aggregate timberland acreage
includes roads and other non-productive acreage. See the definition of
"Initial Timberlands" above.
135
<PAGE>
TONS: All references to tons of timber are to green tons.
UNEVEN-AGED FOREST: A forested area containing trees of all age classes.
USFS: United States Forest Service.
USFS #1 GRADE: USFS grades represent measures of log quality, in terms of
size and number of defects, promulgated by the USFS. USFS #1 grade is the
highest such grade.
VENEER: Wood peeled, sawn or sliced into thin sheets of a given thickness.
WOOD FIBER: Generally refers to pulpwood or chips used in the manufacture of
pulp and paper.
136
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE COMPANY
Independent Auditor's Report............................................ F-2
Consolidated Balance Sheet as of February 27, 1998...................... F-3
Notes to Consolidated Balance Sheet..................................... F-4
THE POTLATCH SOUTHERN TIMBERLANDS
Independent Auditors' Report............................................ F-6
Statements of Earnings for the years ended December 31, 1997, 1996 and
1995................................................................... F-7
Balance Sheets as of December 31, 1997 and 1996......................... F-8
Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995................................................................... F-9
Notes to Financial Statements........................................... F-10
ANDERSON-TULLY COMPANY
Report of Independent Certified Public Accountants...................... F-12
Consolidated Balance Sheets as of December 31, 1997 and July 31, 1997
and 1996............................................................... F-13
Consolidated Statements of Operations for the five months ended December
31, 1997 and years ended July 31, 1997, 1996 and 1995.................. F-14
Consolidated Statements of Stockholders' Equity (Deficit) for the five
months ended December 31, 1997 and years ended July 31, 1997, 1996 and
1995................................................................... F-15
Consolidated Statements of Cash Flows for the five months ended December
31, 1997 and years ended July 31, 1997, 1996 and 1995.................. F-16
Notes to Consolidated Financial Statements.............................. F-17
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Timberland Growth Corporation:
We have audited the accompanying consolidated balance sheet of Timberland
Growth Corporation as of February 27, 1998. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial 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 of a balance sheet includes examining, on a
test basis, evidence supporting the amounts and disclosures in that balance
sheet. An audit of a balance sheet also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Timberland Growth
Corporation as of February 27, 1998 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
March 10, 1998
F-2
<PAGE>
TIMBERLAND GROWTH CORPORATION
CONSOLIDATED BALANCE SHEET
FEBRUARY 27, 1998
<TABLE>
<S> <C>
ASSETS
------
Cash.............................................................. $1,500
======
STOCKHOLDERS' EQUITY
--------------------
Stockholders' Equity:
Common shares, $.01 par value, 100 shares authorized, 100 shares
issued and outstanding......................................... $ 1
Additional paid-in capital...................................... 1,499
------
$1,500
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE>
TIMBERLAND GROWTH CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET
ORGANIZATION
Timberland Growth Corporation (the "Company") was organized in the State of
Delaware on February 4, 1998. The Company intends to qualify as a real estate
investment trust ("REIT") under the Internal Revenue Code commencing with its
taxable year ending December 31, 1998. As a REIT, the Company generally will
not be subject to federal income taxes on net income that it distributes to
its stockholders.
The Company was formed to acquire approximately 324,000 fee acres of
timberlands and real estate assets from the Anderson-Tully Company ("ATCO") in
a cash merger. The ATCO timberlands and real estate assets will be contributed
to the Timberland Growth Limited Partnership (the "Partnership") in exchange
for the sole general partner interest of the Partnership. Potlatch Corporation
("Potlatch") will contribute approximately 513,000 acres of fee and leased
timberlands and an office building to the Partnership and will initially own
the sole limited partner interest in the Partnership. In addition, Potlatch
will own the Company's sole share of Special Voting Stock that will give
Potlatch voting power of the Company equal to the number of votes to which
Potlatch would be entitled if all of its interests in the Partnership were
exchanged for Common Stock. Initially, Potlatch's voting power will equal its
percentage interest in the Partnership.
The Company's operations, which will consist of managing and acquiring
timberlands, will be conducted through the Partnership. The Company has had no
operations to date.
The consolidated balance sheet includes the accounts of Beaver Acquisition
Corporation, a wholly-owned subsidiary of the Company. All intercompany
transactions were eliminated upon consolidation.
PUBLIC OFFERING
The Company intends to file a registration statement on Form S-11 with the
Securities and Exchange Commission for a public offering (the "Offering") of
Common Stock. The number of shares to be offered and the initial offering
price will be determined at a future date. The Company intends to use all of
the net proceeds of the Offering to fund a majority of the purchase price for
its acquisition of timberlands and real estate assets of ATCO.
LINE OF CREDIT
The Company has a commitment to obtain a $200 million unsecured revolving
line of credit (the "Credit Facility") from a commercial bank prior to the
closing of the Offering. Upon closing of the Offering, the Company intends to
borrow under the Credit Facility in order to (i) repay $21.4 million of a loan
from Potlatch to ATCO, which the Company will assume in the acquisition, and
(ii) fund the portion of the ATCO acquisition not funded from the proceeds of
the Offering. The Partnership will assume the Company's obligations under the
Credit Facility.
INCENTIVE AND BENEFIT PLANS
Stock Incentive Plan
The Company intends to adopt the 1998 Stock Incentive Plan (the "Stock
Incentive Plan") prior to the consummation of the Offering. A total of
3,000,000 shares of Common Stock will be available for issuance under the
Stock Incentive Plan. An award under this plan may be in the form of stock
options, limited stock appreciation rights, restricted stock or other share-
based awards.
F-4
<PAGE>
TIMBERLAND GROWTH CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
Participants in the Stock Incentive Plan will be key employees of the
Company, the Partnership or its subsidiaries who are selected by the Board of
Directors. Directors not employed by Potlatch, the Company or their
subsidiaries (the "Outside Directors") are eligible to receive only
nondiscretionary awards of nonqualified stock options under the plan. These
awards will consist of an option grant of 5,000 shares upon a director's
initial election to the Board, and thereafter an annual option grant of 1,500
shares. The maximum number of stock options, restricted stock or other share-
based awards that may be granted to a key employee under the Stock Incentive
Plan in any calendar year is 250,000 shares.
Stock options granted to key employees and Outside Directors will be subject
to terms and conditions specified in the Stock Incentive Plan and stock option
agreements. The exercise price of a stock option will be the fair market value
of a share on the date of grant. Each stock option granted to a key employee
will become exerciseable at the time or times specified in the applicable
stock option agreement. Each stock option granted to an Outside Director will
become exerciseable in 50% increments on the first and second anniversaries of
the date of grant, provided that he or she has continuously been an Outside
Director from the date of grant until such time. In addition, each plan
participant will have the right to accelerated vesting upon the occurrence of
certain events.
INCENTIVE BONUS PROGRAM
The Company intends to establish an incentive compensation plan (the
"Incentive Bonus Plan") for key employees. The Incentive Bonus Plan will
provide for payment of annual cash incentive awards to participating employees
based on the Company's attainment of key annual financial objectives and an
evaluation of the employee's personal performance during the year. The
Company's Board will determine the awards. Awards will only be paid with
respect to years in which minimum financial objectives, as established
annually by the Board, are met. The maximum award earned in any year will be
100% of the employee's base salary in effect for that year.
PENSION PLANS
Employees of the Company will be eligible to participate in a tax-qualified
defined benefit pension plan (the "Retirement Plan") and a Supplemental
Benefit Plan which will replace benefits lost because of any limitation placed
on the Company's tax-qualified defined benefit plan or a 401(k) savings plan
that the Company also intends to establish. In calculating years of credited
service, the period of time recognized under Potlatch's Salaried Employees'
Retirement Plan will be taken into account.
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 at the
date of the financial statements. Actual results could differ from those
estimates and assumptions.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Potlatch Corporation:
We have audited the accompanying balance sheets of the Potlatch Southern
Timberlands as of December 31, 1997 and 1996, and the related statements of
earnings and cash flows for each of the years in the three-year period ended
December 31, 1997. These financial statements are the responsibility of the
management of Potlatch Corporation. 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 presently fairly,
in all material respects, the financial position of the Potlatch Southern
Timberlands as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Portland, Oregon
February 12, 1998
F-6
<PAGE>
POTLATCH SOUTHERN TIMBERLANDS
STATEMENTS OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Timber sales........................................... $29,715 $28,318 $40,449
------- ------- -------
Costs and expenses:
Depletion, depreciation and amortization............. 1,398 3,466 1,683
Operating expenses................................... 4,232 4,523 4,788
------- ------- -------
Total costs and expenses........................... 5,630 7,989 6,471
------- ------- -------
Earnings from operations............................... 24,085 20,329 33,978
Other income, net...................................... 1,537 1,252 1,362
------- ------- -------
Net earnings........................................... $25,622 $21,581 $35,340
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
POTLATCH SOUTHERN TIMBERLANDS
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
ASSETS
------
Equipment, net of accumulated depreciation..................... $ 466 $ 479
Logging roads.................................................. 2,963 3,103
Timber and timberlands......................................... 47,935 49,225
------- -------
$51,364 $52,807
======= =======
LIABILITIES AND POTLATCH CORPORATION EQUITY
-------------------------------------------
Accounts payable and accrued liabilities....................... $ 1,302 $ 1,316
Potlatch Corporation equity.................................... 50,062 51,491
------- -------
$51,364 $52,807
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
POTLATCH SOUTHERN TIMBERLANDS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net earnings................................... $ 25,622 $ 21,581 $ 35,340
Adjustments to reconcile net earnings to cash
flows from operations:
Depletion, depreciation and amortization.... 1,398 3,466 1,683
Changes in working capital.................. 152 (416) (14)
-------- -------- --------
Cash flows from operations..................... 27,172 24,631 37,009
-------- -------- --------
CASH FLOWS FROM INVESTING
Additions to timber, timberlands and related
logging facilities............................ (3,168) (2,318) (2,699)
Other, net..................................... (209) (33) (427)
-------- -------- --------
Cash flows from investing...................... (3,377) (2,351) (3,126)
-------- -------- --------
CASH FLOWS FROM FINANCING
Net payments to Potlatch Corporation........... (23,795) (22,280) (33,883)
-------- -------- --------
Change in cash................................. -- -- --
Balance at beginning of period................. -- -- --
-------- -------- --------
Balance at end of period....................... $ -- $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
POTLATCH SOUTHERN TIMBERLANDS
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND NATURE OF OPERATIONS
The Potlatch Southern Timberlands ("Timberlands") is responsible for the
management of fee and leased timberlands in Arkansas owned and leased by
Potlatch Corporation ("Potlatch"). Timberlands manages a total of
approximately 513,000 acres of timberlands. The financial statements of
Timberlands are derived from the historical books and records of Potlatch.
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 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 and assumptions.
EQUIPMENT
Equipment is valued at cost less accumulated depreciation. Depreciation is
determined by using the straight-line method on estimated useful lives.
Estimated useful lives range from three to 40 years.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Equipment.............................................. $ 1,748 $ 1,871
Less accumulated depreciation.......................... (1,282) (1,392)
------- -------
$ 466 $ 479
======= =======
</TABLE>
LOGGING ROADS
Main logging roads, including bridges, culverts and improvements, are stated
at cost, less accumulated amortization. The amortizable (non-roadbed) portion
of logging road costs is amortized on a straight-line basis, with useful lives
ranging from 10 to 20 years.
TIMBER AND TIMBERLANDS
Timber and timberlands are stated at cost less depletion. The portion of the
cost of timberlands attributed to standing merchantable timber is charged
against income as timber is cut, at rates determined annually, based on the
relationship of unamortized timber costs to the estimated volume of
recoverable timber.
REVENUE RECOGNITION
Timber sales are recognized when legal ownership and the risk of loss pass
to the purchaser and the quantity sold is determinable. This generally occurs
when the purchaser severs and measures the timber.
Revenues are based on actual harvest volumes multiplied by internal transfer
prices. The transfer prices were based upon the price paid by Potlatch's mills
in arms'-length transactions, less Potlatch's costs of logging and
transporting the timber to its mills.
F-10
<PAGE>
POTLATCH SOUTHERN TIMBERLANDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OTHER INCOME
Other income consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Hunting lease revenue................................ $1,122 $1,146 $1,164
Income from timberlands sales, net................... 390 64 158
Other, net........................................... 25 42 40
------ ------ ------
$1,537 $1,252 $1,362
====== ====== ======
</TABLE>
INCOME TAXES
Timberlands is not a separate taxable entity for federal, state or local
income tax purposes. The results of Timberlands have been included in the
consolidated tax return of Potlatch. Accordingly, no provision for current or
deferred income taxes has been provided in the accompanying financial
statements of Timberlands.
RELATED PARTY TRANSACTIONS
Timberlands supplies timber to Potlatch for use in Potlatch's converting
facilities in Arkansas and for log trading activities. All of Timberlands'
timber sales represent fee timber sales to Potlatch.
Timberlands engages in various transactions with Potlatch that are
characteristic of a consolidated group under common control. The receipts,
disbursements and net cash position of Timberlands are currently managed by
Potlatch through a centralized treasury system. Accordingly, both cash
generated by and cash requirements of Timberlands flow through Potlatch
Corporation Equity on the accompanying financial statements of Timberlands.
There is no direct interest income or interest cost allocated to Timberlands
with respect to net lendings or borrowings. Also, general corporate
administration expenses have not been allocated to Timberlands.
F-11
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors,
Anderson-Tully Company
We have audited the accompanying consolidated balance sheets of Anderson-
Tully Company (the "Company") and its subsidiaries as of July 31, 1996 and
1997 and December 31, 1997 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended July 31, 1997 and the five-month period ended
December 31, 1997. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Anderson-Tully Company and
its subsidiaries at July 31, 1996 and 1997 and December 31, 1997 and the
results of their operations and their cash flows for each of the three years
in the period ended July 31, 1997 and the five-month period ended December 31,
1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Memphis, Tennessee
February 10, 1998
F-12
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 31,
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 188 $ 1,749 $ 1,711
Certificates of deposit..................... 100 100 117
Accounts receivable......................... 6,783 9,684 11,049
Notes receivable............................ 4,899
Inventories................................. 6,341 4,783 5,408
Deferred income taxes....................... 1,229 1,076 1,258
Prepaid expenses............................ 885 1,339 1,190
Refundable income taxes..................... 685
-------- -------- --------
Total current assets...................... 16,211 18,731 25,632
TIMBERLAND AND TIMBER--At cost................ 29,942 28,183 27,858
Less accumulated depletion.................. (18,599) (18,215) (18,577)
-------- -------- --------
Timberland and timber--net................ 11,343 9,968 9,281
PLANT PROPERTY--NET........................... 68,693 75,474 64,300
COMMERCIAL REAL ESTATE........................ 22,385 30,007 29,801
OTHER ASSETS.................................. 2,552 2,306 3,085
-------- -------- --------
TOTAL......................................... $121,184 $136,486 $132,099
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ 4,346 $ 5,532 $ 7,326
Current portion of long-term debt........... 1,805 4,826 7,356
Accrued expenses:
Wages, insurance, and other................. 3,074 3,105 3,474
Dividends payable........................... 695 723
Taxes other than income..................... 905 1,053 1,585
Income and franchise taxes.................. 239 1,826 2,191
-------- -------- --------
Total accrued expenses.................... 4,913 6,707 7,250
Deferred revenues............................. 917
-------- -------- --------
Total current liabilities................. 11,064 17,065 22,849
DEFERRED INCOME TAXES......................... 13,519 15,955 13,971
LONG-TERM LIABILITIES......................... 1,177 1,171 1,507
LONG-TERM DEBT, Less current portion.......... 42,804 46,344 96,787
MINORITY INTEREST IN EQUITY OF CONSOLIDATED
LIMITED PARTNERSHIP.......................... 275 1,578 2,862
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Capital stock--$2,000 par value; 1,200
shares authorized; 579.54 shares
outstanding................................ 1,159 1,159 1,159
Retained earnings (deficit)................. 51,186 53,214 (7,036)
-------- -------- --------
Total stockholders' equity (deficit)...... 52,345 54,373 (5,877)
-------- -------- --------
TOTAL......................................... $121,184 $136,486 $132,099
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTH
YEARS ENDED JULY 31, PERIOD ENDED
------------------------- DECEMBER 31,
1995 1996 1997 1997
------- ------- ------- ------------
<S> <C> <C> <C> <C>
NET REVENUES:
Timber and wood products............. $63,148 $59,137 $74,262 $37,710
River construction................... 22,797 23,108 16,688 11,691
Commercial real estate............... 3,299 3,037 2,927 1,392
Other................................ 2,421 2,878 3,031 1,692
------- ------- ------- --------
Total.............................. 91,665 88,160 96,908 52,485
COSTS AND EXPENSES:
Timber and wood products............. 51,976 49,724 60,825 29,341
River construction................... 18,102 19,221 15,097 11,003
Commercial real estate............... 1,746 1,788 1,601 667
Selling, administrative, and general. 5,575 5,526 6,026 3,059
Other................................ 737 776 1,506 1,425
------- ------- ------- --------
Total.............................. 78,136 77,035 85,055 45,495
INCOME FROM OPERATIONS................. 13,529 11,125 11,853 6,990
OTHER INCOME (EXPENSE):
Interest income...................... 110 266 469 35
Interest expense..................... (1,601) (2,634) (3,380) (2,374)
Gain (loss) on sales of assets....... (335) 353 2,419 (5,216)
------- ------- ------- --------
Total other expense--net........... (1,826) (2,015) (492) (7,555)
------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAX
(EXPENSE) BENEFIT AND MINORITY
INTEREST.............................. 11,703 9,110 11,361 (565)
INCOME TAX (EXPENSE) BENEFIT........... (4,042) (3,023) (3,891) 629
------- ------- ------- --------
INCOME BEFORE MINORITY INTEREST........ 7,661 6,087 7,470 64
MINORITY INTEREST IN INCOME OF
CONSOLIDATED LIMITED PARTNERSHIP...... (1,820) (1,380)
------- ------- ------- --------
NET INCOME (LOSS)...................... $ 7,661 $ 6,087 $ 5,650 $ (1,316)
======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND FIVE-MONTH PERIOD ENDED DECEMBER
31,1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED
NUMBER EARNINGS
OF SHARES AMOUNT (DEFICIT) TOTAL
--------- ------ --------- --------
<S> <C> <C> <C> <C>
BALANCES AT JULY 31, 1994................ 581.54 $1,163 $ 44,484 $ 45,647
Cash dividends declared ($5,250 per
share)................................ (3,053) (3,053)
Dividend of shares of Anderson-Tully
Veneers, L.P.......................... (229) (229)
Net income............................. 7,661 7,661
------ ------ -------- --------
BALANCES AT JULY 31, 1995................ 581.54 1,163 48,863 50,026
Cash dividends declared ($6,230 per
share)................................ (3,618) (3,618)
Repurchase and retirement of common
stock................................. (2.00) (4) (146) (150)
Net income............................. 6,087 6,087
------ ------ -------- --------
BALANCES AT JULY 31, 1996................ 579.54 1,159 51,186 52,345
Cash dividends declared ($6,250 per
share)................................ (3,622) (3,622)
Net income............................. 5,650 5,650
------ ------ -------- --------
BALANCES AT JULY 31, 1997................ 579.54 1,159 53,214 54,373
Cash dividends declared ($101,190 per
share)................................ (58,645) (58,645)
Dividend of assets to Anderson-Tully
Veneers, L,P.......................... (289) (289)
Net loss............................... (1,316) (1,316)
------ ------ -------- --------
BALANCES AT DECEMBER 31, 1997............ 579.54 $1,159 $ (7,036) $ (5,877)
====== ====== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTH
YEARS ENDED JULY 31, PERIOD ENDED
---------------------------- DECEMBER 31,
1995 1996 1997 1997
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).................. $ 7,661 $ 6,087 $ 5,650 $ (1,316)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 4,026 5,107 7,401 3,425
Depletion.......................... 1,200 1,915 1,359 1,054
Deferred income taxes.............. 72 2,275 2,589 (2,166)
Minority interest in earnings of
consolidated limited partnership.. 1,820 1,380
(Gain) loss on sale of assets...... 335 (353) (2,419) 5,216
Changes in assets and liabilities:
Accounts receivable................ (747) 1,980 (2,900) (1,365)
Inventories........................ (2,639) 669 1,559 (624)
Other assets....................... (561) (926) (284) (680)
Accounts payable and accrued
expenses.......................... 991 (211) 1,365 2,693
Accrued and refundable income
taxes............................. 1,119 (1,427) 2,272 366
Deferred revenues.................. (998) (792) 917
Long-term liabilities.............. (697) (149) (6) 336
-------- -------- -------- --------
Net cash provided by operating
activities...................... 9,762 14,175 18,406 9,236
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sales of plant
property.......................... 2,256 1,086 1,130 250
Purchases of plant property........ (17,538) (28,339) (14,148) (2,366)
Proceeds from sales of timber and
timberland........................ 1,077
Purchases of timber and timberland. (2,239) (1,307) (10) (368)
Proceeds from sales of commercial
real estate....................... 9,604
Purchases of commercial real
estate............................ (28) (197) (16,940)
Collections of notes receivable.... 1,750
Proceeds from maturities of short-
term investments.................. 200 200 200 100
Purchases of short-term
investments....................... (200) (200) (200) (117)
-------- -------- -------- --------
Net cash used in investing
activities...................... (17,549) (27,007) (19,287) (2,501)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Dividends paid..................... (3,282) (3,504) (3,594) (59,368)
Distributions to limited partners.. (524) (379)
Purchases of treasury stock........ (150)
Net proceeds from (principal
payments on) lines of credit...... 2,629 2,996 (3,750) 4,222
Proceeds from issuance of long-term
debt.............................. 9,820 14,467 13,636 96,500
Principal payments of long-term
debt.............................. (2,169) (1,154) (3,326) (47,748)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities............ 6,998 12,655 2,442 (6,773)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (789) (177) 1,561 (38)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 1,154 365 188 1,749
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 365 $ 188 $ 1,749 $ 1,711
======== ======== ======== ========
SUPPLEMENTAL INFORMATION:
Income taxes paid during the
period............................ $ 2,734 $ 2,173 $ 108 $ 1,174
Interest paid during the period.... 1,379 2,978 3,517 1,713
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company acquired plant property with a total cost of $3,271 in 1995 and
$444 in 1996 by incurring capitalized lease obligations of $1,320 and $444,
respectively, and a note payable of $1,951 in 1995.
During the five-month period ended December 31, 1997, the Company allowed the
payor on its note receivable with a principal balance totalling $7,218 plus
interest to satisfy its obligation by rolling the balance over to a new note
with a principal balance of $7,225.
As of December 31, 1997, the Company sold its inventories and plant property
associated with its Memphis, Tennessee laminated flooring plant for
consideration consisting of $100 cash and notes receivable totalling $4,900.
See notes to consolidated financial statements.
F-16
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1996, AND 1997
AND FIVE-MONTH PERIOD ENDED DECEMBER 31 1997
(IN THOUSANDS)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements include the
accounts of Anderson-Tully Company (the "Company"), its wholly-owned
subsidiaries, Patton-Tully Transportation Company, Tenarc Construction Company
("Tenarc"), Biomass Management Corporation ("Biomass"), and Brickeys Stone
Company, and a limited partnership, Anderson-Tully Veneers, L.P. ("AT Veneers"
or the "Partnership") (collectively, the "Companies"). All material
intercompany transactions have been eliminated. (Also see Note 12.)
The Company serves as managing general partner of the Partnership, holding
an approximate one percent interest in such. Remaining partnership capital is
held in the form of limited partnership interests. The Company, as managing
general partner, controls the operations of the Partnership and guarantees the
Partnership's debt; accordingly, the financial statements of the Partnership
are included in the Company's accompanying consolidated financial statements.
Minority interest is recognized for the limited partners' interest in the
financial position and operations of the Partnership.
Cash and Cash Equivalents--Highly liquid debt instruments purchased with
original maturities of three months or less from the date of purchase are
considered to be cash equivalents.
Inventories--Wood products and supplies inventories are stated primarily at
cost (first-in, first-out method). Costs applicable to growing crops are
capitalized. Lumber and log inventories are stated at cost (last-in, first-out
cost method).
Timber and Timberland--Timber and timberland are recorded at cost. The
Company does not capitalize timber carrying costs. Depletion of timber costs
is provided on footages cut at rates based on estimated recoverable timber in
each tract (cost depletion).
Plant Property--Plant property is stated at cost. Depreciation is provided
over estimated useful lives using the straight-line method.
Commercial Real Estate--The Company accounts for its undivided interests in
commercial real estate using the prorata consolidation method. Depreciation of
buildings is provided over their estimated useful lives, generally forty
years. The partnership interest is carried on the equity method.
Income Taxes--Current income taxes reflect taxes provided for and payable on
the earnings of the Company and its subsidiaries. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes of the Company and its subsidiaries.
Federal income taxes are not payable by, or provided for, the Partnership;
partners are taxed individually on their share of partnership earnings.
Change of Year-End--In 1997 the Board of Directors approved a change in the
Company's fiscal year-end from July 31 to December 31. Fiscal years presented
and referred to in these financial statements are on a July 31 fiscal year
basis unless otherwise indicated.
F-17
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Revenue Recognition--Revenues from product sales (timber and wood products
operations) are recognized upon shipment of product; provision for estimated
sales returns is not deemed necessary based on historical returns rates and
current business conditions.
Revenues from river construction contracts are recognized using the
percentage-of-completion method measured by the percentage of costs incurred
to date to total estimated costs for each contract. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
Regarding commercial real estate, shopping center space is generally leased
to retail tenants under short- and intermediate-term leases which are
accounted for as operating leases. The warehouse leases are similar in nature,
except that the tenants are generally manufacturers and/or distributors of
products. Minimum rents are recognized on an accrual basis as earned, the
result of which do not differ materially from the straight-line method.
Percentage rents, common area maintenance ("CAM"), and other recoveries are
recognized on an accrual basis as earned.
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 assets and 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.
Fair Value of Financial Instruments--In accordance with the requirements of
FASB No. 107, "Disclosures About Fair Value of Financial Instruments," the
estimated fair value of the Companies' financial instruments has been
determined by the Company using available market information. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the fair values are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions may have a
material effect on the estimated fair value amounts. The carrying amounts of
cash, certificates of deposit, accounts receivable, accounts payable, and
long-term debt are considered to be a reasonable estimate of their fair value.
Concentration of Credit Risk--Financial instruments which potentially
subject the Companies to a concentration of credit risk principally consist of
cash, certificates of deposit, trade accounts receivable, and notes
receivable. The Companies maintain their cash balances and certificates of
deposit with large regional or national financial institutions and have not
experienced losses related to these items. The Companies' sales are
principally to U.S. governmental entities (as to river construction) and to
customers in the furniture manufacturing, distribution, and residential
flooring industries in the United States and overseas. No additional credit
risk beyond amounts provided for collection losses is believed inherent in the
Companies' trade accounts receivable balances.
Effect of Recently Issued Accounting Standards--In June 1997, the Financial
Accounting Standards Board issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is required to be
adopted during the Company's first fiscal year beginning after December 15,
1997. At that time, the Company will be required to conform its method of
reporting
F-18
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
industry segment data to new standards and, if necessary, to restate all prior
periods. Under the new requirements, industry segment data will be reported
according to internal reporting segments utilized by management in running the
Company's operations. Statement No. 131 is expected to result in the reporting
of additional segregation of data for the Company's timber and wood products
operations than are currently presented in Note 10.
2. INVENTORIES
Inventories consist of the following at July 31, 1996 and 1997 and December
31, 1997:
<TABLE>
<CAPTION>
JULY 31,
------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Lumber............................................ $3,869 $2,040 $1,663
Wood products..................................... 209 947 774
Logs.............................................. 1,099 606 1,883
Supplies.......................................... 930 857 778
Growing crops..................................... 234 333 310
------ ------ ------
Total........................................... $6,341 $4,783 $5,408
====== ====== ======
</TABLE>
The LIFO reserve related to the lumber and log inventories totalled $5,159,
$4,692, and $3,825 at July 31, 1996 and 1997 and December 31, 1997,
respectively. In the five months ended December 31, 1997, the liquidation of
LIFO inventories decreased cost of sales and, therefore, increased income
before taxes by $377.
3. PLANT PROPERTY
Plant property consists of the following at July 31, 1996 and 1997 and
December 31, 1997:
<TABLE>
<CAPTION>
JULY 31,
---------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
Land.......................................... $ 1,203 $ 1,439 $ 1,155
Buildings..................................... 10,441 11,854 10,495
Machinery and equipment....................... 84,766 105,207 85,495
Computer equipment under capital leases....... 1,764 1,764 1,764
Construction in progress...................... 10,395 885 1,784
------- ------- -------
Total....................................... 108,569 121,149 100,693
Less accumulated depreciation................. (39,876) (45,675) (36,393)
------- ------- -------
Plant property--net........................... $68,693 $75,474 $64,300
======= ======= =======
</TABLE>
On December 31, 1997 the Company sold the assets related to its laminated
truck flooring plant for cash of $100 and notes receivable of $4,900. The
notes receivable bear interest at the prime rate and mature June 30, 1998. The
sale resulted in a loss of approximately $5,100.
F-19
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
4.EMPLOYEE BENEFIT PLANS
The Companies have two defined benefit pension plans covering substantially
all hourly and salaried employees. The benefits under the hourly plan are
based on fixed benefit rates and years of service. The benefits under the
salary plan are based on years of service and the employee's highest average
compensation for any five years of service. The Company's funding policy for
each plan is to make at least the minimum contribution required by the
Employee Retirement Income and Security Act of 1974. Contributions provide for
current benefits as well as expected future benefits. The investments of the
plans consist principally of general investment accumulated funds administered
by the trustees.
Net expense for the years ended July 31, 1995, 1996, and 1997 and the five-
month period ended December 31, 1997 included the following:
<TABLE>
<CAPTION>
JULY 31,
------------------ DECEMBER 31,
1995 1996 1997 1997
---- ------ ---- ------------
<S> <C> <C> <C> <C>
Service cost................................ $318 $ 330 $336 $139
Interest cost............................... 814 786 796 330
Actual return on plan assets................ (279) (1,637) (900) (125)
Net amortization and deferral............... (322) 1,061 204 63
---- ------ ---- ----
Net periodic pension cost................. $531 $ 540 $436 $407
==== ====== ==== ====
</TABLE>
Assumptions used in the computations are as follows:
<TABLE>
<CAPTION>
JANUARY 1,
---------------------
1995 1996 1997
---- ---- ---------
<S> <C> <C> <C>
Assumed discount rate.................................... 7.0% 6.5% 6.5%-7.5%
Rates of increase in compensation levels for salaried
employees............................................... 5.0% 5.0% 5.0%
Expected long-term rate of return on assets.............. 7.0% 6.5% 6.5%
</TABLE>
The following table sets forth the plans' funded status and amounts
recognized in the Company's balance sheets as of July 31, 1996 and 1997. A
separate actuarial valuation was not prepared for the December 31, 1997
transition period; however, amounts are not expected to differ significantly
from those shown below.
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefits......................................... $10,100 $10,354
Nonvested benefits...................................... 129 114
------- -------
Accumulated benefit obligation........................ $10,229 $10,468
======= =======
Projected benefit obligation.............................. $11,357 $11,755
Plan assets at fair value................................. 10,896 11,214
------- -------
Excess of projected benefit obligation over fair value
of plan assets....................................... (461) (541)
Unrecognized net gain..................................... (579) (365)
Unrecognized prior service cost........................... 59 55
------- -------
Accrued pension cost.................................. $ (981) $ (851)
======= =======
</TABLE>
F-20
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
5. COMMERCIAL REAL ESTATE
Commercial real estate consists of the following at July 31, 1996 and 1997
and December 31, 1997:
<TABLE>
<CAPTION>
JULY 31,
--------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
Undeveloped commercial land.................... $ 536
Partnership interest of 24% in a shopping cen-
ter
complex....................................... 1,837 $ 1,786 $ 1,773
Undivided interests of 25% in two shopping cen-
ters.......................................... 4,986 4,883 4,839
Undivided interests of 100% in shopping cen-
ters.......................................... 13,940 5,484 5,433
Undivided interest of 50% in one warehouse..... 1,086 1,055 1,042
Undivided interest of 100% in one warehouse.... 9,581 9,489
Note receivable, secured by a deed of trust on
a warehouse, interest at prime, maturing
December 31, 1998............................. 7,218 7,225
------- ------- -------
Commercial real estate....................... $22,385 $30,007 $29,801
======= ======= =======
</TABLE>
6. LINE OF CREDIT ARRANGEMENTS
At December 31, 1997, the Companies had two unsecured lines of credit
totalling $16,500 under which borrowings of $9,119 were outstanding, leaving
$7,381 available for unrestricted usage. Each of the lines is a direct
obligation of or unconditionally guaranteed by the Company. Borrowings are at
floating rates of 30- to 90-day LIBOR plus 1.2%--1.5%, totalling 7.17%--7.48%
at December 31, 1997. One of the lines of credit, totalling $7,500, expires
November 30, 1998; the other, totalling $9,000, expires January 1, 1999.
7. LONG-TERM DEBT AND CAPITALIZED LEASES
Long-term debt, all of which is a direct obligation of or unconditionally
guaranteed by the Company, consists of the following at July 31, 1996 and 1997
and December 31, 1997:
<TABLE>
<CAPTION>
JULY 31,
------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Note payable to corporation, 6%, due on demand
beginning June 1, 1999 or, if not demanded
previously, due October 1, 2002, unsecured.... $50,000
Notes payable bank line of credit, due November
30, 1998, with variable interest rates (7.48%
at December 31, 1997). The notes are
unsecured..................................... $1,000 $4,000 2,000
Notes payable bank line of credit, due January
1, 1999, with variable interest rates (7.17%
at December 31, 1997). The notes are
unsecured..................................... 7,646 897 7,119
</TABLE>
F-21
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31,
---------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
Notes payable finance institutions, due in
varying amounts to September 2009, with in-
terest ranging from 7.56% to 9.875%. The
notes are collateralized by a 25% interest
in two shopping centers and a 100% interest
in one shopping center..................... $ 8,713 $ 8,465 $ 8,378
Notes payable bank, due in monthly
installmentsof $86 through June 2002, with
the remaining balance due July 2002, at
floating rates (6.92% at December 31,
1997). The note is collateralized by a 100%
interest in an industrial warehouse........ 9,514 9,387
Note payable finance institution, due in
monthly installments of $22 through Septem-
ber 2000, and the remaining unpaid balance
due October 2000, with an interest rate of
10%. The note is collateralized by a 50%
interest in an industrial warehouse........ 1,198 1,185 1,180
Note payable finance institution, due in
monthly installments of $5 through February
2000, with an interest rate of 7.50%. The
note is collateralized by machinery........ 140 119
Notes payable individuals, due in annual in-
stallments of $316 principal and interest
through September 2004, with an interest
rate of 7.25%.............................. 2,126 1,941 1,745
Notes payable finance institution, due in
varying monthly installments through March
2005 at floating rates (7.17% at December
31, 1997). The notes are collateralized by
machinery and equipment.................... 11,000 10,953 10,934
Notes payable finance institution, due in
monthly installments of $29 through Septem-
ber 2002, with an interest rate of 7.3%.
The note is collataralized by a motor ves-
sel........................................ 1,706 1,423 1,362
Notes payable finance institution, due in
total on September 22, 1997, prime rate,
collateralized by a shopping center........ 1,000
Loan payable, city, due in annual install-
ments of $100 principal plus interest
through December 2010, with interest at
2.00%. The loan is secured by an irrevoca-
ble standby letter of credit issued by a
bank (see Note 11)......................... 1,500 1,400 1,300
Loan payable, state agency, due in
monthlyinstallments of principal and inter-
est approximating $153 through June 2006,
with variable interest rates (7.17% at De-
cember 31, 1997). The loan is unsecured.... 7,359 10,256 9,744
Capitalized lease obligations due in varying
monthly installments through February 2000,
with interest rates of 7.78% to 9.47%...... 1,361 996 875
------- ------- -------
Total....................................... 44,609 51,170 104,143
Less current portion........................ (1,805) (4,826) (7,356)
------- ------- -------
Long-term debt.............................. $42,804 $46,344 $96,787
======= ======= =======
</TABLE>
F-22
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Principal payments due in each of the next five years ended December 31 and
thereafter are as follows:
<TABLE>
<CAPTION>
CAPITALIZED NOTES AND TOTAL
LEASE OBLIGATIONS LOANS PAYABLE LONG-TERM DEBT
----------------- ------------- --------------
<S> <C> <C> <C>
1998.......................... $387 $ 6,969 $ 7,356
1999.......................... 417 62,092 62,509
2000.......................... 71 5,149 5,220
2001.......................... 5,816 5,816
2002.......................... 11,639 11,639
Thereafter.................... 11,603 11,603
---- -------- --------
Total....................... $875 $103,268 $104,143
==== ======== ========
</TABLE>
For certain of its debt obligations, the Company is subject to covenants
obligating it to maintain specified ratios of cash flows to interest expense
and of total liabilities to adjusted timber value, all terms as defined in the
relevant agreements. The Company was in compliance with these ratios at
December 31, 1997. In addition, during 1998 the Company will become subject to
a fixed charge coverage ratio covenant for its operations from January 1, 1998
forward.
Interest expense related to the notes collateralized by real estate totalled
$854, $873, $970, and $682 for the years ended July 31, 1995, 1996, and 1997
and the five-month period ended December 31, 1997, respectively. Interest
costs totalling $301 and $211 for the years ended July 31, 1996 and 1997,
respectively, were incurred in conjunction with the Partnership's construction
of its plant property and have been capitalized as a part of its cost.
The Company is lessee of certain computer equipment under capital leases
expiring February 20, 2000. The assets and liabilities under capital leases
are recorded at the present value of the minimum lease payments, which
approximates fair value of the assets. The assets are amortized over the lower
of their related lease terms or their estimated productive lives. Amortization
of assets under capital leases is included in depreciation expense in the
accompanying financial statements.
8. INCOME TAXES
The components of income tax expense (benefit), attributable to the Company
and its wholly-owned subsidiaries, consisted of the following for the years
ended July 31, 1995, 1996, and 1997 and the five-month period ended December
31, 1997:
<TABLE>
<CAPTION>
JULY 31,
-------------------- DECEMBER 31,
1995 1996 1997 1997
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Current.................................... $3,970 $ 748 $1,302 $1,537
Deferred................................... 72 2,275 2,589 (2,166)
------ ------ ------ ------
Total income tax expense (benefit)....... $4,042 $3,023 $3,891 $ (629)
====== ====== ====== ======
</TABLE>
F-23
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
A reconciliation of the Company's actual income taxes for the years ended
July 31, 1995, 1996, and 1997 and the five-month period ended December 31,
1997 to that obtained by applying the U.S. federal statutory income tax rate
against income before income taxes and minority interest is as follows:
<TABLE>
<CAPTION>
JULY 31,
---------------------- DECEMBER 31,
1995 1996 1997 1997
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Federal income tax expense (benefit),
at U.S. federal statutory rate........ $4,096 $3,189 $3,976 $(198)
Effect of state income taxes, net of
federal benefit....................... 361 213 372 (76)
Effect of usage of alternative energy
source credits........................ (384) (450)
Effect of consolidated minority inter-
est not subject to federal income tax
(related to the Partnership's income). (627) (485)
Other differences...................... (31) 71 170 130
------ ------ ------ -----
Income tax expense (benefit)......... $4,042 $3,023 $3,891 $(629)
====== ====== ====== =====
</TABLE>
Deferred income taxes result from temporary differences between the carrying
amounts of assets and liabilities for income tax and financial reporting
purposes for the Company and its wholly-owned subsidiaries. The tax effects of
significant items comprising the Company's deferred taxes as of July 31, 1996
and 1997 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
JULY 31,
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Uniform capitalization of inventory...... $ 424 $ 331 $ 291
Pension plans and deferred compensation.. 685 569 341
Vacation pay............................. 119 128 17
Workers' compensation and hospitalization
insurance reserves...................... 479 524 731
Alternative minimum tax credit and other
carryforwards........................... 343 469
All other................................ 292 138 73
-------- -------- --------
Total deferred tax assets.............. 1,999 2,033 1,922
Deferred tax liabilities--differences be-
tween
financial reporting and income tax bases
of:
Plant property........................... (6,851) (8,982) (6,773)
Commercial real estate................... (7,438) (7,930) (7,862)
-------- -------- --------
Total deferred tax liabilities......... (14,289) (16,912) (14,635)
-------- -------- --------
Net deferred tax liability............. $(12,290) $(14,879) $(12,713)
======== ======== ========
</TABLE>
Federal income taxes are not payable by, or provided for, the Partnership.
F-24
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
9. CONTRACTS IN PROGRESS
Amounts with respect to river construction contracts in progress as of July
31, 1996 and 1997 and December 31, 1997, which are included in accounts
receivable in the accompanying financial statements, are as follows:
<TABLE>
<CAPTION>
JULY 31,
------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Costs incurred on contracts in progress and es-
timated earnings on contracts in progress..... $5,919 $4,816 $6,954
Less billings to date on contracts in progress. 5,903 4,905 6,766
------ ------ ------
Net.......................................... $ 16 $ (89) $ 188
====== ====== ======
Costs and estimated earnings in excess of bill-
ings on uncompleted contracts................. $ 35 $ 90 $ 188
Billings in excess of costs and estimated earn-
ings on uncompleted contracts................. 19 179
------ ------ ------
Net.......................................... $ 16 $ (89) $ 188
====== ====== ======
</TABLE>
As of December 31, 1997, the Company had a contractual obligations backlog,
consisting of revenues to be recognized on signed contracts, of approximately
$2,090.
10. INDUSTRY SEGMENT DATA AND MAJOR CUSTOMERS
The Company principally operates in three industries: timber and wood
products operations, river construction contract operations, and commercial
real estate operations. Timber and wood product operations consist of the
management of the Company's forested lands and acquisition of logging rights
to other lands, contracting for the logging thereon, and the sale and/or
processing of the logs into lumber and wood products. River construction
contracts are performed principally for U.S. governmental entities, with
revenues from these entities totalling $16,269, $15,723, $8,017, and $8,954
for the years ended July 31, 1995, 1996, and 1997, and for the five-month
period ended December 31, 1997, respectively. Commercial real estate
operations consist principally of the Company's ownership of varying
percentages of undivided interests in shopping centers or warehouses, or of
partnerships owning these, with revenues being received from occupying
tenants.
F-25
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Financial information, summarized by industry segment, is as follows:
<TABLE>
<CAPTION>
COMMERCIAL
YEAR ENDED TIMBER AND RIVER REAL
JULY 31, 1995 WOOD PRODUCTS CONSTRUCTION ESTATE OTHER ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues:
Unaffiliated customers:
Domestic............... $50,884 $22,797 $ 3,299 $2,421 $ 79,401
Export................. 12,264 12,264
Intersegment sales..... 1,179 $(1,179)
------- ------- ------- ------ ------- --------
Total................. $63,148 $23,976 $ 3,299 $2,421 $(1,179) $ 91,665
======= ======= ======= ====== ======= ========
Income from operations.. $ 7,184 $ 3,254 $ 1,345 $1,746 $ 13,529
------- ------- ------- ------ --------
Identifiable assets..... $57,566 $13,145 $22,941 $ 820 $ 94,472
------- ------- ------- ------
Corporate assets........ 7,168
--------
Total assets.......... $101,640
========
Depreciation and
amortization expense... $ 2,707 $ 852 $ 394 $ 73 $ 4,026
------- ------- ------- ------ --------
Capital expenditures.... $18,030 $ 1,590 $ 40 $ 145 $ 19,805
------- ------- ------- ------ --------
<CAPTION>
COMMERCIAL
YEAR ENDED TIMBER AND RIVER REAL
JULY 31, 1996 WOOD PRODUCTS CONSTRUCTION ESTATE OTHER ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues:
Unaffiliated customers:
Domestic............... $48,914 $23,108 $ 3,037 $2,878 $ 77,937
Export................. 10,223 10,223
Intersegment sales..... 1,003 $(1,003)
------- ------- ------- ------ ------- --------
Total................. $59,137 $24,111 $ 3,037 $2,878 $(1,003) $ 88,160
======= ======= ======= ====== ======= ========
Income from operations.. $ 5,602 $ 2,399 $ 1,056 $2,068 $ 11,125
------- ------- ------- ------ --------
Identifiable assets..... $73,765 $13,865 $22,636 $1,433 $111,699
------- ------- ------- ------
Corporate assets........ 9,485
--------
Total assets.......... $121,184
========
Depreciation and
amortization expense... $ 3,646 $ 973 $ 402 $ 86 $ 5,107
------- ------- ------- ------ --------
Capital expenditures.... $25,143 $ 3,809 $ 298 $ 593 $ 29,843
------- ------- ------- ------ --------
<CAPTION>
COMMERCIAL
YEAR ENDED TIMBER AND RIVER REAL
JULY 31, 1997 WOOD PRODUCTS CONSTRUCTION ESTATE OTHER ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues:
Unaffiliated customers:
Domestic............... $66,691 $16,688 $ 2,927 $3,031 $ 89,337
Export................. 7,571 7,571
Intersegment sales..... 1,028 $(1,028)
------- ------- ------- ------ ------- --------
Total................. $74,262 $17,716 $ 2,927 $3,031 $(1,028) $ 96,908
======= ======= ======= ====== ======= ========
Income from operations.. $ 8,250 $ 426 $ 1,123 $2,054 $ 11,853
------- ------- ------- ------ ========
Identifiable assets..... $79,006 $15,636 $30,167 $1,769 $126,578
------- ------- ------- ------
Corporate assets........ 9,908
--------
Total assets.......... $136,486
========
Depreciation and
amortization expense... $ 5,757 $ 1,111 $ 432 $ 101 $ 7,401
------- ------- ------- ------ --------
Capital expenditures.... $11,637 $ 2,168 $16,987 $ 306 $ 31,098
------- ------- ------- ------ --------
</TABLE>
F-26
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTH
PERIOD ENDED COMMERCIAL
DECEMBER 31, TIMBER AND RIVER REAL
1997 WOOD PRODUCTS CONSTRUCTION ESTATE OTHER ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues:
Unaffiliated customers:
Domestic............... $33,083 $11,691 $ 1,392 $1,692 $ 47,858
Export................. 4,627 4,627
Intersegment sales..... 553 $(553)
------- ------- ------- ------ ----- --------
Total................. $37,710 $12,244 $ 1,392 $1,692 $(553) $ 52,485
======= ======= ======= ====== ===== ========
Income from operations.. $ 6,195 $ (19) $ 645 $ 169 $ 6,990
======= ======= ======= ====== ========
Identifiable assets..... $76,502 $16,950 $29,801 $1,667 $124,920
======= ======= ======= ======
Corporate assets........ 7,179
--------
Total assets.......... $132,099
========
Depreciation and
amortization expense... $ 2,668 $ 532 $ 200 $ 25 $ 3,425
======= ======= ======= ====== ========
Capital expenditures.... $ 2,285 $ 431 $ --- $ 18 $ 2,734
======= ======= ======= ====== ========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company leases certain equipment used in its
operations under operating leases. Payments made under these operating leases
totalled $37, $382, $630, and $225 for the years ended July 31, 1995, 1996,
and 1997 and for the five-month period ended December 31, 1997, respectively.
Operating lease payments due in each of the years ended December 31 are as
follows:
<TABLE>
<S> <C>
1998.................................................................. $ 796
1999.................................................................. 608
2000.................................................................. 368
2001.................................................................. 123
------
Total............................................................... $1,895
======
</TABLE>
Guarantee--The Company owns a 24% undivided interest in a partnership which
owns a shopping center complex. The partners guaranteed the construction and
permanent financing of the project. The Company's contingent liability
currently approximates $2,425 and will be reduced to $480 when the operating
property becomes profitable.
Litigation, Claims, and Assessments--The Companies are subject to certain
claims and litigation, including unasserted claims, in the normal course of
business. While it is not possible to predict with certainty the outcome of
these matters, it is management's opinion that the ultimate outcome will not
have a material adverse effect on the financial statements of the Companies.
Irrevocable Standby Letters of Credit--As of December 31, 1997, the
Companies have outstanding irrevocable standby letters of credit issued
related to their loan payable, city (see Note 7), and for insurance purposes,
totalling $1,894.
F-27
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
12. CHANGE IN CORPORATE STRUCTURE
As of the close of business on December 31, 1997, in order for the Company
to have a corporate structure of an allowable nature to qualify as a real
estate investment trust (a "REIT"), significant liquidations, transfers, and
exchanges were effected. The result is that the Company retains ownership of
the timberland and timber, the commercial real estate, and the farmland that
it previously owned. The logging and timber conversion related assets,
previously owned by the Company, are now owned by new companies, of which the
Company owns 100% of their preferred stock, representing 95% of their economic
value, and of which AT Veneers owns 100% of their common stock. The river
construction and management services related assets, previously owned by the
Company or its wholly-owned subsidiaries, are now owned by new companies which
are wholly-owned by AT Veneers. The approximate 1% ownership interest in AT
Veneers, previously owned by the Company, now rests with a new company which
is a wholly-owned subsidiary of the Company. The accompanying December 31,
1997 balance sheet gives effect to these transactions which have occurred
within the Company's consolidated group.
The consolidated group at December 31, 1997 consists of the Company, its
wholly-owned subsidiaries, Tenarc and Anderson-Tully GP Company ("AT GP") and
its 100% preferred stock ownership of Anderson-Tully Timber Company ("AT
Timber") and Anderson-Tully Lumber Company ("AT Lumber"). AT GP owns an
approximate 1% ownership interest in AT Veneers, which in turn directly or
indirectly owns 100% of the common stock of Anderson-Tully Management Services
LLC, AT Timber, AT Lumber, Patton-Tully Transportation LLC, and Brickeys Stone
LLC.
13. SUBSEQUENT EVENTS
On February 9, 1998, the Board of Directors of Anderson-Tully Company voted
to submit to the shareholders for their approval and adoption of a merger
agreement whereby Timberland Growth Corporation would acquire all of the
outstanding common stock of Anderson-Tully Company. Also on that date, the
Board of Directors of AT GP Company voted to submit to the limited partners of
AT Veneers for their approval and adoption of an agreement to sell to Potlatch
Corporation assets relating to the veneer operations, and the Board of
Managers of Anderson-Tully Management Services LLC approved an agreement to
sell to Potlatch Corporation all of its assets including the common stock of
AT Timber and AT Lumber. Patton-Tully Transportation LLC and Brickeys Stone
LLC and certain other assets will be retained by AT Veneers. Under the terms
of these agreements the shareholders and AT Veneers will receive, in the
aggregate, approximately $470 million, subject to certain working capital
adjustments, less outstanding debt at closing and transaction costs.
Shareholder and limited partner approval is required to consummate these
transactions; in addition, certain events must also occur, some of which are
beyond the control of the Company, to effect these transactions. In
anticipation of these transactions legal, accounting, and investment banking
fees totalling $935 as of December 31, 1997 have been deferred and recorded as
other assets in the accompanying financial statements.
The Board voted to empower the officers of the Company to take the actions
necessary to register its stock under Section 12(g) of the Securities Exchange
Act of 1934.
F-28
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
14. COMPARATIVE RESULTS OF OPERATIONS FOR THE FIVE MONTHS ENDED DECEMBER 31,
1996 (UNAUDITED)
The following unaudited results of operations for the five months ended
December 31, 1996 are presented for comparative purposes. It is management's
opinion that this information includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the results of
operations for the five months ended December 31, 1996.
<TABLE>
<S> <C>
Net revenues........................................................ $35,779
Costs and expenses.................................................. 33,048
-------
Income from operations.............................................. 2,731
Other expense, net.................................................. (673)
-------
Income before income tax expense and minority interest.............. 2,058
Income tax expense.................................................. (606)
-------
Income before minority interest..................................... 1,452
Minority interest in income of consolidated limited partnership..... (490)
-------
Net income........................................................ $ 962
=======
</TABLE>
F-29
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN-
DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 6
Risk Factors.............................................................. 17
Use of Proceeds........................................................... 29
Distribution Policy....................................................... 30
Dilution.................................................................. 34
Capitalization............................................................ 35
Selected Financial and Operating Information of the Potlatch Southern
Timberlands.............................................................. 36
Selected Consolidated Financial Information of ATCO....................... 38
Pro Forma Condensed Consolidated Financial Information.................... 39
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company................................................ 45
Management's Discussion and Analysis of Financial Condition and Results of
Operations of ATCO....................................................... 57
Business.................................................................. 62
Management................................................................ 82
Certain Policies and Objectives........................................... 89
Information Regarding Potlatch............................................ 92
The Formation Transactions................................................ 92
Certain Relationships and Transactions.................................... 94
The Partnership Agreement................................................. 95
Certain Federal Income Tax Considerations................................. 99
ERISA Considerations...................................................... 118
Principal Stockholders of the Company and Partners of the Partnership..... 121
Description of Capital Stock.............................................. 123
Certain Provisions of Delaware Law and the Company's Charter and Bylaws... 127
Shares Eligible for Future Sale........................................... 129
Underwriting.............................................................. 131
Legal Matters............................................................. 132
Experts................................................................... 132
Additional Information.................................................... 133
Glossary.................................................................. 134
Index to Financial Statements............................................. F-1
</TABLE>
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PRO-
SPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
15,000,000 SHARES
TIMBERLAND GROWTH CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
PROSPECTUS
-----------
GOLDMAN, SACHS & CO.
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
----------
<S> <C>
SEC registration fee............................................. $ 101,775
National Association of Securities Dealers, Inc. filing fee...... 30,500
New York Stock Exchange listing fee.............................. 147,600
Blue Sky fees and expenses....................................... 2,000
Accounting fees and expenses..................................... 500,000
Legal fees and expenses.......................................... 1,300,000
Printing and engraving expenses.................................. 250,000
Registrar and Transfer Agent's fees.............................. 15,000
Miscellaneous fees and expenses.................................. 653,125
----------
Total.......................................................... $3,000,000
==========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
In connection with the formation of the Registrant, in February 1998, the
Registrant issued 100 shares of Common Stock to Potlatch in return for $1,500
in cash.
In connection with the Formation Transactions (as defined in the Prospectus
contained herein), the Registrant issued one share of Special Voting Stock to
Potlatch in exchange for the shares of Common Stock previously issued to
Potlatch as described above.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
With respect to the issuances of Common Stock and Special Voting Stock
described in Item 32 above, the Registrant relied upon the exemption provided
by Section 4(2) of the Securities Act of 1933, as amended.
The recipient of the above-described securities represented its intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
such transactions. The recipient had adequate access to information about the
Registrant.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
II-1
<PAGE>
Securities Act of 1933, as amended (the "Act"). Article VIII of the
Registrant's Restated Certificate of Incorporation (Exhibit 3.2 hereto) and
Article VIII of the Registrant's Bylaws (Exhibit 3.3 hereto) provide for
indemnification of the Registrant's directors, officers, employees and other
agents to the extent and under the circumstances permitted by the Delaware
General Corporation Law. The Registrant will also enter into agreements with
its directors and certain of its officers that will require the Registrant,
among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors or officers to the
fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant, its directors and its officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Act, and affords certain rights of contribution with respect
thereto.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See Index to Financial Statements.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1+ Agreement and Plan of Merger dated as of February 9, 1998 among the
Registrant, Potlatch Corporation, Anderson-Tully Company and Beaver
Acquisition Corporation. Pursuant to Item 601(b)(2) of Regulation S-K,
certain schedules have been omitted but will be furnished
supplementally to the Commission on request.
2.2* Contribution Agreement between Potlatch Corporation and Timberland
Growth Limited Partnership. Pursuant to Item 601(b)(2) of Regulation
S-K, certain schedules have been omitted but will be furnished
supplementally to the Commission on request.
3.1+ Certificate of Incorporation of the Registrant.
3.2 Form of Restated Certificate of Incorporation of the Registrant to be
effective on or prior to the Consummation of the offering made hereby.
3.3 Bylaws of the Registrant.
4.1 Form of Common Stock Certificate.
4.2 Form of Special Voting Stock Certificate.
4.3 Form of Registration Rights Agreement between the Registrant and
Potlatch Corporation to be executed prior to the effective date of
this Registration Statement.
4.4* Form of Revolving Credit Agreement between the Registrant and [bank].
5.1* Opinion of Pillsbury Madison & Sutro LLP as to certain matters
regarding of the shares of Common Stock offered hereby.
8.1* Opinion of Pillsbury Madison & Sutro LLP as to tax matters.
10.1 Amended and Restated Agreement of Limited Partnership of Timberland
Growth Limited Partnership.
10.2 Timberland Management and Timber Purchase Agreement dated as of
, 1998 between Potlatch Corporation and Timberland Growth
Limited Partnership.
10.3* Administrative Services Agreement dated as of , 1998 between
Potlatch Corporation and the Registrant.
10.4 Opportunities Agreement dated as of , 1998 among Potlatch
Corporation, the Registrant and Timberland Growth Limited Partnership.
10.5* Form of 1998 Stock Incentive Plan of the Registrant.
10.6* Form of Stock Option Agreement.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.7* Form of Stock Option Agreement for Outside Directors.
10.8* Form of Deferred Compensation Plan for Directors.
10.9* Form of indemnification agreement to be executed between Registrant
and certain of its officers and directors.
10.10* Employment agreement between the Registrant and Scott R. Jones.
10.11* Employment agreement between the Registrant and Allan F. Trinkwald.
10.12* Form of Timberland Growth Corporation Severance Plan for Executive
Employees.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3* Consent of Skadden, Arps, Slate, Meagher & Flom LLP.
23.4* Consent of Pillsbury Madison & Sutro LLP (included in Exhibits 5.1 and
8.1)
24.1+ Power of Attorney (see Page II-4).
27.1+ Financial Data Schedule.
99.1+ Consent of prospective director Christine Garvey.
99.2+ Consent of prospective director Parnell S. Lewis, Jr.
99.3+ Consent of prospective director James F. Rippey.
99.4+ Consent of prospective director Will M. Storey.
99.5+ Consent of prospective director Frederick T. Weyerhaeuser.
99.6+ Consent of prospective director and officer Scott R. Jones.
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
ITEM 37. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) It will provide to the underwriters at the closing(s) specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS AMENDMENT TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF SPOKANE, STATE OF WASHINGTON, ON THE
28TH DAY OF APRIL, 1998.
Timberland Growth Corporation
/s/ John M. Richards
By: _________________________________
JOHN M. RICHARDS PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ John M. Richards President and Chief
- ------------------------------------- Financial Officer April 28, 1998
JOHN M. RICHARDS (Principal
Executive,
Financial and
Accounting Officer)
and Director
II-4
<PAGE>
EXHIBIT 3.2
RESTATED CERTIFICATE OF INCORPORATION OF
----------------------------------------
TIMBERLAND GROWTH CORPORATION
-----------------------------
TIMBERLAND GROWTH CORPORATION, a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Timberland Growth Corporation.
Timberland Growth Corporation was originally incorporated under the same name,
and the original Certificate of Incorporation of the corporation was filed with
the Secretary of State of the State of Delaware on February 4, 1998.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Restated Certificate of Incorporation amends and
restates the provisions of the Certificate of Incorporation of the corporation.
3. The text of the Certificate of Incorporation of the corporation is
amended and restated to read in its entirety as follows:
I. FIRST: The name of the corporation is: Timberland Growth Corporation
-----
(hereinafter, the "Corporation").
II. SECOND: The address of the registered office of the Corporation in
------
the State of Delaware is The Corporation Trust Company, 1209 Orange Street,
in the City of Wilmington, County of New Castle. The name of its
registered agent at such address is The Corporation Trust Company.
III. THIRD: The nature of the business or purposes to be conducted or
-----
promoted is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware
(the "GCL").
IV. FOURTH: A. The total number of shares of all classes of capital
------
stock that the Corporation shall have authority to issue is Five Hundred
and Fifty Million and one (550,000,001) shares of which (i) Two Hundred and
Fifty Million (250,000,000) shares shall be shares of Common Stock, par
value $.01 per share (the "Common Stock"), and One (1) share shall be a
share of Special Voting Common Stock, par value $.01 per share (the
"Special Voting Stock") (the Common Stock and the Special Voting Stock
being collectively referred to herein as the "Common Equity"), (ii) Two
Hundred and Fifty Million (250,000,000) shares shall be shares of Excess
Stock, par value $.01 per share (the "Excess Stock"), and (iii) Fifty
Million
-1-
<PAGE>
(50,000,000) shares shall be shares of Preferred Stock, par value $.01 per
share (the "Preferred Stock").
B. The number of authorized shares of any class or classes of capital
stock may be increased or decreased (but not below the number of shares
thereof then outstanding) by the affirmative vote of the holders of a
majority of the total voting power of the shares of capital stock entitled
to vote thereon, voting together as a single class, and without the vote of
the holders of such class or each such class; provided, however, that the
authorized number of shares of Special Voting Stock may not be increased
without the unanimous vote of all holders of Common Equity.
C. The following is a statement of the powers, preferences, and
relative participating, optional or other special rights and
qualifications, limitations and restrictions of the Common Stock and
Special Voting Stock of the Corporation:
1. Except as otherwise set forth below in this ARTICLE FOURTH,
the powers, preferences and relative participating, optional or other
special rights and qualifications, limitations or restrictions of the
Common Stock and Special Voting Stock shall be identical in all
respects.
2. Subject to the rights of the holders of Preferred Stock, and
subject to any other provisions of this Certificate of Incorporation,
holders of Common Stock and Special Voting Stock shall be entitled to
receive such dividends and other distributions in cash, stock or
property of the Corporation as may be declared thereon by the Board of
Directors of the Corporation from time to time out of assets or funds
of the Corporation legally available therefor. If any dividend or
other distribution in cash or other property is paid with respect to
Common Stock or with respect to Special Voting Stock (other than in
connection with a subdivision of the Common Stock), a like dividend or
other distribution in cash or other property shall also be paid with
respect to shares of the other class of Common Equity, in an equal
amount per share. The shares of Common Stock may be reclassified,
subdivided or combined, but, without the unanimous vote of all holders
of Common Equity, the share of Special Voting Stock shall not be
reclassified, subdivided or combined.
3.(a) At every meeting of the stockholders of the Corporation,
every holder of Common Stock shall be entitled to one vote in person
or by proxy for each share of Common Stock standing in such holder's
name on the transfer books of
-2-
<PAGE>
the Corporation, and the holder of the Special Voting Stock shall be
entitled to the Proportionate Number of Votes (as hereinafter defined)
in person or by proxy for the share of Special Voting Stock standing
in such holder's name on the transfer books of the Corporation in
connection with the election of directors and all other matters
submitted to a vote of the stockholders. Except as may be otherwise
required by this ARTICLE FOURTH or applicable law, the holders of
Common Stock and Special Voting Stock shall vote together as a single
class, subject to any voting rights which may be granted to holders of
Preferred Stock, on all matters submitted to a vote of the holders of
Common Equity.
(b) Subject to any rights of the holders of Preferred Stock, the
provisions of this Certificate of Incorporation shall not be modified,
revised, altered or amended, repealed or rescinded in whole or in
part, without the approval of a majority (or such greater percentage
as is required by ARTICLE TENTH of this Certificate of Incorporation)
of the votes entitled to be cast by the holders of the Common Stock
and the Special Voting Stock, voting together as a single class or, in
the case of amendments or changes to this Certificate of Incorporation
to be effected by a merger, without the approval of the agreement of
merger by a majority of the votes entitled to be cast by the holders
of the Common Stock and the Special Voting Stock, voting together as a
single class; provided, however, that with respect to any proposed
amendment of this Certificate of Incorporation (including, without
limitation, an amendment to be effected by a merger) which would
increase or decrease the par value of the shares of Common Stock or
Special Voting Stock or alter or change the powers, preferences or
special rights of the shares of Common Stock or Special Voting Stock
so as to affect them adversely, the approval of a majority of the
votes entitled to be cast by the holders of the shares affected by the
proposed amendment, voting separately as a class, shall be obtained in
addition to the approval of a majority of the votes entitled to be
cast by the holders of the Common Stock and the Special Voting Stock
voting together as a single class as hereinbefore provided. Any
increase in the authorized number of shares of any class or classes of
stock of the Corporation or creation, authorization or issuance of any
additional class or series of stock or any securities convertible
into, or warrants, options or similar rights to purchase, acquire or
receive, shares of any such class or classes of stock shall be deemed
not to affect adversely the powers, preferences or
-3-
<PAGE>
special rights of the shares of Common Stock or Special Voting Stock.
4. In the event of any dissolution, liquidation or winding up of
the affairs of the Corporation, whether voluntary or involuntary,
after payment in full of the amounts required to be paid to the
holders of Preferred Stock, the remaining assets and funds of the
Corporation shall be distributed pro rata to the holders of Common
Stock and Special Voting Stock based on the number of shares
outstanding on the relevant record date. For the purposes of this
section C.4, the voluntary sale, conveyance, lease, exchange or
transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the assets of the
Corporation or a consolidation or merger of the Corporation with one
or more other corporations (whether or not the Corporation is the
corporation surviving such consolidation or merger) shall not be
deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary.
5. In the event that any shares of Common Equity are converted
into or exchanged for cash, securities or other property in connection
with any consolidation of the Corporation with one or more other
Persons (as hereinafter defined) or a merger of the Corporation with
another Person, unless immediately following such event, and resulting
solely from the ownership of the securities issued in connection
therewith, a majority of the total voting power of the surviving
Person in such consolidation or merger is held by Persons that were
stockholders of the Corporation immediately prior to such event, or
unless the holders of Common Equity unanimously vote otherwise, each
holder of a share of Common Stock shall be entitled to receive with
respect to such share the same kind and amount of shares of stock and
other securities and property (including cash) receivable upon such
consolidation or merger by a holder of a share of Special Voting
Stock, and each holder of a share of Special Voting Stock shall be
entitled to receive with respect to such share the same kind and
amount of shares of stock and other securities and property (including
cash) receivable upon such consolidation or merger by a holder of a
share of Common Stock.
6.(a) The record holder of the share of Special Voting Stock may
at any time convert such share into one share of Common Stock by
surrendering the certificate for such share, accompanied by any
required tax transfer stamps and by a written notice by such record
holder to the Corporation stating
-4-
<PAGE>
that such record holder desires to convert such share of Special
Voting Stock into one share of Common Stock and requesting that the
Corporation issue such share of Common Stock to the Persons named
therein. To the extent permitted by law, such voluntary conversion
shall be deemed to have been effected at the close of business on the
date of such surrender.
(b)(i) Except as provided in paragraph (ii) below, the share of
Special Voting Stock shall automatically convert into one share of
Common Stock immediately prior to the Transfer (as hereinafter
defined) of such share.
(ii) The share of Special Voting Stock shall not automatically
convert to Common Stock upon the Transfer of such share if such
Transfer is being made by Potlatch (as hereinafter defined) to a
Subsidiary (as hereinafter defined) of Potlatch or by a Subsidiary of
Potlatch to Potlatch or another Subsidiary of Potlatch.
(iii) If at any time the Proportionate Number of Votes which
would be accorded to the record holder of the Special Voting Stock
shall represent less than 1% of the total voting power of the shares
of Common Equity then outstanding, then the share of Special Voting
Stock shall automatically convert into one share of Common Stock.
(iv) Immediately upon any such conversion of the Special
Voting Stock, the rights of the holder of the share of Special Voting
Stock as such shall cease and such holder shall be treated for all
purposes as having become the record owner of the share of Common
Stock issuable upon such conversion; provided, however, that such
holder shall be entitled to receive when paid any dividends declared
on the Special Voting Stock as of a record date preceding the time of
such conversion and unpaid as of the time of such conversion.
(c) The holder of the share of Special Voting Stock may (i)
Transfer such share only in connection with a Transfer which meets the
qualifications of section C.6(d) below, and under no other
circumstances, or (ii) convert such share into one share of Common
Stock as provided in section C.6(a) above. No one other than that
Person in whose name the share of Special Voting Stock originally is
registered on the stock ledger of the Corporation, or transferees or
successive transferees who receive the share of Special Voting Stock
in connection with a Transfer which meets the qualifications set
-5-
<PAGE>
forth in section C.6(d) below, shall by virtue of the acquisition of
the certificate for the share of Special Voting Stock have the status
of an owner or holder of the share of Special Voting Stock or be
recognized as such by the Corporation or be otherwise entitled to
enjoy for its, his or her own benefit the special rights and powers of
a holder of the share of Special Voting Stock, and such share of
Special Voting Stock will have been converted into one share of Common
Stock immediately prior to such Transfer as hereinabove provided.
The holder of the share of Special Voting Stock may at any and
all times Transfer to any Person the share of Common Stock issuable
upon conversion of such share of Special Voting Stock, except where
such Transfer is restricted by applicable law.
(d) The share of Special Voting Stock shall be transferred on the
books of the Corporation and a new certificate therefor issued, upon
presentation at the office of the Secretary of the Corporation (or at
such additional place or places as may from time to time be designated
by the Secretary of the Corporation) of the certificate for such
share, in proper form for transfer and accompanied by all requisite
stock transfer tax stamps, only if such certificate when so presented
shall also be accompanied by any one of the following:
(i) an affidavit from Potlatch stating that such certificate is
being presented to effect a Transfer of such share by Potlatch to a
Subsidiary of Potlatch; or
(ii) an affidavit from Potlatch stating that such certificate is
being presented to effect a Transfer by any Subsidiary of Potlatch to
Potlatch or another Subsidiary of Potlatch.
Each affidavit of a record holder furnished pursuant to this
section C.6(d) shall be verified as of a date not earlier than five
days prior to the date of delivery thereof, and, where such record
holder is a corporation or partnership, shall be verified by an
officer of the corporation or by a general partner of the partnership,
as the case may be.
(e) The certificate for the share of Special Voting Stock shall
bear a legend on the face thereof reading as follows:
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"The share of Special Voting Stock represented by this
certificate may not be transferred to any person or entity unless such
transfer meets the qualifications set forth in section C.6(d) of
ARTICLE FOURTH of the Certificate of Incorporation of this Corporation
and no person who receives this share in connection with a transfer
which does not meet the qualifications prescribed by section C.6(d) of
said ARTICLE FOURTH is entitled to own or to be registered as the
record holder of this share of Special Voting Stock and this share
will have been automatically converted into one share of Common Stock
upon any such purported transfer. The record holder of this
certificate may at any time convert this share of Special Voting Stock
into one share of Common Stock. Each holder of this certificate, by
accepting the same, accepts and agrees to all of the foregoing. The
Corporation will furnish without charge, to each stockholder who so
requests, a copy of the Certificate of Incorporation of the
Corporation, containing, among other things, a statement of the
powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series
thereof that the Corporation is authorized to issue and the
qualifications, limitations or restrictions of such preferences and/or
rights. Any such request shall be addressed to the Secretary of the
Corporation."
(f) The Corporation shall not reissue or resell the share of
Special Voting Stock if such share shall have been converted into a
share of Common Stock pursuant to or as permitted by the provisions of
this section C.6, or the share of Special Voting Stock shall have been
acquired by the Corporation in any other manner. The Corporation
shall, from time to time, take such appropriate action as may be
necessary to retire such share and to reduce the authorized amount of
Special Voting Stock accordingly.
For so long as the share of Special Voting Stock is outstanding,
the Corporation shall at all times reserve and keep available, out of
its authorized but unissued Common Stock, one share of Common Stock.
(g) In connection with any Transfer or conversion of any stock of
the Corporation pursuant to or as permitted by the provisions of this
section C.6 or in connection with the making of any determination
referred to in this section C.6:
(1) the Corporation shall be under no obligation to make any
investigation of facts unless an executive officer of
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the Corporation has substantial reason to believe, or unless the Board
of Directors (or a committee of the Board of Directors designated for
such purpose) determines that there is substantial reason to believe,
that any affidavit or other document is incomplete or incorrect in a
material respect, in which case the Corporation shall make or cause to
be made such investigation as it may deem necessary or desirable in
the circumstances and have a reasonable time to complete such
investigation; and
(2) neither the Corporation nor any director, officer, employee
or agent of the Corporation shall be liable in any manner for any
action taken or omitted in good faith.
(h) The Corporation will not be required to pay any documentary,
stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of the share of Common Stock on the conversion of
the share of Special Voting Stock pursuant to this section C.6, and no
such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation,
that such tax has been paid.
7. All rights to vote and all voting power (including, without
limitation thereto, the right to elect directors) shall be vested
exclusively in the holders of Common Equity, voting together as a
single class, except as otherwise expressly provided in this
Certificate of Incorporation, in a Preferred Stock Designation (as
defined in section D of this ARTICLE FOURTH) or as otherwise expressly
required by applicable law.
D. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized to provide by
resolution or resolutions from time to time for the issuance of shares of
Preferred Stock in one or more series and, by filing a certificate pursuant
to the GCL (hereinafter, along with any similar designation relating to any
other series of Preferred Stock which may hereafter be authorized, referred
to as a "Preferred Stock Designation," each of which shall be part of this
Certificate of Incorporation), to establish from time to time the number of
shares to be included in each such series, and to fix the designation,
powers (including voting powers), preferences and rights of the shares of
each such series and the qualifications, limitations and restrictions
thereof.
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E. Restrictions on Ownership and Transfer of Equity Stock.
1. (a)(i) Except as provided in section E.3 of this ARTICLE
FOURTH, from and after the date of the Initial Public Offering (as
hereinafter defined) and until the Restriction Termination Date (as
hereinafter defined), no Person (other than the Excluded Holder) shall
Beneficially Own (as hereinafter defined) shares of Equity Stock (as
hereinafter defined) in excess of the Ownership Limit (as hereinafter
defined).
(ii) Except as provided in section E.3 of this ARTICLE
FOURTH, from and after the date of the Initial Public Offering and
until the Restriction Termination Date, any purported Transfer
(whether or not the result of a transaction entered into through the
facilities of the New York Stock Exchange or any other national
securities exchange or the Nasdaq Stock Market, Inc. or any other
automated quotation system) that, if effective, would result in any
Person (other than the Excluded Holder) Beneficially Owning shares of
Equity Stock in excess of the Ownership Limit shall be void AB INITIO
as to the Transfer of that number of shares of Equity Stock which
otherwise would be Beneficially Owned by such Person in excess of the
Ownership Limit, and the intended transferee shall acquire no rights
in such shares of Equity Stock.
(b) Until the Restriction Termination Date, any purported
Transfer (whether or not the result of a transaction entered into
through the facilities of the New York Stock Exchange or any other
national securities exchange or the Nasdaq Stock Market, Inc. or any
other automated quotation system) of shares of Equity Stock that, if
effective, would result in the Corporation being "closely held" within
the meaning of Section 856(h) of the Code (as hereinafter defined)
shall be void AB INITIO as to the Transfer of that number of shares of
Equity Stock that would cause the Corporation to be "closely held"
within the meaning of Section 856(h) of the Code, and the intended
transferee shall acquire no rights in such shares of Equity Stock.
(c) Until the Restriction Termination Date, any purported
Transfer (whether or not the result of a transaction entered into
through the facilities of the New York Stock Exchange or any other
national securities exchange or the Nasdaq Stock Market, Inc. or any
other automated quotation
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system) of shares of Equity Stock that, if effective, would cause the
Corporation to Constructively Own (as hereinafter defined) 10% or more
of the ownership interests in a tenant of the real property of the
Corporation or any direct or indirect subsidiary of the Corporation,
within the meaning of Section 856(d)(2)(B) of the Code, shall be void
AB INITIO as to the Transfer of that number of shares of Equity Stock
that would cause the Corporation to Constructively Own 10% or more of
the ownership interests in a tenant of the real property of the
Corporation or a subsidiary within the meaning of Section 856(d)(2)(B)
of the Code, and the intended transferee shall acquire no rights in
such shares of Equity Stock.
(d) Until the Restriction Termination Date, any purported
Transfer (whether or not the result of a transaction entered into
through the facilities of the New York Stock Exchange or any other
national securities exchange or the Nasdaq Stock Market, Inc. or any
other automated quotation system) of shares of Equity Stock that, if
effective, would result in shares of Equity Stock being beneficially
owned by fewer than 100 persons within the meaning of Section
856(a)(5) of the Code shall be void AB INITIO and the intended
transferee shall acquire no rights in such shares of Equity Stock.
(e) Until the Restriction Termination Date, any purported
Transfer (whether or not the result of a transaction entered into
through the facilities of the New York Stock Exchange or any other
national securities exchange or the Nasdaq Stock Market, Inc. or any
other automated quotation system) of shares of Equity Stock that, if
effective, would result in the failure of the Corporation to qualify
as a "domestically controlled REIT" within the meaning of Section
897(h)(4)(B) of the Code shall be void AB INITIO and the intended
transferee shall acquire no rights in the shares of Equity Stock which
are the subject of such purported Transfer.
(f) Until the Restriction Termination Date, any purported
Transfer (whether or not the result of a transaction entered into
through the facilities of the New York Stock Exchange or any other
national securities exchange or the Nasdaq Stock Market, Inc. or any
other automated quotation system) of shares of Equity Stock that, if
effective, would cause the Corporation to fail to qualify as a REIT
(as hereinafter defined) shall be void AB INITIO and the intended
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<PAGE>
transferee shall acquire no rights in the shares of Equity Stock which
are the subject of such purported Transfer.
2. Until the Restriction Termination Date:
(a) Every Beneficial Owner of more than 5%, or such lower
percentages as are then required pursuant to regulations under the
Code, of the outstanding shares of any class or series of Equity Stock
of the Corporation shall, within 30 days after January 1 of each year,
provide to the Corporation a written statement or affidavit stating
the name and address of such Beneficial Owner, the number of shares of
Equity Stock Beneficially Owned by such Beneficial Owner and a
description of how such shares are held. Each such Beneficial Owner
shall provide to the Corporation such additional information as the
Corporation may request in order to determine the effect, if any, of
such Beneficial Ownership on the Corporation's status as a REIT and to
ensure compliance with the Ownership Limit.
(b) Each Person who is a Beneficial Owner of shares of Equity
Stock and each Person (including the stockholder of record) who is
holding shares of Equity Stock for a Beneficial Owner shall provide to
the Corporation a written statement or affidavit stating such
information as the Corporation may request in order to determine the
Corporation's status as a REIT and to ensure compliance with the
Ownership Limit.
3. The Board of Directors, upon receipt of a ruling from the
Internal Revenue Service or an opinion of counsel or other evidence or
undertakings acceptable to it, may, in its sole discretion, waive the
application of the Ownership Limit to a Person subject to such limit,
provided that (A) the Board of Directors obtains such representations
and undertakings from such Person as are reasonably necessary to
ascertain that such Person's Beneficial Ownership or Constructive
Ownership of shares of Equity Stock will now and in the future (i) not
result in the Corporation being "closely held" within the meaning of
Section 856(h) of the Code, (ii) not cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant
of the real property of the Corporation or any direct or indirect
subsidiary of the Corporation within the meaning of Section
856(d)(2)(B) of the Code, (iii) not result in the shares of Equity
Stock of the Corporation being beneficially owned by fewer than 100
persons within the meaning of Section
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<PAGE>
856(a)(5) of the Code, and (iv) not result in the Corporation failing
to qualify as a "domestically controlled REIT" within the meaning of
Section 897(h)(4)(B) of the Code, and (B) such Person agrees in
writing that any violation or attempted violation of any other
limitations, restrictions and conditions that the Board of Directors
may in its sole discretion impose at the time of such waiver with
respect to such Person will result, as of the time of such violation
even if discovered after such violation, in the conversion of such
shares in excess of the original limit applicable to such Person into
shares of Excess Stock pursuant to section F.1 of this ARTICLE FOURTH.
4. Notwithstanding any provision contained herein to the
contrary, nothing in this Certificate of Incorporation shall preclude
the settlement of any transaction entered into through the facilities
of the New York Stock Exchange or any other national securities
exchange or the NASDAQ Stock Market, Inc. or any other automated
quotation system. In no event shall the existence or application of
the preceding sentence have the effect of deterring or preventing the
conversion of Equity Stock into Excess Stock as contemplated herein.
F. Excess Stock
1.(a) If, notwithstanding the other provisions contained in this
ARTICLE FOURTH, from and after the date of the Initial Public Offering
and prior to the Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event (as hereinafter defined) such that any
Person (other than the Excluded Holder) would Beneficially Own shares
of Equity Stock in excess of the Ownership Limit, then, (i) except as
otherwise provided in section E.3 of this ARTICLE FOURTH, the
Purported Record Transferee (as hereinafter defined) (and the
Purported Beneficial Transferee (as hereinafter defined), if
different) shall acquire no right or interest (or, in the case of a
Non-Transfer Event, the Person holding record title to the shares of
Equity Stock Beneficially Owned by such Beneficial Owner shall cease
to own any right or interest) in such number of shares of Equity Stock
which would cause such Beneficial Owner to Beneficially Own shares of
Equity Stock in excess of the Ownership Limit, (ii) such number of
shares (rounded up to the nearest whole share) of Equity Stock in
excess of the Ownership Limit shall be automatically converted into an
equal number of shares of Excess Stock and transferred to a Trust (as
hereinafter defined) in accordance with section F.4 of this ARTICLE
FOURTH and
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<PAGE>
(iii) such Purported Record Transferee (and such Purported Beneficial
Transferee, if different) or, in the case of a Non-Transfer Event, the
Person who, immediately prior to such automatic conversion, was the
holder of record title to the shares of Equity Stock automatically
converted, shall submit the certificates representing such number of
shares of Equity Stock to the Corporation, accompanied by all
requisite and duly executed assignments of Transfer thereof, for
registration in the name of the Trustee (as hereinafter defined) of
the Trust. Such conversion into Excess Stock and Transfer to a Trust
shall be effective as of the close of trading on the Trading Day (as
hereinafter defined) prior to the date of the purported Transfer or
Non-Transfer Event, as the case may be, even though the certificates
representing the shares of Equity Stock so converted may be submitted
to the Corporation at a later date.
(b) If, notwithstanding the other provisions contained in this
ARTICLE FOURTH, prior to the Restriction Termination Date there is a
purported Transfer or Non-Transfer Event that, if effective, would (i)
result in the Corporation being "closely held" within the meaning of
Section 856(h) of the Code, (ii) cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant
of the real property of the Corporation or any direct or indirect
subsidiary of the Corporation within the meaning of Section
856(d)(2)(B) of the Code, (iii) result in the shares of Equity Stock
being beneficially owned by fewer than 100 persons within the meaning
of Section 856(a)(5) of the Code, (iv) result in the Corporation
failing to qualify as a "domestically controlled REIT" within the
meaning of Section 897(h)(4)(B) of the Code, or (v) otherwise cause
the Corporation to fail to qualify as a REIT, then (x) the Purported
Record Transferee (and the Purported Beneficial Transferee, if
different) shall acquire no right or interest, and, in the case of a
Non-Transfer Event, the Person holding record title to the shares of
Equity Stock Beneficially Owned by the Person whose Beneficial
Ownership of Equity Stock would result in any of the events referred
to in clauses (i) - (v) above shall cease to own any right or
interest, in such number of shares of Equity Stock the ownership of
which would (A) result in the Corporation being "closely held" within
the meaning of Section 856(h) of the Code, (B) cause the Corporation
to Constructively Own 10% or more of the ownership interests in a
tenant of the real property of the Corporation or any direct or
indirect subsidiary of the Corporation within the meaning of Section
856(d)(2)(B) of the Code, (C) result in the shares of Equity Stock
being
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<PAGE>
beneficially owned by fewer than 100 persons within the meaning of
Section 856(a)(5) of the Code, (D) result in the Corporation failing
to qualify as a "domestically controlled REIT" within the meaning of
Section 897(h)(4)(B) of the Code, or (E) otherwise cause the
Corporation to fail to qualify as a REIT, (y) such number of shares of
Equity Stock (rounded up to the nearest whole share) shall be
automatically converted into an equal number of shares of Excess Stock
and transferred to a Trust in accordance with section F.4 of this
ARTICLE FOURTH and (z) the Purported Record Transferee (and the
Purported Beneficial Transferee, if different) or, in the case of a
Non-Transfer Event, the Person who, immediately prior to such
automatic conversion, was the holder of record title to the shares of
Equity Stock automatically converted, shall submit such number of
shares of Equity Stock to the Corporation, accompanied by all
requisite and duly executed assignments of Transfer thereof, for
registration in the name of the Trustee of the Trust. Such conversion
into Excess Stock and Transfer to a Trust shall be effective as of the
close of trading on the Trading Day prior to the date of the purported
Transfer or Non-Transfer Event, as the case may be, even though the
certificates representing the shares of Equity Stock so converted may
be submitted to the Corporation at a later date.
(c) Upon the occurrence of such a conversion of shares of Equity
Stock into an equal number of shares of Excess Stock, such shares of
Equity Stock shall be automatically retired and canceled, without any
action required by the Board of Directors of the Corporation, and
shall thereupon be restored to the status of authorized but unissued
shares of the particular class or series of Equity Stock from which
such Excess Stock was converted and may be reissued by the Corporation
as that particular class or series of Equity Stock.
2. If the Corporation, or its designees, shall at any time
determine in good faith that a Transfer has taken place in violation
of section E.1 of this ARTICLE FOURTH or that a Person intends to
acquire or has attempted to acquire Beneficial Ownership or
Constructive Ownership of any shares of Equity Stock in violation of
section E.1 of this ARTICLE FOURTH, the Corporation shall take such
action as it deems advisable to refuse to give effect to or to prevent
such Transfer or acquisition, including, but not limited to, refusing
to give effect to such Transfer on the stock transfer books of the
Corporation or instituting proceedings to enjoin such Transfer or
acquisition, but the failure to take any such action shall not
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<PAGE>
affect the automatic conversion of shares of Equity Stock into Excess
Stock and their Transfer to a Trust in accordance with section F.4.
3. Any Person who acquires or attempts to acquire shares of
Equity Stock in violation of section E.1 of this ARTICLE FOURTH, or
any Person who owns shares of Equity Stock that were converted into
shares of Excess Stock and transferred to a Trust pursuant to section
F.4 of this ARTICLE FOURTH, shall immediately give written notice to
the Corporation of such event and shall provide to the Corporation
such other information as the Corporation may request in order to
determine the effect, if any, of such Transfer or Non-Transfer Event,
as the case may be, on the Corporation's status as a REIT.
4. Upon any purported Transfer or Non-Transfer Event that
results in Excess Stock pursuant to section F.1 of this ARTICLE
FOURTH, (i) the Corporation shall create, or cause to be created, a
Trust, and shall designate a Trustee and name a Beneficiary (as
hereinafter defined) thereof and (ii) such Excess Stock shall be
automatically transferred to such Trust to be held for the exclusive
benefit of the Beneficiary. Any conversion of shares of Equity Stock
into shares of Excess Stock and transfer to a Trust shall be effective
as of the close of trading on the Trading Day prior to the date of the
purported Transfer or Non-Transfer Event that results in the
conversion. Shares of Excess Stock so held in trust shall be issued
and outstanding shares of stock of the Corporation.
5. Each share of Excess Stock shall be entitled to the same
dividends and distributions (as to both timing and amount) as may be
declared by the Board of Directors of the Corporation with respect to
each share of Equity Stock which was converted into such Excess Stock.
The Trustee, as record holder of the shares of Excess Stock, shall be
entitled to receive all dividends and distributions and shall hold all
such dividends or distributions in trust for the benefit of the
Beneficiary. The Prohibited Owner (as hereinafter defined) with
respect to such shares of Excess Stock shall repay to the Trust the
amount of any dividends or distributions received by it (i) that are
attributable to any shares of Equity Stock that have been converted
into shares of Excess Stock and (ii) the record date of which was on
or after the date that such shares were converted into shares of
Excess Stock. The Corporation shall take all measures that it
determines are reasonably
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<PAGE>
necessary to recover the amount of any such dividend or distribution
paid to a Prohibited Owner, including, if necessary, withholding any
portion of future dividends or distributions payable on shares of
Equity Stock Beneficially Owned by the Person who, but for the
provisions of this ARTICLE FOURTH, would Constructively Own or
Beneficially Own the shares of Equity Stock that were converted into
shares of Excess Stock; and, as soon as reasonably practicable
following the Corporation's receipt or withholding thereof, shall pay
over to the Trust for the benefit of the Beneficiary the dividends so
received or withheld, as the case may be.
6. In the event of any voluntary or involuntary liquidation of,
or winding up of, or any distribution of the assets of, the
Corporation, each holder of shares of Excess Stock shall be entitled
to receive, ratably with each other holder of shares of the same class
and series of Equity Stock which was converted into such Excess Stock,
that portion of the assets of the Corporation that is available for
distribution to the holders of the same class and series of Equity
Stock which was converted into such Excess Stock. The Trust shall
distribute to the Prohibited Owner the amounts received upon such
liquidation, dissolution, or winding up, or distribution; provided,
however, that the Prohibited Owner shall not be entitled to receive
amounts in excess of, in the case of a purported Transfer in which the
Prohibited Owner gave value for shares of Equity Stock and which
Transfer resulted in the conversion of such shares of Equity Stock
into shares of Excess Stock, the product of (x) the price per share,
if any, such Prohibited Owner paid for the shares of Equity Stock and
(y) the number of shares of Equity Stock which were so converted into
Excess Stock, and, in the case of a Non-Transfer Event or purported
Transfer in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise)
and which Non-Transfer Event or purported Transfer, as the case may
be, resulted in the conversion of the shares into shares of Excess
Stock, the product of (x) the price per share equal to the Market
Price (as hereinafter defined) on the date of such Non-Transfer Event
or purported Transfer and (y) the number of shares of Equity Stock
which were so converted into Excess Stock. Any remaining amount in
such Trust shall be distributed to the Beneficiary.
7. Each share of Excess Stock shall entitle the holder to no
voting rights other than those voting rights which accompany a class
of capital stock under Delaware law. The
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Trustee, as record holder of the Excess Stock, shall be entitled to
vote all shares of Excess Stock. Any vote by a Prohibited Owner as a
purported holder of shares of Equity Stock prior to the discovery by
the Corporation that such shares of Equity Stock have been converted
into shares of Excess Stock shall, subject to applicable law, be
rescinded and shall be void AB INITIO with respect to such shares of
Excess Stock.
8.(a) As soon as practicable after the Trustee acquires Excess
Stock and complies with the last sentence of this Section 8(a), but in
an orderly fashion so as not to materially adversely affect the
trading price of the same class and series of Equity Stock from which
such Excess Stock was converted, the Trustee shall designate one or
more Persons as Permitted Transferees (as hereinafter defined) and
sell to such Permitted Transferees any shares of Excess Stock held by
the Trustee; provided, however, that (i) any Permitted Transferee so
designated purchases for valuable consideration (whether in a public
or private sale) the shares of Excess Stock and (ii) any Permitted
Transferee so designated may acquire the shares of the same class and
series of Equity Stock from which such Excess Stock was converted
without violating any of the restrictions set forth in section E.1 of
this ARTICLE FOURTH and without such acquisition resulting in the
conversion of such shares of Equity Stock into shares of Excess Stock
and the Transfer of such shares to a Trust pursuant to sections F.1
and F.4 of this ARTICLE FOURTH. The Trustee shall have the exclusive
and absolute right to designate Permitted Transferees of any and all
shares of Excess Stock. Prior to any Transfer by the Trustee of
shares of Excess Stock to a Permitted Transferee, the Trustee shall
give not less than five Trading Days prior written notice to the
Corporation of such intended Transfer and the Corporation must have
waived in writing its purchase rights under section F.10 of this
ARTICLE FOURTH if such intended Transfer would occur during the 90-day
period referred to therein.
(b) Upon the designation by the Trustee of a Permitted Transferee
in accordance with the provisions of this section F.8, the Trustee
shall cause to be Transferred to the Permitted Transferee shares of
Excess Stock acquired by the Trustee pursuant to section F.4 of this
ARTICLE FOURTH. Upon such Transfer of shares of Excess Stock to the
Permitted Transferee, such shares of Excess Stock shall be
automatically converted into an equal number of shares of Equity Stock
of the same class and series from which such Excess Stock was
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converted. Upon the occurrence of such a conversion of shares of
Excess Stock into an equal number of shares of Equity Stock, such
shares of Excess Stock shall be automatically retired and canceled,
without any action required by the Board of Directors of the
Corporation, and shall thereupon be restored to the status of
authorized but unissued shares of Excess Stock and may be reissued by
the Corporation as Excess Stock. The Trustee shall (i) cause to be
recorded on the stock transfer books of the Corporation that the
Permitted Transferee is the holder of record of such number of shares
of Equity Stock, and (ii) distribute to the Beneficiary any and all
amounts held with respect to such shares of Excess Stock after making
payment to the Prohibited Owner pursuant to section F.9 of this
ARTICLE FOURTH.
(c) If the Transfer of shares of Excess Stock to a purported
Permitted Transferee would or does violate any of the transfer
restrictions set forth in Section E.1 of this ARTICLE FOURTH, such
Transfer shall be void AB INITIO as to that number of shares of Excess
Stock that cause the violation of any such restriction when such
shares are converted into shares of Equity Stock (as described in
section 8(b) above) and the purported Permitted Transferee shall be
deemed to be a Prohibited Owner and shall acquire no rights in such
shares of Excess Stock or Equity stock. Such shares of Equity Stock
shall be automatically converted into Excess Stock and transferred to
the Trust from which they were originally Transferred. Such
conversion and transfer to the Trust shall be effective as of the
close of trading on the Trading Day prior to the date of the Transfer
to the purported Permitted Transferee and the provisions of this
ARTICLE FOURTH shall apply to such shares, including, without
limitation, the provisions of sections F.8 through F.10 with respect
to any future transfer of such shares by the Trust.
9. Any Prohibited Owner shall be entitled (following acquisition
of the shares of Excess Stock and subsequent designation of and sale
of Excess Stock to a Permitted Transferee in accordance with section
F.8 of this ARTICLE FOURTH or following the acceptance of the offer to
purchase such shares in accordance with section F.10 of this ARTICLE
FOURTH) to receive from the Trustee following the sale or other
disposition of such shares of Excess Stock the lesser of (a)(i) in the
case of a purported Transfer in which the Prohibited Owner gave value
for shares of Equity Stock and which Transfer resulted in the
conversion of such shares into shares of Excess Stock, the product of
(x) the price per share, if any, such Prohibited Owner paid for the
shares of Equity
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Stock and (y) the number of shares of Equity Stock which were so
converted into Excess Stock and (ii) in the case of a Non-Transfer
Event or purported Transfer in which the Prohibited Owner did not give
value for such shares (e.g., if the shares were received through a
gift or devise) and which Non-Transfer Event or purported Transfer, as
the case may be, resulted in the conversion of such shares into shares
of Excess Stock, the product of (x) the price per share equal to the
Market Price on the date of such Non-Transfer Event or purported
Transfer and (y) the number of shares of Equity Stock which were so
converted into Excess Stock or (b) the proceeds received by the
Trustee from the sale or other disposition of such shares of Excess
Stock in accordance with section F.8 or section F.10 of this ARTICLE
FOURTH. Any amounts received by the Trustee in respect of such shares
of Excess Stock which are in excess of such amounts to be paid to the
Prohibited Owner pursuant to this section F.9 shall be distributed to
the Beneficiary in accordance with the provisions of section F.8 of
this ARTICLE FOURTH. The Trustee and the Trust shall not be liable
for, and each Beneficiary and Prohibited Owner shall be deemed to have
irrevocably waived, any claim by a Beneficiary or Prohibited Owner
arising out of the disposition of shares of Excess Stock, except for
claims arising out of the gross negligence or willful misconduct of,
or any failure to make payments in accordance with this section F of
this ARTICLE FOURTH by, such Trustee.
10. Shares of Excess Stock shall be deemed to have been offered
for sale to the Corporation, or its designee, at a price per share
equal to the lesser of (a) the price per share in the transaction that
created such shares of Excess Stock (or, in the case of a Non-Transfer
Event or Transfer in which the Prohibited Owner did not give value for
the shares (e.g., if the shares were received through a gift or
devise), the Market Price on the date of such Non Transfer Event or
Transfer in which the Prohibited Owner did not give value for the
shares) or (b) the Market Price on the date the Corporation, or its
designee, accepts such offer. The Corporation shall have the right to
accept such offer for a period of 90 days following the later of (x)
the date of the Non-Transfer Event or purported Transfer which results
in such shares of Excess Stock or (y) the date the Board of Directors
of the Corporation first determined that a Transfer or Non-Transfer
Event resulting in shares of Excess Stock has occurred, if the
Corporation does not receive a notice of such Transfer or Non-Transfer
Event pursuant to section F.3 of this ARTICLE FOURTH.
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<PAGE>
G. Except as set forth in section E.4 of this ARTICLE FOURTH, nothing
contained in this ARTICLE FOURTH shall limit the authority of the
Corporation to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders by
preservation of the Corporation's status as a REIT and to ensure compliance
with the Ownership Limit.
H. In the case of an ambiguity in the application of any of the
provisions of this ARTICLE FOURTH, including any definition contained in
ARTICLE ELEVENTH hereof, the Board of Directors shall have the power to
determine the application of the provisions of this ARTICLE FOURTH with
respect to any situation based on the facts known to it and any such
determination made in good faith shall be binding on all stockholders of
the Corporation.
I. Each certificate for shares of Equity Stock shall bear the
following legend:
"The shares of Timberland Growth Corporation (the "Corporation")
represented by this certificate are subject to restrictions set forth
in the Corporation's Certificate of Incorporation which prohibit in
general (a) any Person from Beneficially Owning shares of Equity Stock
in excess of the Ownership Limit and (b) any Person from acquiring or
maintaining any ownership interest in the capital stock of the
Corporation that is inconsistent with (i) the requirements of the Code
pertaining to real estate investment trusts or (ii) the Certificate of
Incorporation of the Corporation, and the holder of this certificate
by his acceptance hereof consents to be bound by such restrictions.
Any purported transfer of Equity Stock in violation of such
restrictions shall be void ab initio and the Equity Stock in violation
of such restrictions, whether as a result of a Transfer or the Non-
Transfer Event, shall be automatically converted into shares of Excess
Stock and transferred to a Trust for disposition as provided in the
Certificate of Incorporation. Capitalized terms used in this
paragraph and not defined herein are defined in the Corporation's
Certificate of Incorporation. The Corporation will furnish without
charge, to each stockholder who so requests, a copy of the Certificate
of Incorporation of the Corporation, containing, among other things, a
statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock
or series thereof that the Corporation is authorized to issue and the
qualifications, limitations or restrictions of such preferences
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<PAGE>
and/or rights. Any such request shall be addressed to the Secretary
of the Corporation.
J. Each provision of this ARTICLE FOURTH shall be severable and any
such provision determined to be invalid by a court having jurisdiction
shall in no way affect the validity of any other provision.
V. FIFTH: A. At all times subsequent to the Initial Public Offering, the
-----
directors shall be classified, with respect to the term for which they
severally hold office, into three classes, designated "Class I," "Class II"
and "Class III," respectively. The initial Class I Directors shall serve
for a term expiring at the first annual meeting of stockholders; the
initial Class II Directors shall serve for a term expiring at the second
annual meeting of stockholders; and the initial Class III Directors shall
serve for a term expiring at the third annual meeting of stockholders. At
each annual meeting of stockholders, the successor or successors of the
class of directors whose term expires at that meeting shall be elected by a
plurality of the votes of the shares present in person or represented by
proxy at such meeting and entitled to vote on the election of directors,
and shall hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election.
The directors elected to each class shall hold office until their
successors are duly elected and qualified or until their earlier
resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
ARTICLE FOURTH of this Certificate, the holders of any one or more series
of Preferred Stock shall have the right, voting separately as a series or
together with holders of other such series, to elect directors at an annual
or special meeting of stockholders, the election, term of office, filling
of vacancies and other features of such directorships shall be governed by
the terms of this Certificate of Incorporation, including any Preferred
Stock Designation applicable thereto.
During any period when the holders of any series of Preferred Stock
have the right to elect additional directors as provided for or fixed
pursuant to the provisions of ARTICLE FOURTH of this Certificate of
Incorporation, then upon commencement and for the duration of the period
during which such right continues: (a) the then otherwise total authorized
number of directors of the Corporation shall automatically be increased by
such specified number of directors, and the holders of such Preferred Stock
shall be entitled to elect the additional directors so provided for or
fixed pursuant to said provisions and (b) each such additional director
shall serve until such director's successor shall have been duly elected
and qualified, or until such director's right to hold such office
terminates pursuant to said provisions, whichever occurs earlier, subject
to such director's earlier death, disqualification, resignation or removal.
Except as otherwise provided by the
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<PAGE>
Board of Directors in the resolution or resolutions establishing such
series, whenever the holders of any series of Preferred Stock having such
right to elect additional directors are divested of such right pursuant to
the provisions of such stock, the terms of office of all such additional
directors elected by the holders of such stock, or elected to fill any
vacancies resulting from the death, resignation, disqualification or
removal of such additional directors, shall forthwith terminate and the
total authorized number of directors of the Corporation shall be reduced
accordingly.
B. Subject to the rights, if any, of the holders of any series of
Preferred Stock to elect directors and to remove any director whom such
holders have the right to elect, any director (including persons elected by
directors to fill vacancies in the Board of Directors) may be removed from
office (a) only with cause and (b) only by the affirmative vote of the
holders of at least 66 2/3% of the total voting power of the shares of
capital stock then entitled to vote at a meeting of the stockholders called
for that purpose. At least 30 days prior to any meeting of stockholders at
which it is proposed that any director be removed from office, written
notice of such proposed removal shall be sent to the director whose removal
will be considered at the meeting. For purposes of this Certificate of
Incorporation, "cause," with respect to the removal of any director, shall
mean only (i) conviction of a felony, (ii) declaration of unsound mind by
order of a court, (iii) gross dereliction of duty, (iv) commission of any
act involving moral turpitude or (v) commission of an act that constitutes
intentional misconduct or a knowing violation of law if such action in
either event results both in an improper substantial personal benefit to
such director and a material injury to the Corporation.
C. Subject to the rights, if any, of the holders of any series of
Preferred Stock to elect directors and to fill vacancies in the Board of
Directors relating thereto, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of
an increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a director, shall be filled solely by the
affirmative vote of a majority of the remaining directors then in office,
even if less than a quorum of the Board of Directors. Any director
appointed in accordance with the preceding sentence shall hold office for
the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been duly elected and qualified or until such
director's earlier resignation or removal. Subject to the rights, if any,
of the holders of any series of Preferred Stock, when the number of
directors is increased or decreased, the Board of Directors shall determine
the class or classes to which the increased or decreased number of
directors shall be apportioned; provided, however, that no decrease in the
number of directors shall shorten the term of any incumbent director. In
the
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<PAGE>
event of a vacancy in the Board of Directors, the remaining directors,
except as otherwise provided by law, may exercise the powers of the full
Board of Directors until such vacancy is filled.
VI. SIXTH: Any action required to be taken at any annual or special
-----
meeting of stockholders of the Corporation, or any action which may be
taken at any annual or special meeting of the stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by
the holders of outstanding capital stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at
a meeting at which all shares entitled to vote thereon were present and
voted and shall be delivered to the Corporation by delivery to its
registered office in Delaware (either by hand or by certified or registered
mail, return receipt requested), its principal place of business, or an
officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded; provided, however,
that on and after the date on which the Board of Directors of the
Corporation determines that Potlatch and its Subsidiaries do not continue
to Beneficially Own 50% or more of the total voting power of the shares of
capital stock then outstanding and causes written notice of such
determination to be delivered to the Secretary of the Corporation, any
corporate action required to be taken at any annual or special meeting of
the stockholders, or any action which may be taken at any annual or special
meeting of the stockholders, may be taken only at a duly called annual or
special meeting of stockholders and may not be taken by written consent of
the stockholders in lieu of such meeting.
So long as stockholders are entitled to consent to corporate action in
writing without a meeting in accordance with this ARTICLE SIXTH, every
written consent shall bear the date of signature of each stockholder who
signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the
date the earliest dated consent is delivered to the Corporation, a written
consent or consents signed by a sufficient number of holders to take action
are delivered to the Corporation in the manner prescribed in this ARTICLE
SIXTH.
VII. SEVENTH: The Board of Directors is expressly authorized to make,
-------
amend or repeal the bylaws of the Corporation, without any action on the
part of the stockholders, solely by the affirmative vote of at least 66
2/3% of the directors of the Corporation then in office. In addition to
any other vote required by law, the bylaws may be amended or repealed by
the stockholders by the affirmative vote of the holders of shares
representing at least 66 2/3% of the combined voting power of the
outstanding shares of capital stock of the corporation entitled to vote.
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<PAGE>
VIII. EIGHTH: No director of the Corporation shall be liable to the
------
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
GCL, or (iv) for any transaction from which the director derived an
improper personal benefit.
If the GCL hereafter is amended to further eliminate or limit the
liability of directors, then the liability of a director of the
Corporation, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by the amended
GCL. Any repeal or modification of this ARTICLE EIGHTH by the stockholders
of the Corporation shall be prospective only, and shall not adversely
affect any limitation on the liability of a director of the Corporation
existing at the time of such repeal or modification.
IX. NINTH. Until the Restriction Termination Date, the Corporation shall
-----
seek to satisfy the requirements for qualification as a REIT under the
Code.
X. TENTH. In addition to any other vote required by law, the amendment or
-----
repeal of, or adoption of any provisions inconsistent with, ARTICLES FIFTH,
SIXTH, SEVENTH, EIGHTH, NINTH or this ARTICLE TENTH or any term defined in
ARTICLE ELEVENTH to the extent such term is used in any such ARTICLE shall
require the approval of the holders of at least 66 2/3% of the total voting
power of the shares of capital stock entitled to vote thereon, voting as a
single class.
XI. ELEVENTH. For purposes of this Certificate of Incorporation, the
--------
following terms shall have the meanings set forth below:
"Beneficial Ownership," when used in sections E and F of ARTICLE
FOURTH or in any defined term used therein, shall mean ownership of Equity
Stock by a Person who would be treated as an owner of Equity Stock either
directly or indirectly under Section 542(a)(2) of the Code, taking into
account, for this purpose, constructive ownership determined under Section
544 of the Code, as modified by Section 856(h)(1)(B) of the Code (except
where expressly provided otherwise). "Beneficial Ownership," when used
elsewhere in this Certificate of Incorporation, shall mean beneficial
ownership determined under Rule 13d-3 under the Exchange Act (as
hereinafter defined). The terms "Beneficial Owner," "Beneficially Owns"
and "Beneficially Owned" shall have the correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
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<PAGE>
(vii) and (viii) thereof) and Section 170(c)(2) of the Code that are named
by the Corporation as the beneficiary or beneficiaries of such Trust, in
accordance with the provisions of section F.4 of ARTICLE FOURTH.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Constructive Ownership" shall mean ownership of shares of Equity
Stock by a Person who is or would be treated as a direct or indirect owner
of such shares of Equity Stock through the application of Section 318 of
the Code, as modified by Section 856(d)(5) of the Code. The terms
"Constructive Owner," "Constructively Owns" and "Constructively Owned"
shall have correlative meanings.
"Equity Stock" shall mean the Common Stock and the Preferred Stock of
the Corporation.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Excluded Holder" shall mean Potlatch Corporation, a Delaware
corporation, and its Subsidiaries and successors; provided that a successor
shall be treated as an Excluded Holder only if Potlatch Corporation obtains
an opinion of counsel that any ownership of shares of Equity Stock by such
successor will not jeopardize the status of the Corporation as a REIT under
the Code.
"Initial Public Offering" shall mean the initial sale of shares of
Common Stock to the public pursuant to the Corporation's first effective
registration statement for such Common Stock filed under the Securities Act
of 1933, as amended.
"Market Price" of Equity Stock on any date shall mean the average of
the closing price for shares of such Equity Stock for the five consecutive
Trading Days ending on the Trading Day immediately prior to such date. The
"Closing Price" on any date shall mean the last sale price, regular way,
or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported in
the principal consolidated transactions reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or,
if the shares of Equity Stock are not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the
principal national securities exchange on which the shares of Equity Stock
are listed or admitted to trading or, if the shares of Equity Stock are not
listed on admitted to trading on any national securities exchange, the last
quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter
-25-
<PAGE>
market, as reported by the Nasdaq Stock Market, Inc. or, if such system is
no longer in use, the principal other automated quotation system that may
be in use or, if the shares of Equity Stock are not quoted by any such
organization, the average of the closing bid and asked prices as furnished
by a professional market maker selected by the Board of Directors making a
market in the shares of Equity Stock.
"Non-Transfer Event" shall mean an event other than a purported
Transfer that would cause or result in an increase in the percentage of any
Person's Beneficial Ownership of the outstanding shares of Equity Stock.
"Ownership Limit" shall mean, (i) with respect to the Common Stock,
9.8% or the lesser of (a) the total number, or (b) the value of, the
outstanding shares of Common Stock or (ii) with respect to Preferred Stock,
9.8% of the lesser of (a) the total number, or (b) the value of, the
outstanding shares of Preferred Stock (or such other number or value of
Preferred Stock as the Board of Directors may determine in fixing the terms
of the Preferred Stock).
"Partnership" shall mean Timberland Growth Limited Partnership, a
Delaware limited partnership formed pursuant to the Partnership Agreement,
and any successor thereto.
"Partnership Agreement" shall mean the agreement of limited
partnership establishing the Partnership, as the same may be amended,
supplemented or restated from time to time.
"Partnership Units" shall have the meaning set forth in the
Partnership Agreement, as in effect at the time of the Initial Public
Offering.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of section F.8 of ARTICLE
FOURTH.
"Person" shall mean (a) an individual or any corporation, partnership,
estate, trust, association, private foundation, joint stock company or any
other entity and (b) a "group" as the term is used for purposes of Section
13(d)(3) of the Exchange Act; but shall not include an underwriter that
participates in a public offering of Equity Stock for a period of 90 days
following purchase by such underwriter of such Equity Stock.
"Potlatch" shall mean Potlatch Corporation, a Delaware corporation,
and all successors to Potlatch Corporation by way of merger, consolidation
or sale of all or substantially all of its assets.
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<PAGE>
"Prohibited Owner" shall mean, with respect to any purported Transfer
or Non-Transfer Event, any Person who is prevented from becoming or
remaining the owner of record title to shares of Equity Stock by the
provisions of section F.1 of ARTICLE FOURTH.
"Proportionate Number of Votes" shall mean, at any time, a number of
votes equal to the number of shares of Common Stock which the holder of the
Special Voting Stock would hold if, as of such time, all of the Partnership
Units then held by such holder were exchanged for shares of Common Stock
pursuant to Section 8.5 of the Partnership Agreement.
"Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer of Beneficial Ownership of shares of Equity Stock that
results in the automatic conversion of such shares into Excess Stock, the
purported transferee of Beneficial Ownership of such shares if such
purported Transfer had been valid under Section E.1 of ARTICLE FOURTH.
"Purported Record Transferee" shall mean, with respect to any
purported Transfer of Beneficial Ownership of shares of Equity Stock that
results in the automatic conversion of such shares into Excess Stock, the
purported record transferee of such shares if such purported Transfer had
been valid under Section E.1 of ARTICLE FOURTH.
"REIT" shall mean a real estate investment trust under Section 856 et
seq. of the Code.
"Restriction Termination Date" shall mean such time as (i) the Board
of Directors has adopted a resolution recommending that the Corporation
terminate its status as a REIT, (ii) the Board of Directors presents a
resolution to terminate the Corporation's status as a REIT at an annual or
special meeting of stockholders of the Corporation, and (iii) such
resolution is approved by at least 66 2/3% of the total voting power of the
shares of capital stock of the Corporation entitled to vote thereon, voting
as a single class.
"Subsidiary" shall mean any Person in which the Corporation
beneficially owns, directly or indirectly, more than 50% of the voting
power of the outstanding voting equity securities.
"Trading Day" shall mean a day on which the principal national
securities exchange on which any of the shares of Equity Stock are listed
or admitted to trading is open for the transaction of business or, if none
of the shares of Equity Stock are listed or admitted to trading on any
national securities exchange, any day other than a Saturday, a Sunday or a
day on
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<PAGE>
which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of Beneficial Ownership of shares
of capital stock, whether voluntary or involuntary and whether by operation
of law or otherwise. "Transfer" (as a verb) shall have the correlative
meaning.
"Trust" shall mean any separate trust created and administered in
accordance with the terms of section F of ARTICLE FOURTH, for the exclusive
benefit of any Beneficiary.
"Trustee" shall mean any Person, unaffiliated with both the
Corporation and any Prohibited Owner (and, if different than the Prohibited
Owner, the Person who would have had Beneficial Ownership of the Shares
that would have been owned of record by the Prohibited Owner), designated
by the Corporation to act as trustee of any Trust, or any successor trustee
thereof.
IN WITNESS WHEREOF, Timberland Growth Corporation has caused this Restated
Certificate of Incorporation to be signed by Scott R. Jones, its President, and
attested by Betty R. Fleshman, its Secretary.
TIMBERLAND GROWTH CORPORATION
By
------------------------------
Scott R. Jones,
President
Attest:
- ---------------------------------
Betty R. Fleshman, Secretary
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<PAGE>
EXHIBIT 3.3
BYLAWS
OF
TIMBERLAND GROWTH CORPORATION
Adopted February 4, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
ARTICLE I Offices.................................................. 1
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Section 1. Registered Office................................. 1
-----------------
Section 2. Other Offices..................................... 1
-------------
ARTICLE II Meetings of Stockholders................................. 1
------------------------
Section 1. Place of Meetings................................. 1
-----------------
Section 2. Annual Meeting.................................... 1
--------------
Section 3. Notice of Annual Meeting.......................... 1
------------------------
Section 4. Stockholders List................................. 1
-----------------
Section 5. Special Meetings.................................. 2
----------------
Section 6. Notice of Special Meetings........................ 2
--------------------------
Section 7. Business.......................................... 2
--------
Section 8. Quorum and Adjournment............................ 2
----------------------
Section 9. Organization...................................... 2
------------
Section 10. Voting............................................ 2
------
Section 11. Action by Written Consent......................... 3
-------------------------
Section 12. Inspectors of Election............................ 3
----------------------
Section 13. Notice of Stockholder Business at Annual Meeting.. 3
------------------------------------------------
Section 14. Notice of Stockholder Nominees.................... 4
------------------------------
ARTICLE III Directors................................................ 5
---------
Section 1. Number, Election and Term......................... 5
-------------------------
Section 2. Vacancies and Newly Created Directorships......... 5
-----------------------------------------
Section 3. Resignation and Removal........................... 5
-----------------------
Section 4. General Powers.................................... 5
--------------
Section 5. Compensation of Directors......................... 6
-------------------------
ARTICLE IV Meetings of the Board of Directors....................... 6
----------------------------------
Section 1. Place of Meetings................................. 6
-----------------
Section 2. Regular Meetings.................................. 6
----------------
Section 3. Special Meetings.................................. 6
----------------
Section 4. Quorum............................................ 6
------
Section 5. Action by Written Consent......................... 7
-------------------------
Section 6. Telephone Participation........................... 7
-----------------------
ARTICLE V Committees............................................... 7
----------
ARTICLE VI Officers................................................. 7
--------
Section 1. Number and Titles................................. 7
-----------------
Section 2. Compensation...................................... 8
------------
Section 3. Term of Office.................................... 8
--------------
Section 4. Chairman of the Board............................. 8
---------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Section 5. Chief Executive Officer.......................... 8
-----------------------
Section 6. President........................................ 8
---------
Section 7. Vice Presidents.................................. 8
---------------
Section 8. Chief Financial Officer.......................... 9
-----------------------
Section 9. Secretary........................................ 9
---------
Section 10. Assistant Secretaries............................ 9
---------------------
Section 11. Treasurer........................................ 9
---------
Section 12. Assistant Treasurers............................. 10
--------------------
Section 13. Delegation of Authority.......................... 10
-----------------------
ARTICLE VII Capital Stock........................................... 10
-------------
Section 1. Certificates..................................... 10
------------
Section 2. Registrars and Transfer Agents................... 10
------------------------------
Section 3. Lost Certificates................................ 10
-----------------
Section 4. Transfers of Stock............................... 11
------------------
Section 5. Fixing Record Date............................... 11
------------------
Section 6. Registered Stockholders.......................... 11
-----------------------
Section 7. Dividends........................................ 11
---------
Section 8. Reserves......................................... 12
--------
ARTICLE VIII Indemnification......................................... 12
---------------
Section 1. Right to Indemnification......................... 12
------------------------
Section 2. Right of Claimant to Bring Suit.................. 13
-------------------------------
Section 3. Non-Exclusivity of Rights........................ 13
-------------------------
Section 4. Insurance........................................ 13
---------
Section 5. Contracts........................................ 13
---------
Section 6. Severability..................................... 14
------------
Section 7. Intent of Article................................ 14
-----------------
Section 8. Effect of Repeal or Modification................. 14
--------------------------------
ARTICLE IX Notices................................................. 14
-------
Section 1. Form of Notices.................................. 14
---------------
Section 2. Waiver of Notice................................. 14
----------------
ARTICLE X Miscellaneous........................................... 15
-------------
Section 1. Annual Statements................................ 15
-----------------
Section 2. Checks........................................... 15
------
Section 3. Fiscal Year...................................... 15
-----------
Section 4. Seal............................................. 15
----
ARTICLE XI Amendments.............................................. 15
----------
</TABLE>
-ii-
<PAGE>
TIMBERLAND GROWTH CORPORATION
-----------------------------
BYLAWS
------
ARTICLE I
---------
Offices
-------
Section 1. Registered Office. The registered office of the corporation
-----------------
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The corporation may also have offices at such
-------------
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
----------
Meetings of Stockholders
------------------------
Section 1. Place of Meetings. All meetings of the stockholders for the
-----------------
election of directors shall be held at a place either within or without the
State of Delaware as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
Section 2. Annual Meeting. The annual meeting of stockholders shall be
--------------
held on such date and at such time as shall be determined by the Board of
Directors. At such meeting, directors shall be elected or, if the Board of
Directors shall then be divided into classes, the members of that class of
directors whose term of office expires at such meeting shall be elected and any
other proper business may be transacted which is within the powers of the
stockholders.
Section 3. Notice of Annual Meeting. Written notice of the annual meeting
------------------------
of stockholders stating the place, date and hour of the meeting shall be given
to each stockholder entitled to vote at such meeting not less than ten (10) nor
more than sixty (60) days before the date of the meeting.
Section 4. Stockholders List. The officer who has charge of the stock
-----------------
ledger of the corporation shall prepare and make, at least ten (10) days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares
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<PAGE>
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting either at a place within the city where the meeting is to be held, which
place shall be specified in the notice of the meeting, or, if not so specified,
at the place where the meeting is to be held. The list shall also be produced
and kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present.
Section 5. Special Meetings. Special meetings of the stockholders, for
----------------
any purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the chairman of the board or the
president, and shall be called by any officer at the request in writing of a
majority of the Board of Directors. Such request shall state the purpose or
purposes of the proposed meeting.
Section 6. Notice of Special Meetings. Written notice of a special
--------------------------
meeting, stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given not less than ten (10)
nor more than sixty (60) days before the date of the meeting to each stockholder
entitled to vote at such meeting.
Section 7. Business. Business transacted at any special meeting of
--------
stockholders shall be limited to the purposes stated in the notice.
Section 8. Quorum and Adjournment. At any meeting of stockholders, the
----------------------
holders of shares having a majority of the voting power of all of the then
issued and outstanding shares of capital stock entitled to vote thereat, present
in person or represented by proxy, shall constitute a quorum for the transaction
of business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. Organization. At every meeting of the stockholders the
------------
chairman of the board or, in his or her absence, the president, shall preside.
In the absence of said officers, any other officer of the rank of vice president
present shall call such meeting to order and preside. The secretary of the
corporation or, in the secretary's absence, the appointee of the presiding
officer of the meeting shall act as secretary of the meeting.
Section 10. Voting. When a quorum is present or represented at any
------
meeting, the vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide any question brought
before such meeting, unless the
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question is one upon which by express provision of the statutes or of the
certificate of incorporation a different vote is required, in which case such
express provision shall govern and control the decision of such question.
Unless otherwise provided in the certificate of incorporation, each
stockholder shall at every meeting of the stockholders be entitled to one vote
in person or by proxy for each share of capital stock having voting power held
by such stockholder. No proxy shall be voted after three (3) years from its
date, unless the proxy provides for a longer period.
Section 11. Action by Written Consent. Unless otherwise provided in the
-------------------------
certificate of incorporation, any action required or permitted to be taken at
any annual or special meeting of stockholders of the corporation may be taken
without a meeting, without prior notice except as otherwise provided by
applicable law, and without a vote, if a consent in writing setting forth the
action so taken shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Section 12. Inspectors of Election. The Board of Directors shall, in
----------------------
advance of any meeting of stockholders, at any time appoint one or more persons
to serve as inspectors of election at any meeting of stockholders with respect
to the votes of stockholders at such meeting. The corporation may designate one
or more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of stockholders,
the person presiding at the meeting shall appoint one or more inspectors to act
at the meeting. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his ability.
The inspectors may appoint or retain such other persons or entities to assist
the inspectors in the performance of the duties of the inspectors.
Section 13. Notice of Stockholder Business at Annual Meeting. At an
------------------------------------------------
annual meeting of the stockholders only such business shall be conducted as
shall have been brought before the meeting (a) by or at the direction of the
Board of Directors or (b) by any stockholder of the corporation entitled to vote
at the meeting who complies with the notice procedures set forth in this
section. In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the secretary of the corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the corporation, addressed to the
attention of the secretary of the corporation, not less than sixty (60) days nor
more than ninety (90) days prior to the scheduled date of the meeting
(regardless of any postponements, deferrals or adjournments of the meeting to a
later date); provided, however, that if less than seventy (70) days' notice or
-------- -------
prior public disclosure of the date of the meeting is given to stockholders,
notice by the stockholder to be timely must be so received not later than the
earlier of (1) the close of business on the tenth day following the day on which
such notice of the date of the annual
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meeting was mailed or such public disclosure was made, whichever occurs first,
or (2) two business days prior to the scheduled date of the meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the corporation's books, of the stockholder proposing such
business, (c) the class and number of shares of the corporation's stock which
are owned by the stockholder and (d) any material interest of the stockholder in
such business. Notwithstanding anything in these bylaws to the contrary, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this section. The chairman of an annual meeting shall,
if the facts warrant, determine and declare to the meeting that any business
proposed at the meeting was not properly brought before the meeting in
accordance with the provisions of this section, and if he or she should so
determine and declare, such business shall not be transacted.
Section 14. Notice of Stockholder Nominees. Only persons who are
------------------------------
nominated in accordance with the procedures set forth in this section shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the corporation may be made at a meeting of stockholders
(a) by or at the direction of the Board of Directors or (b) by any stockholder
of the corporation entitled to vote for the election of directors at the meeting
who has complied with the notice procedures set forth in this section. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the secretary
of the corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal executive offices of the corporation,
addressed to the attention of the secretary of the corporation, not less than
one hundred twenty (120) days nor more than one hundred fifty (150) days prior
to the scheduled date of the meeting (regardless of any postponements, deferrals
or adjournments of the meeting to a later date); provided, however, that if less
-------- -------
than one hundred thirty (130) days' notice of the date of the meeting is given
to stockholders, notice by the stockholder to be timely must be so received not
later than the earlier of (1) close of business on the tenth day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever occurs first, or (2) two business days prior to
the scheduled date of the meeting. A stockholder's notice to the secretary
shall set forth (a) as to each person whom the stockholder proposes to nominate
for election or re-election as a director, all information relating to such
person that is required to be disclosed in solicitations or proxies for election
of directors pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); and (b)
as to the stockholder giving the notice (i) the name and address, as they appear
on the corporation's books, of such stockholder and (ii) the class and number of
shares of the corporation's stock which are owned by such stockholder. The
corporation may require any person nominated for election as a director to
furnish to the secretary of the corporation such other information as may
reasonably be required by the corporation to determine such person's eligibility
to serve as a director. No person shall be eligible for election as a director
of the corporation unless nominated in accordance with the procedures set forth
in this section. In connection with a stockholders' meeting, the
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<PAGE>
chairman of the board (or such other person presiding at such meeting in
accordance with these bylaws) shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the provisions
of this section, and if he or she should so determine and declare, the
nomination shall be disregarded.
ARTICLE III
-----------
Directors
---------
Section 1. Number, Election and Term. The Board of Directors shall
-------------------------
consist of one or more members, the number thereof to be determined from time to
time by resolution of the Board of Directors. Until such determination by the
Board of Directors, the number thereof shall be one. At each annual meeting of
the stockholders, directors shall be elected for that class of directors whose
terms are then expiring, except as provided in Section 2 of this Article, and
each director so elected shall hold office until his or her successor is elected
and qualified or until his or her earlier resignation or removal. Directors
need not be stockholders. No person shall continue to serve as a director after
the expiration of the calendar year in which the age of 72 is attained.
Section 2. Vacancies and Newly Created Directorships. Vacancies and newly
-----------------------------------------
created directorships resulting from any increase in the authorized number of
directors elected by all of the stockholders having the right to vote as a
single class may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director, and the directors
so chosen shall hold office until the next annual election and until their
successors are elected and qualified, or until their earlier resignations or
removals. If there are no directors in office, then an election of directors
may be held in the manner provided by statute. In the event of a vacancy in the
Board of Directors, the remaining directors, except as otherwise provided by
law, the corporation's certificate of incorporation or these bylaws, may
exercise the powers of the full board until the vacancy is filled.
Section 3. Resignation and Removal. Any director of the corporation may
-----------------------
resign at any time by giving written notice to the chairman of the board, or to
the president, or to the secretary of the corporation. The resignation of any
director shall take effect at the date of receipt of such notice or at any later
date specified therein; and unless otherwise specified therein the acceptance of
such resignation by the Board of Directors shall not be necessary to make it
effective. Any director or the entire Board of Directors may be removed, but
only for cause, by the holders of a majority of the shares then entitled to vote
at an election of directors, unless otherwise specified by law or the
certificate of incorporation.
Section 4. General Powers. The business of the corporation shall be
--------------
managed by or under the direction of its Board of Directors which may exercise
all such powers of the corporation and do all such lawful acts and things as are
not by statute or by the certificate of incorporation or by these bylaws
directed or required to be exercised or done by the stockholders.
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<PAGE>
Section 5. Compensation of Directors. Unless otherwise restricted by the
-------------------------
certificate of incorporation or these bylaws, the Board of Directors shall have
the authority to fix from time to time the compensation of directors.
ARTICLE IV
----------
Meetings of the Board of Directors
----------------------------------
Section 1. Place of Meetings. The Board of Directors of the corporation
-----------------
may hold meetings, both regular and special, either within or without the State
of Delaware.
Section 2. Regular Meetings. Regular meetings of the Board of Directors
----------------
may be held without notice at such time and at such place as shall from time to
time be determined by the Board of Directors.
Section 3. Special Meetings. Special meetings of the Board of Directors
----------------
for any purpose or purposes may be called at any time by the chairman of the
board or president or, if the chairman of the board and the president are each
absent or are unable or refuse to act, by any two directors. Notice of the time
and place of special meetings shall be delivered personally or by telephone to
each director, or sent by first-class mail or telegram or facsimile
transmission, charges prepaid, addressed to him or her at his or her home or
office address as they appear upon the records of the corporation or, if not so
shown on the records and not readily ascertainable, at the place at which the
meetings of the directors are regularly held. In case such notice is mailed, it
shall be deposited in the United States mail at least four (4) days prior to the
date of the meeting. In case such notice is telegraphed or sent by facsimile
transmission, it shall be delivered to a common carrier for transmission to the
director or actually transmitted by the person giving the notice by electronic
means to the director at least forty-eight (48) hours prior to the time of the
holding of the meeting. In case such notice is delivered personally or by
telephone as above provided, it shall be so delivered at least four (4) hours
prior to the time of the holding of the meeting. Any notice given personally,
by facsimile or by telephone may be communicated to either the director or to a
person at the office of the director whom the person giving the notice has
reason to believe will promptly communicate it to the director. Such deposit in
the mail, delivery to a common carrier, transmission by electronic means or
delivery, personally or by telephone, as above provided, shall be due, legal and
personal notice to such directors. The notice need not specify the place of the
meeting if the meeting is to be held at the principal executive office of the
corporation, and need not specify the purpose of the meeting.
Section 4. Quorum. At all meetings of the Board of Directors a majority
------
of the then authorized directors shall constitute a quorum for the transaction
of business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute, by these bylaws or by the
certificate of incorporation. If a quorum shall not be present at any meeting
of the Board of Directors the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum
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<PAGE>
shall be present. A meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of directors, provided that
any action taken is approved by at least a majority of the required quorum for
such meeting.
Section 5. Action by Written Consent. Unless otherwise restricted by the
-------------------------
certificate of incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or any committee thereof
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
Section 6. Telephone Participation. Unless otherwise restricted by the
-----------------------
certificate of incorporation or these bylaws, members of the Board of Directors
may participate in a meeting of the Board of Directors by means of conference
telephone or other communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at the meeting.
ARTICLE V
---------
Committees
----------
The Board of Directors may designate such committees with such powers and
duties as it may prescribe by resolution. Unless specifically provided to the
contrary in or otherwise restricted by the certificate of incorporation, these
bylaws or a resolution adopted by the Board of Directors, the procedures set
forth in Sections 1, 3, 4, 5 and 6 of Article IV apply to each committee created
by the Board of Directors in the same manner as those sections apply to the
Board of Directors, as though references therein to directors were to members of
the committee. No committee shall have power or authority in reference to the
following matters: (1) approving or adopting or recommending to the stockholders
any action or matter expressly required by the Delaware General Corporation Law
to be submitted to stockholders for approval, or (2) adopting, amending or
repealing any bylaw of the corporation, all such powers and authorities being
reserved to the Board of Directors or the stockholders, as the case may be.
ARTICLE VI
----------
Officers
--------
Section 1. Number and Titles. The officers of the corporation shall be
-----------------
appointed by the Board of Directors and shall be a chairman of the board, a
chief executive officer, a president, a secretary and a treasurer. The Board of
Directors may also appoint one or more vice presidents, one or more assistant
secretaries and assistant treasurers, a chief financial officer, and such other
officers as the board may by resolution create, or as may be appointed in
accordance with Section 3 of this Article. Any one or more vice presidents may
be designated executive vice president or senior vice president. One person may
hold
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<PAGE>
any number of offices, unless the certificate of incorporation or these bylaws
otherwise provide.
Section 2. Compensation. The compensation of all officers and agents of
------------
the corporation shall be fixed by the Board of Directors or by a committee
created or officers designated for that purpose.
Section 3. Term of Office. The officers of the corporation shall hold
--------------
office until their successors are chosen and qualify or until their earlier
resignation or removal. Any officer elected or appointed by the Board of
Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the corporation
shall be filled by the Board of Directors. Any officer may resign by delivering
such officer's written resignation to the corporation at its principal place of
business, addressed to the attention of the Board of Directors, or to the chief
executive officer or the secretary. Such resignation shall be effective upon
receipt unless it is specified to be effective at some other time or upon the
happening of some other event.
Section 4. Chairman of the Board. The chairman of the board shall preside
---------------------
at all meetings of the stockholders and the Board of Directors and shall
exercise and perform such other powers and duties as may from time to time be
assigned by the Board of Directors or prescribed by these bylaws. The chairman
of the board shall, if the Board of Directors has not appointed a chief
executive officer, serve as the chief executive officer of the corporation and
shall have the powers and duties prescribed in Section 5 of Article VI of these
bylaws; provided, that the chairman of the board under such circumstances shall
have the right to delegate some or all of such powers and duties to the
president.
Section 5. Chief Executive Officer. Subject to such powers and duties, if
-----------------------
any, as may be prescribed by these bylaws or the Board of Directors for the
chairman of the board, if there be such officer, the chief executive officer
shall, subject to the control of the Board of Directors, have general
supervision, direction and control of the business and officers of the
corporation. In the absence of the chairman of the board, or if there be none,
he or she shall preside at all meetings of the stockholders and all meetings of
the Board of Directors. He or she shall have all the powers and shall perform
all of the duties which are ordinarily inherent in the office of chief executive
officer of a corporation, and he or she shall have such further powers and shall
perform such further duties as may be prescribed for him or her by the Board of
Directors.
Section 6. President. The president shall, in addition to any other
---------
duties delegated to him or her, be the chief operating officer of the
corporation, shall have active management of the business of the corporation and
shall see that all orders and resolutions of the Board of Directors, chairman of
the board and chief executive officer are carried into effect.
Section 7. Vice Presidents. Vice presidents shall perform such duties and
---------------
have such powers as the Board of Directors may from time to time prescribe. The
executive vice
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<PAGE>
presidents shall be senior in rank to all other vice presidents, including
senior vice presidents, unless specifically provided otherwise in a resolution
of the Board of Directors.
Section 8. Chief Financial Officer. The chief financial officer shall
-----------------------
serve as the chief financial officer of the corporation and shall perform such
other duties and have such other powers as the Board of Directors, the chief
executive officer or the president may from time to time prescribe.
Section 9. Secretary. The secretary shall have such powers and perform
---------
such duties as are incident to the office of secretary. The secretary shall
maintain a stock ledger and prepare lists of stockholders and their addresses as
required and shall be the custodian of corporate records. The secretary shall
attend all meetings of the Board of Directors and all meetings of the
stockholders and record all the proceedings of the meetings of the corporation
and of the Board of Directors in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. The secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be from time to time prescribed by the Board of Directors or chief
executive officer, under whose supervision the secretary shall be. The
secretary shall have custody of the corporate seal of the corporation and the
secretary, or an assistant secretary, shall have authority to affix the same to
any instrument requiring it and when so affixed, it may be attested by the
secretary's signature or by the signature of such assistant secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the corporation and to attest the affixing by such officer's signature.
Section 10. Assistant Secretaries. The assistant secretary, or if there
---------------------
be more than one, the assistant secretaries in the order determined by the Board
of Directors, the president or the secretary (or if there be no such
determination, then in the order determined by their tenure in office), shall,
in the absence of the secretary or in the event of the secretary's inability or
refusal to act, perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as the Board of
Directors, the president or the secretary may from time to time prescribe. In
the absence of the secretary or any assistant secretary at any meeting of
stockholders or directors, the person presiding at the meeting shall designate a
temporary or acting secretary to keep a record of the meeting.
Section 11. Treasurer. The treasurer shall have the custody of the
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the Board of
Directors. The treasurer shall also disburse the funds of the corporation as
may be ordered by the Board of Directors, at its regular meetings, or when the
Board of Directors so requires. The treasurer shall give an account of all
transactions as treasurer and of the financial condition of the corporation. In
the absence of the chief financial officer, the treasurer shall serve as the
chief financial officer of the corporation.
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<PAGE>
Section 12. Assistant Treasurers. The assistant treasurer, or if there
--------------------
shall be more than one, the assistant treasurers in the order determined by the
Board of Directors, the president or the treasurer (or if there be no such
determination, then in the order determined by their tenure in office), shall,
in the absence of the treasurer or in the event of the treasurer's inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the Board of
Directors, the president or the treasurer may from time to time prescribe.
Section 13. Delegation of Authority. The Board of Directors may from time
-----------------------
to time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
ARTICLE VII
-----------
Capital Stock
-------------
Section 1. Certificates. Every holder of stock in the corporation shall
------------
be entitled to have a certificate, signed by or in the name of the corporation
by the chairman of the Board of Directors, or the president or a vice president
and by the treasurer, an assistant treasurer, the secretary or an assistant
secretary of the corporation, certifying the number of shares owned by such
holder. If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the Delaware General Corporation Law, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock a statement that the corporation will furnish without charge to
each stockholder who so requests, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and rights.
Section 2. Registrars and Transfer Agents. Where a certificate is
------------------------------
countersigned (1) by a transfer agent other than the corporation or its
employee, or (2) by a registrar other than the corporation or its employee, any
other signature on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if such person were such officer, transfer
agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the
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<PAGE>
corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or such owner's legal representative, to
advertise the same in such manner as it shall require or to give the corporation
a bond in such sum as it may direct as indemnity against any claim that may be
made against the corporation with respect to the certificate alleged to have
been lost, stolen or destroyed, or both.
Section 4. Transfers of Stock. Upon surrender to the corporation or the
------------------
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, including evidence of approval of such transfer by the corporation as
required by the certificate of incorporation, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
Section 5. Fixing Record Date. In order that the corporation may
------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any right in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) days nor less
than ten (10) days prior to the date of such meeting, nor more than sixty (60)
days prior to any other action. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting. If no record date is fixed,
the record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the day before
the day on which notice is given, or, if notice is waived, at the close of
business on the day before the day on which the meeting is held. The record
date for determining stockholders for any other purpose within this Section 5
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating to such purpose.
Section 6. Registered Stockholders. The corporation shall be entitled to
-----------------------
recognize the exclusive right of a person registered on its books as the owner
of shares for all purposes, including but not limited to the right to receive
dividends and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
Section 7. Dividends. Dividends upon the capital stock of the
---------
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be
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<PAGE>
paid in cash, in property, or in shares of the capital stock, subject to the
provisions of the certificate of incorporation.
Section 8. Reserves. Before payment of any dividend, there may be set
--------
aside out of any funds of the corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ARTICLE VIII
Indemnification
---------------
Section 1. Right to Indemnification. Each person who was or is made a
------------------------
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that such person, or another
person of whom such person is the legal representative, is or was a director,
officer, or employee of the corporation or is or was serving at the request of
the corporation as a director, officer, or employee of, or in some other
representative capacity for, another corporation or a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, or employee or in any other capacity
while serving as a director, officer, or employee, shall be indemnified and held
harmless by the corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended, against
all expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, or employee and shall inure to the benefit of such person's heirs,
executors and administrators; provided, however, that except as provided in
Section 2 hereof with respect to proceedings seeking to enforce rights to
indemnification, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the corporation. The right to indemnification conferred
in this Article shall be a contract right and shall include the right to be paid
by the corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the Delaware
General Corporation Law so requires, the payment of such expenses incurred by a
director, officer, employee or representative in such person's capacity as a
director, officer, employee or representative (and not in any other capacity in
which service was or is rendered by such person while a director, officer,
employee or representative, including, without limitation, service to an
employee benefit plan) in advance of the final disposition of a proceeding,
shall be made only upon delivery to the corporation of an undertaking, by or on
behalf of
-12-
<PAGE>
such person, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Article or otherwise.
Section 2. Right of Claimant to Bring Suit. Upon making a request for
-------------------------------
indemnification, the claimant shall be presumed to be entitled to
indemnification under this Article and the corporation shall have the burden of
proof to overcome that presumption in reaching any contrary determination. If a
claim under Section 1 of this Article is not paid in full by the corporation
within ninety (90) days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the corporation) that the claimant has
not met the standards of conduct which make it permissible under the Delaware
General Corporation Law for the corporation to indemnify the claimant for the
amount claimed, but the burden of proving such defense shall be on the
corporation. Neither the failure of the corporation (including its Board of
Directors, independent legal counsel, or stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because the claimant has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the corporation (including its Board of
Directors, independent legal counsel, or stockholders) that the claimant has not
met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
Section 3. Non-Exclusivity of Rights. The right to indemnification and
-------------------------
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent of the corporation and shall inure to the benefit of
the heirs, executors and administrators of such a person.
Section 4. Insurance. The corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, or employee of the
corporation serving in any capacity on behalf of the corporation or at its
request for any other entity to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended, whether
or not the corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation Law.
Section 5. Contracts. The corporation may enter into contracts to provide
---------
individuals entitled to indemnification under this Article with specific rights
of
-13-
<PAGE>
indemnification to the fullest extent permitted by the Delaware General
Corporation Law and may create trust funds, grant security interests, obtain
letters of credit or use other means to ensure the payment of such amounts as
may be necessary to effect the rights provided in this Article or in any such
contract.
Section 6. Severability. If any word, clause or provision of this Article
------------
or any award made hereunder shall for any reason be determined to be invalid,
the provisions hereof shall not otherwise be affected thereby but shall remain
in full force and effect.
Section 7. Intent of Article. The intent of this Article VIII is to
-----------------
provide for indemnification to the fullest extent permitted by section 145 of
the Delaware General Corporation Law. To the extent that such section or any
successor section may be amended or supplemented from time to time, this Article
VIII shall be amended automatically and construed so as to permit
indemnification to the fullest extent from time to time permitted by law.
Section 8. Effect of Repeal or Modification. Any repeal or modification
--------------------------------
of the foregoing provisions of this Article VIII shall not adversely affect any
right or protection of any indemnitee existing at the time of such repeal or
modification.
ARTICLE IX
----------
Notices
-------
Section 1. Form of Notices. Unless otherwise provided in these bylaws,
---------------
whenever, under the provisions of the Delaware General Corporation Law or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, such notice shall be given in writing, by United
States mail, postage prepaid, or other means of written communication (which
includes, without limitation, telegraphic, facsimile and other electronic
communication), addressed to such director or stockholder, at his or her address
as it appears on the records of the corporation, and such notice shall be deemed
to be given at the time when the same shall be deposited in the United States
mail or sent by telegraphic, facsimile or other electronic communication.
Section 2. Waiver of Notice. Whenever any notice is required to be given
----------------
under the provisions of the statutes or of the certificate of incorporation or
of these bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, subject to any exceptions
provided in the Delaware General Corporation Law.
-14-
<PAGE>
ARTICLE X
---------
Miscellaneous
-------------
Section 1. Annual Statements. The Board of Directors may present at any
-----------------
annual meeting, or at any special meeting of the stockholders when called for by
vote of the stockholders, a full and clear statement of the business and
condition of the corporation.
Section 2. Checks. All checks or demands for money and notes of the
------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the corporation shall be fixed
-----------
by resolution of the Board of Directors.
Section 4. Seal. The corporate seal shall be in such form as may be
----
approved from time to time by the Board of Directors, and said seal, or a
facsimile thereof, may be imprinted or affixed by any process or in any manner
reproduced. Affixing the seal is not necessary to make the execution of any
document effective or binding.
ARTICLE XI
----------
Amendments
----------
The Board of Directors is expressly empowered to adopt, amend or repeal
these bylaws, provided, however, that any adoption, amendment or repeal of these
bylaws by the Board of Directors shall require the approval of at least sixty-
six and two-thirds percent (66%) of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any resolution providing for adoption, amendment or repeal is
presented to the Board of Directors). The stockholders shall also have power to
adopt, amend or repeal these bylaws, provided, however, that in addition to any
vote of the holders of any class or series of stock of this corporation required
by law or by the certificate of incorporation of this corporation, the
affirmative vote of the holders of at least eighty percent (80%) of the voting
power of all of the then outstanding shares of the capital stock of the
corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required for such adoption, amendment or
repeal by the stockholders of any provision of these bylaws.
-15-
<PAGE>
EXHIBIT 4.1
<TABLE>
<CAPTION>
TEMPORARY CERTIFICATE--EXCHANGEABLE FOR DEFINITIVE CERTIFICATE WHEN READY FOR DELIVERY
===================================================================================================================================
<S> <C> <C>
COMMON STOCK TIMBERLAND GROWTH CORPORATION COMMON STOCK
[LOGO] INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE [LOGO]
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR
IN THE CITIES OF CHICAGO, IL CERTAIN DEFINITIONS
OR NEW YORK, NY
CUSIP 887101 10 3
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.01 PAR VALUE PER SHARE, OF
TIMBERLAND GROWTH CORPORATION
transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid unless countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ Allan F. Trinkwald [SEAL] /s/ Scott R. Jones
---------------------- ------------------
Treasurer President
===================================================================================================================================
</TABLE>
<PAGE>
The shares of Timberland Growth Corporation (the "Corporation") represented
by this certificate are subject to restrictions set forth in the Corporation's
Certificate of Incorporation which prohibit in general (a) any Person from
Beneficially Owning shares of Equity Stock in excess of the Ownership Limit
and (b) any Person from acquiring or maintaining any ownership interest in the
capital stock of the Corporation that is inconsistent with (i) the
requirements of the Code pertaining to real estate investment trusts or (ii)
the Certificate of Incorporation of the Corporation, and the holder of this
certificate by his acceptance hereof consents to be bound by such
restrictions. Any purported transfer of Equity Stock in violation of such
restrictions shall be void ab initio and the Equity Stock in violation of such
restrictions, whether as a result of a Transfer or the Non-Transfer Event,
shall be automatically converted into shares of Excess Stock and transferred
to a Trust for disposition as provided in the Certificate of Incorporation.
Capitalized terms used in this paragraph and not defined herein are defined in
the Corporation's Certificate of Incorporation. The Corporation will furnish
without charge, to each stockholder who so requests, a copy of the Certificate
of Incorporation of the Corporation, containing, among other things, a
statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof that the Corporation is authorized to issue and the
qualifications, limitations or restrictions of such preferences and/or rights.
Any such request shall be addressed to the Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - __________ Custodian _____________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_______________________________
in common (State)
UNIF TRF MIN ACT - __________ Custodian (until age___)
(Cust)
____________ under Uniform Transfers
(Minor)
to Minors Act _____________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
| |
| |
______________________________________
- ------------------------------------------------------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------- Shares
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
- ------------------------------------------------------------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.
Dated___________________________________
X __________________________________________________________________________________
X __________________________________________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By _____________________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED MEDALLION SIGNATURE GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE>
EHIBIT 4.2
================================================================================
----------------------------------
Incorporated under the Laws of the
State of Delaware
----------------------------------
================================================================================
NUMBER SHARES
**01** **1**
===============================================================
TIMBERLAND GROWTH CORPORATION
Authorized Capital: One share of Special Voting Common Stock
par value $0.01
=============================================
SEE REVERSE FOR A SUMMARY OF THE RIGHTS, PREFERENCES AND PRIVILEGES OF, AND
RESTRICTIONS ON, EACH CLASS AND SERIES OF SHARES.
THIS CERTIFIES THAT Potlatch Corporation is the
---------------------------------------------
registered holder of ****One (1)**** Shares
---------------------------------------------
Of Special Voting Common Stock of Timberland Growth Corporation
transferable only on the books of the Corporation by the holder hereof in
person or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ______________ day of __________________ A.D. __________
------------------------------ [SEAL] -----------------------------
President Treasurer
Scott R. Jones Allan F. Trinkwald
================================================================================
<PAGE>
THE SHARE OF SPECIAL VOTING STOCK REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED TO ANY PERSON OR ENTITY UNLESS SUCH TRANSFER MEETS THE
QUALIFICATIONS SET FORTH IN SECTION C.6(d) OF ARTICLE FOURTH OF THE
CERTIFICATE OF INCORPORATION OF THIS CORPORATION AND NO PERSON WHO RECEIVES
THIS SHARE IN CONNECTION WITH A TRANSFER WHICH DOES NOT MEET THE
QUALIFICATIONS PRESCRIBED BY SECTION C.6(d) OF SAID ARTICLE FOURTH IS ENTITLED
TO OWN OR TO BE REGISTERED AS THE RECORD HOLDER OF THIS SHARE OF SPECIAL
VOTING STOCK AND THIS SHARE WILL HAVE BEEN AUTOMATICALLY CONVERTED INTO ONE
SHARE OF COMMON STOCK UPON ANY SUCH PURPORTED TRANSFER. THE RECORD HOLDER OF
THIS CERTIFICATE MAY AT ANY TIME CONVERT THIS SHARE OF SPECIAL VOTING STOCK
INTO ONE SHARE OF COMMON STOCK. EACH HOLDER OF THIS CERTIFICATE, BY ACCEPTING
THE SAME, ACCEPTS AND AGREES TO ALL OF THE FOREGOING. THE CORPORATION WILL
FURNISH WITHOUT CHARGE, TO EACH STOCKHOLDER WHO SO REQUESTS, A COPY OF THE
CERTIFICATE OF INCORPORATION OF THE CORPORATION, CONTAINING, AMONG OTHER
THINGS, A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF THAT THE CORPORATION IS AUTHORIZED TO ISSUE AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
ANY SUCH REQUEST SHALL BE ADDRESSED TO THE SECRETARY OF THE cORPORATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS
OF ANY STATE, AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED
PURSUANT TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR IF
THE COMPANY IS PROVIDED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
REGISTRATION AND QUALIFICATION UNDER FEDERAL AND STATE SECURITIES LAWS IS NOT
REQUIRED.
FOR VALUE RECEIVED, ___________ HEREBY SELL, ASSIGN AND TRANSFER UNTO ____
________________________________________________________________________ SHARES
REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE
AND APPOINT _______________________________________ ATTORNEY TO TRANSFER THE
SAID SHARES ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF
SUBSTITUTION IN THE PREMISES.
DATED ________________________________
IN PRESENCE OF __________________________________
<PAGE>
EXHIBIT 4.3
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of
___________, 1998 by and between TIMBERLAND GROWTH CORPORATION, a Delaware
-----------------------------
corporation (the "Company"), and POTLATCH CORPORATION, a Delaware corporation
--------------------
("Potlatch"),
W I T N E S S E T H:
WHEREAS, the Company, as general partner, and Potlatch, as limited partner,
have formed Timberland Growth Limited Partnership, a Delaware limited
partnership (the "Partnership"), pursuant to that certain Agreement of Limited
Partnership, dated as of March __, 1998 (the "Original Partnership Agreement");
and
WHEREAS, concurrently with the execution of this agreement by the parties
hereto, the Original Partnership Agreement will be amended and restated by that
certain Amended and Restated Agreement of Limited Partnership, dated as of the
date hereof (the "Partnership Agreement"); and
WHEREAS, pursuant to Section 8.5 of the Partnership Agreement, Potlatch may
under certain circumstances acquire shares of Common Stock of the Company in
exchange for its limited partnership interests in the Partnership; and
WHEREAS, the Company and Potlatch desire to provide for the rights set
forth herein with respect to the registration of such shares of Common Stock:
NOW, THEREFORE, in consideration of the covenants and agreements of the
Holder (as defined below) and the Company contained herein and in the
Partnership Agreement and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions and Usage.
---------------------
As used in this Agreement:
1.1 Definitions.
-----------
Agent. "Agent" shall mean the principal placement agent on an agented
-----
placement of Registrable Securities.
Board. "Board" shall mean the Board of Directors of the Company.
-----
-1-
<PAGE>
Commission. "Commission" shall mean the U.S. Securities and Exchange
----------
Commission.
Common Stock. "Common Stock" shall mean (i) the Common Stock, par value
------------
$.01 per share, of the Company and (ii) shares of capital stock of the Company
issued by the Company in respect of or in exchange for shares of such Common
Stock in connection with any stock dividend or distribution, stock split-up,
recapitalization, recombination or exchange by the Company generally of shares
of such Common Stock.
Continuously Effective. "Continuously Effective," with respect to a
----------------------
specified registration statement, shall mean that such registration statement
shall not cease to be effective and available for Transfers of Registrable
Securities thereunder for less than either (i) any ten (10) consecutive business
days, or (ii) an aggregate of fifteen (15) business days during the period
specified in the relevant provision of this Agreement.
Demand Registration. "Demand Registration" shall have the meaning set
-------------------
forth in Section 2.1(a).
Equity. "Equity" shall mean any and all shares of Common Stock, Special
------
Voting Stock and other capital stock of the Company, securities of the Company
convertible into such shares, and options, warrants or other rights to acquire
such shares.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
------------
1934, as amended.
Holder. "Holder" shall mean Potlatch and any holder of Registrable
------
Securities to whom the registration rights conferred by this Agreement are
transferred in compliance with Section 8 hereof.
IPO Closing Date. "IPO Closing Date" shall mean the closing date of the
----------------
initial public offering of Common Stock.
Other Shares. "Other Shares" shall have the meaning set forth in Section
------------
3.2.
Partnership Agreement. "Partnership Agreement" shall have the meaning set
---------------------
forth in the second recital to this Agreement.
Person. "Person" shall mean any individual, corporation, partnership,
------
limited liability company, joint venture, association, trust, unincorporated
organization or other entity.
Piggyback Registration. "Piggyback Registration" shall have the meaning
----------------------
set forth in Section 3.
Register, Registered and Registration. "Register," "registered" and
-------------------------------------
"registration" shall refer to a registration effected by preparing and filing a
registration statement or similar
-2-
<PAGE>
document in compliance with the Securities Act, and the declaration or ordering
by the Commission of effectiveness of such registration statement or document.
Registrable Securities. "Registrable Securities" shall mean any shares of
----------------------
Common Stock issued or issuable to the Holder upon exchange (pursuant to Section
8.5 of the Partnership Agreement) of the limited partnership interests in the
Partnership held by the Holder on the date hereof or hereafter acquired;
provided, however, that the Company shall have no obligation under Sections 2
- -------- -------
and 3 to register any Registrable Securities of the Holder if the Company shall
deliver to the Holder an opinion of counsel reasonably satisfactory to such
Holder and its counsel to the effect that the proposed sale or disposition of
all of the Registrable Securities for which registration was requested does not
require registration under the Securities Act for a sale or disposition in a
single public sale, and the Company offers to remove any and all legends
restricting transfer from the certificates evidencing such Registrable
Securities.
Registration Expenses. "Registration Expenses" shall have the meaning set
---------------------
forth in Section 6.1.
Rule 144. "Rule 144" shall mean Rule 144 as promulgated by the Commission
--------
under the Securities Act, as such rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
--------------
amended.
Transfer. "Transfer" shall mean and include the act of offering, selling,
--------
giving, transferring, creating a trust (voting or otherwise), assigning or
otherwise disposing of, whether voluntarily or involuntarily and including by
way of merger or consolidation and regardless of whether such act is by
operation of law or otherwise, (other than pledging, hypothecating or otherwise
transferring as security) (and correlative words shall have correlative
meanings); provided, however, that any transfer or other disposition upon
-------- -------
foreclosure or other exercise of remedies of a secured creditor after an event
of default under or with respect to a pledge, hypothecation or other transfer as
security shall constitute a "Transfer."
Underwriters' Representative. "Underwriters' Representative" shall mean
----------------------------
the managing underwriter, or, in the case of a co-managed underwriting, the
managing underwriter designated as the Underwriters' Representative by the co-
managers.
Violation. "Violation" shall have the meaning set forth in Section 7.1.
---------
1.2 Usage.
-----
(a) References to a Person are also references to its successors in
interest (by means of merger, consolidation or sale of all or substantially all
the assets of such Person or otherwise, as the case may be) and permitted
assigns.
-3-
<PAGE>
(b) References to a document are to it as amended, waived and otherwise
modified from time to time and references to a statute or other governmental
rule are to it as amended and otherwise modified from time to time (and
references to any provision thereof shall include references to any successor
provision).
(c) References to Sections or to Schedules or Exhibits are to sections
hereof or schedules or exhibits hereto, unless the context otherwise requires.
(d) The definitions set forth herein are equally applicable both to the
singular and plural forms and the feminine, masculine and neuter forms of the
terms defined.
(e) The term "including" and correlative terms shall be deemed to be
followed by "without limitation" whether or not followed by such words or words
of like such import.
(f) The term "hereof" and similar terms refer to this Agreement as a whole.
(g) The "date of" any notice or request given pursuant to this Agreement
shall be determined in accordance with Section 11.2.
Section 2. Demand Registration.
-------------------
2.1(a) At any time on or after the second anniversary of the IPO Closing
Date, if the Holder shall make a written request to the Company, the Company
shall cause to be filed with the Commission a registration statement meeting the
requirements of the Securities Act (a "Demand Registration"), and the Holder
shall be entitled to have included therein all or such number of Holder's
Registrable Securities, as the Holder shall request in writing; provided,
--------
however, that the fair market value of the Holder's Registrable Securities to be
- -------
included in such registration shall not be less than $50.0 million as of the
date of such written request (unless such Registrable Securities represent all
of the Holder's Registrable Securities); and provided further, however, that no
---------------- -------
request may be made pursuant to this Section 2.1 if within six (6) months prior
to the date of such request a Demand Registration statement pursuant to this
Section 2.1 shall have been declared effective by the Commission. Any request
made pursuant to this Section 2.1 shall be addressed to the attention of the
Secretary of the Company (or if there is no such officer, the President), and
shall specify the number of Registrable Securities to be registered, the
intended methods of disposition thereof and that the request is for a Demand
Registration pursuant to this Section 2.1(a).
(b) The Company shall be entitled to postpone for up to sixty (60) days the
filing of any Demand Registration statement otherwise required to be prepared
and filed pursuant to this Section 2.1 (or delay seeking effectiveness of a
Registration Statement which has been filed), if the Board determines, in its
good faith reasonable judgment, that such registration would materially
interfere with, or require premature and seriously detrimental disclosure of,
any material financing, acquisition or reorganization or other material matter
involving the Company or any of its subsidiaries and the Company promptly gives
the Holder notice of such determination; provided, however, that the Company
-------- -------
shall not have postponed pursuant to this Section 2.1(b) the filing of any other
Demand
-4-
<PAGE>
Registration statement otherwise required to be prepared and filed pursuant to
this Section 2.1 during the 180-day period ended on the date of the relevant
request pursuant to Section 2.1(a).
2.2 Following receipt of a request for a Demand Registration, the Company
shall:
(a) File the registration statement with the Commission as promptly
as practicable, and, subject to Section 2.1(b), shall use the Company's
reasonable efforts to have the registration statement declared effective
under the Securities Act as soon as reasonably practicable, in each
instance giving due regard to the need to prepare current financial
statements, conduct due diligence and complete other actions that are
reasonably necessary to effect a registered public offering; and
(b) Use the Company's reasonable efforts to keep the relevant
registration statement Continuously Effective for up to ninety (90) days or
until such earlier date as of which all the Registrable Securities under
the Demand Registration statement shall have been disposed of in the manner
described in the Registration Statement. Notwithstanding the foregoing, if
for any reason the effectiveness of a registration pursuant to this Section
2 is suspended or filing of the Registration Statement or seeking
effectiveness thereof is postponed as permitted by Section 2.1(b), the
foregoing period shall be extended by the aggregate number of days of such
suspension or postponement.
2.3 A registration pursuant to this Section 2 shall be on such
appropriate registration form of the Commission as shall (a) be selected by the
Company and be reasonably acceptable to the Holder and (b) permit the
disposition of the Registrable Securities in accordance with the intended method
or methods of disposition specified in the request pursuant to Section 2.1(a).
2.4 If any registration pursuant to this Section 2 involves an
underwritten offering (whether on a "firm commitment," "best efforts" or "all
reasonable efforts" basis or otherwise), or an agented offering, the Holder
shall have the right to select the underwriter or underwriters and manager or
managers to administer such underwritten offering or the placement agent or
agents for such agented offering; provided, however, that each Person so
-------- -------
selected shall be reasonably acceptable to the Company.
2.5 No securities other than Registrable Securities (including without
limitation shares to be sold for the Company's account) shall be included in any
registration pursuant to this Section 2 without the prior written consent of the
Holder.
-5-
<PAGE>
Section 3. Piggyback Registration.
----------------------
3.1 If any time after the second anniversary of the IPO Closing Date the
Company proposes to register (including for this purpose a registration effected
by the Company for stockholders of the Company other than the Holder) Common
Stock under the Securities Act in connection with a public offering solely for
cash (other than in connection with an employee benefit plan) on Form S-l, S-2,
S-3 or S-11 (or any replacement or successor forms thereto), the Company shall
promptly give the Holder written notice of such registration (a "Piggyback
Registration"). Upon the written request of the Holder given within 20 days
following the date of such notice, the Company shall cause to be included in
such registration statement and use its reasonable efforts to cause to be
registered under the Securities Act all of the Registrable Securities that the
Holder shall have requested to be registered. The Company shall have the
absolute right to withdraw or cease to prepare or file any registration
statement for any offering referred to in this Section 3 without any obligation
or liability to the Holder.
3.2 If the Underwriters' Representative or Agent shall advise the Company
in writing (with a copy to the Holder) that, in its opinion, the amount of
Registrable Securities requested to be included in such registration would
materially adversely affect such offering, or the timing thereof, then the
Company will include in such registration, to the extent of the amount and class
which the Company is so advised can be sold without such material adverse effect
in such offering: first, all securities proposed to be sold by the Company for
its own account; and second, the Registrable Securities requested to be included
in such registration by the Holder pursuant to this Section 3 and all other
securities requested to be registered other than on behalf of the Company (the
"Other Shares") pro rata based on the respective number of shares of Common
Stock held by the Holder and the Person(s) requesting registration of the Other
Shares (assuming for such purpose that all limited partnership interests in the
Partnership held by the Holder and such Persons had been redeemed for shares of
Common Stock).
Section 4. Registration Procedures. Whenever required under Section 2 or
-----------------------
Section 3 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously practicable:
4.1 Prepare and file with the Commission a registration statement with
respect to such Registrable Securities and, subject to Section 2.1(b) and
Section 3.1, use the Company's reasonable efforts to cause such registration
statement to become effective, provided, however, that before filing a
-------- -------
registration statement or prospectus or any amendments or supplements thereto,
including documents incorporated by reference after the initial filing of the
registration statement and prior to effectiveness thereof, the Company shall
furnish to counsel for the Holder copies of all such documents in the form
substantially as proposed to be filed with the Commission prior to filing for
review and comment by such counsel.
4.2 Prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection with each
registration
-6-
<PAGE>
statement as may be necessary to comply with the provisions of the Securities
Act and rules thereunder with respect to the disposition of all securities
covered by such registration statement. If the registration is for an
underwritten offering, the Company shall amend the registration statement or
supplement the prospectus whenever required by the terms of the underwriting
agreement entered into pursuant to Section 4.5. Pending such amendment or
supplement the Holder shall cease making offers or Transfers of Registrable
Shares pursuant to the prior prospectus. In the event that any Registrable
Securities included in a registration statement subject to, or required by, this
Agreement remain unsold at the end of the period during which the Company is
obligated to use its reasonable efforts to maintain the effectiveness of such
registration statement, the Company may file a post-effective amendment to the
registration statement for the purpose of removing such Registrable Securities
from registered status.
4.3 Furnish to the Holder, without charge, such numbers of copies of the
registration statement, any pre-effective or post-effective amendment thereto,
the prospectus, including each preliminary prospectus and any amendments or
supplements thereto, in each case in conformity with the requirements of the
Securities Act and the rules thereunder, and such other related documents as the
Holder may reasonably request in order to facilitate the disposition of
Registrable Securities owned by the Holder.
4.4 Use the Company's reasonable efforts (i) to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such states or jurisdictions as shall be reasonably requested
by the Underwriters' Representative or Agent (or if there is no Underwriters'
Representative or Agent, as shall be reasonably requested by the Holder), and
(ii) to obtain the withdrawal of any order suspending the effectiveness of a
registration statement, or the lifting of any suspension of the qualification
(or exemption from qualification) of the offer and sale of any of the
Registrable Securities in any jurisdiction, at the earliest possible moment;
provided, however, that the Company shall not be required in connection
- -------- -------
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions.
4.5 In the event of any underwritten or agented offering, enter into and
perform the Company's obligations under an underwriting or agency agreement, in
usual and customary form, with the managing underwriter or underwriters of or
agents for such offering. The Company shall also cooperate with the Holder and
the Underwriters' Representative or Agent for such offering in the marketing of
the Registrable Securities.
4.6 Promptly notify the Holder of any stop order issued or threatened to
be issued by the Commission in connection therewith and take all reasonable
actions required to prevent the entry of such stop order or to remove it if
entered.
4.7 Make available for inspection by the Holder, any underwriter or agent
participating in such offering and the representatives of the Holder and
underwriter or agent, all financial and other information as shall be reasonably
requested by them, and provide the Holder, any underwriter or agent
participating in such offering and the representatives of the
-7-
<PAGE>
Holder and such underwriter or agent the reasonable opportunity to discuss the
business affairs of the Company with its principal executives and independent
public accountants who have certified the audited financial statements included
in such registration statement, in each case all as necessary to enable them to
exercise their due diligence responsibility under the Securities Act; provided,
--------
however, that information that the Company determines, in good faith, to be
- -------
confidential and which the Company advises such Person in writing, is
confidential shall not be disclosed unless such Person signs a confidentiality
agreement reasonably satisfactory to the Company or the Holder of Registrable
Securities agrees to be responsible for such Person's breach of confidentiality
on terms reasonably satisfactory to the Company.
4.8 Use the Company's reasonable efforts to obtain a "comfort letter"
from its independent public accountants and legal opinions of counsel to the
Company, each in usual and customary form, addressed to the Holder. The Company
shall furnish to the Holder a signed counterpart of any such comfort letter or
legal opinion. Delivery of any such opinion or comfort letter shall be subject
to the recipient furnishing such written representations or acknowledgements as
are customarily provided by selling shareholders who receive such comfort
letters or opinions.
4.9 Provide and cause to be maintained a transfer agent and registrar for
all Registrable Securities covered by such registration statement from and after
a date not later than the effective date of such registration statement.
4.10 Use reasonable efforts to cause the Registrable Securities covered by
such registration statement (i) if the Common Stock is then listed on a
securities exchange or included for quotation in a recognized trading market, to
continue to be so listed or included for a reasonable period of time after the
offering, and (ii) to be registered with or approved by such other United States
or state governmental agencies or authorities as may be necessary by virtue of
the business and operations of the Company to enable the Holder to consummate
the disposition of the Registrable Securities which are included in such
registration.
4.11 Take such other actions as are reasonably required in order to
expedite or facilitate the disposition of Registrable Securities included in
such registration.
Section 5. Holder's Obligations. It shall be a condition precedent to the
--------------------
obligations of the Company hereunder that the Holder shall furnish to the
Company such information regarding the Holder, the number of the Registrable
Securities owned by it, and the intended method of disposition of such
Registrable Securities as shall be required to effect the registration of the
Holder's Registrable Securities and to cooperate with the Company in preparing
such registration.
Section 6. Expenses of Registration. With respect to each Demand
------------------------
Registration and Piggyback Registration, the Company shall bear and pay all
expenses incurred in connection with any registration, filing, or qualification
of Registrable Securities with respect to such Demand or Piggyback Registration,
including all registration, filing and National Association
-8-
<PAGE>
of Securities Dealers, Inc. fees, all fees and expenses of complying with
securities or blue sky laws, all word processing, duplicating and printing
expenses, messenger and delivery expenses, and the reasonable fees and
disbursements of counsel for the Company and of the Company's independent public
accountants, including the expenses of "cold comfort" letters required by or
incident to such performance and compliance (the "Registration Expenses"), but
excluding underwriting discounts and commissions relating to Registrable
Securities or fees and expenses of Holder's counsel (which shall be paid by the
Holder), provided, however, that the Company shall not be required to pay for
-------- -------
any expenses of any registration begun pursuant to Section 2 if the registration
is subsequently withdrawn at the request of the Holder (in which case the Holder
shall bear such expense).
Section 7. Indemnification; Contribution. If any Registrable Securities
-----------------------------
are included in a registration statement under this Agreement:
7.1 To the extent permitted by applicable law, the Company shall
indemnify and hold harmless the Holder, each Person, if any, who controls such
Holder within the meaning of the Securities Act, and each officer, director,
partner, and employee of the Holder and such controlling Person, against any and
all losses, claims, damages, liabilities and expenses (joint or several),
including reasonable attorneys' fees and disbursements and expenses of
investigation, incurred by such party pursuant to any actual or threatened
action, suit, proceeding or investigation, to which any of the foregoing Persons
may become subject under the Securities Act, the Exchange Act or other federal
or state laws, insofar as such losses, claims, damages, liabilities and expenses
arise out of or are based upon any of the following statements, omissions or
violations (collectively, a "Violation"):
(a) Any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein, or any amendments or
supplements thereto;
(b) The omission or alleged omission to state therein a material
fact required to be stated therein, or necessary to make the statements
therein not misleading; or
(c) Any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any applicable state securities law or
any rule or regulation promulgated under the Securities Act, the Exchange
Act or any applicable state securities law;
provided, however, that the indemnification required by this Section 7.1 shall
- -------- -------
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or expense if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or expense to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished to the Company by the indemnified party expressly for use in
connection with
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<PAGE>
such registration; provided, further, that the indemnity agreement contained in
-------- -------
this Section 7 shall not apply to any underwriter to the extent that any such
loss is based on or arises out of an untrue statement or alleged untrue
statement of a material fact, or an omission or alleged omission to state a
material fact, contained in or omitted from any preliminary prospectus if the
final prospectus shall correct such untrue statement or alleged untrue
statement, or such omission or alleged omission, and a copy of the final
prospectus has not been sent or given to such person at or prior to the
confirmation of sale to such person if such underwriter was under an obligation
to deliver such final prospectus and failed to do so. The Company shall also
indemnify underwriters and selling or placement agents participating in the
distribution, their officers, directors, agents and employees and each person
who controls such persons (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) to the same extent as provided above with
respect to the indemnification of the Holder, provided, however that no such
-------- -------
underwriter or agent shall be entitled to indemnification under this Agreement
if such person shall have entered into a separate underwriting agency or
indemnification agreement with the Company.
7.2 To the extent permitted by applicable law, the Holder shall indemnify
and hold harmless the Company, each of its directors, each of its officers who
shall have signed the registration statement, each Person, if any, who controls
the Company within the meaning of the Securities Act, and each officer,
director, partner, and employee of the Company and such controlling Person,
against any and all losses, claims, damages, liabilities and expenses (joint and
several), including attorneys' fees and disbursements and expenses of
investigation, incurred by such party pursuant to any actual or threatened
action, suit, proceeding or investigation, or to which any of the foregoing may
otherwise become subject under the Securities Act, the Exchange Act or other
federal or state laws, insofar as such losses, claims, damages, liabilities and
expenses arise out of or are based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished by the Holder expressly for use
in connection with such registration; provided, however, that the
-------- -------
indemnification required by this Section 7.2 shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or expense if settlement
is effected without the consent of the Holder, which consent shall not be
unreasonably withheld.
7.3 Promptly after receipt by an indemnified party under this Section 7
of notice of the commencement of any action, suit, proceeding, investigation or
threat thereof made in writing for which such indemnified party may make a claim
under this Section 7, such indemnified party shall deliver to the indemnifying
party a written notice of the commencement thereof and the indemnifying party
shall have the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly noticed,
to assume the defense thereof with counsel mutually satisfactory to the parties;
subject to the rights of an indemnified party to retain its own counsel as
hereinafter provided. The failure to deliver written notice to the indemnifying
party within a reasonable time following the commencement of any such action, if
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
7 but shall not relieve the indemnifying party of any liability that it may have
to any indemnified party otherwise than pursuant to this Section 7. Any fees
and
-10-
<PAGE>
expenses incurred by the indemnified party (including any fees and expenses
incurred in connection with investigating or preparing to defend such action or
proceeding) owed by the indemnifying party hereunder shall be paid to the
indemnified party, as incurred, within thirty (30) days of written notice
thereof to the indemnifying party (subject to refund if it is ultimately
determined that an indemnified party is not entitled to indemnification
hereunder). Any such indemnified party shall have the right to employ separate
counsel in any such action, claim or proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be the expenses
of such indemnified party unless (i) the indemnifying party has agreed to pay
such fees and expenses or (ii) the indemnifying party shall have failed to
promptly assume the defense of such action, claim or proceeding or (iii) the
named parties to any such action, claim or proceeding (including any impleaded
parties) include both such indemnified party and the indemnifying party, and
such indemnified party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or in addition
to those available to the indemnifying party and that the assertion of such
defenses would create a conflict of interest such that counsel employed by the
indemnifying party could not faithfully represent the indemnified party (in
which case, if such indemnified party notifies the indemnifying party in writing
that it elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense of
such action, claim or proceeding on behalf of such indemnified party, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action, claim or proceeding or separate but substantially similar
or related actions, claims or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all such indemnified parties, unless
in the reasonable judgment of such indemnified party a conflict of interest may
exist between such indemnified party and any other of such indemnified parties
with respect to such action, claim or proceeding, in which event the
indemnifying party shall be obligated to pay the reasonable fees and expenses of
such additional counsel or counsels).
7.4 If the indemnification required by this Section 7 from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to in this
Section 7:
(a) The indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities or expenses
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as
well as any other relevant equitable considerations. The relative fault of
such indemnifying party and indemnified parties shall be determined by
reference to, among other things, whether any Violation has been committed
by, or relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such Violation. The
amount paid or payable
-11-
<PAGE>
by a party as a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include, subject to the
limitations set forth in Section 7.l and Section 7.2, any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
(b) The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 7.4 were determined by pro rata
allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in Section 7.4(a). No
Person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
7.5 If indemnification is available under this Section 7, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in this Section 7 without regard to the relative fault of such
indemnifying party or indemnified party or any other equitable consideration
referred to in Section 7.4.
7.6 The obligations of the Company and the Holder under this Section 7
shall survive the completion of any offering of Registrable Securities pursuant
to a registration statement under this Agreement, and otherwise.
Section 8. Transfer or Assignment of Registration Rights. The rights to
---------------------------------------------
cause the Company to register Common Stock granted hereunder to Potlatch by the
Company may be transferred or assigned by Potlatch or any subsequent Holder only
to a transferee or assignee of not less than 2,500,000 shares of Registrable
Securities (subject to adjustment for stock splits, stock dividends, stock
combinations and the like) (assuming for this purpose the exchange of any
limited partnership interests in the Partnership which may be exchanged for
shares of Registrable Securities pursuant to Section 8.5 of the Partnership
Agreement), provided, that the Company is given written notice at the time of or
--------
within a reasonable time after said transfer or assignment, stating the name and
address of the transferee or assignee and identifying the securities with
respect to which such registration rights are being transferred or assigned and,
provided further, that the transferee or assignee of such rights assumes in
- ----------------
writing the obligations of such Holder under this Agreement. In the event that
there is more than one Holder, any action to be taken or consent to be given by
the Holder under this Agreement shall mean the action or consent of the Holder
or Holders who in the aggregate hold not less than a majority of the outstanding
Registrable Securities (assuming for such purpose that any limited partnership
interests in the Partnership held by a Holder are exchanged, as of the date of
determination, for shares of Registrable Securities pursuant to Section 8.5 of
the Partnership Agreement).
Section 9. Amendment, Modification and Waivers; Further Assurances.
-------------------------------------------------------
(a) This Agreement may be amended with the consent of the Company and the
Company may take any action herein prohibited, or omit to perform any act herein
required
-12-
<PAGE>
to be performed by it, only if the Company shall have obtained the written
consent of the Holder to such amendment, action or omission to act.
(b) No waiver of any single breach or default of this Agreement shall
operate as a waiver of any other breach or default of this Agreement, nor shall
any failure to enforce any provision hereof operate as a waiver of such
provision or of any other provision hereof. No written waiver hereunder, unless
it by its own terms explicitly provides to the contrary, shall be construed to
effect a continuing waiver of the provisions being waived and no such waiver in
any instance shall constitute a waiver in any other instance or for any other
purpose or impair the right of the party against whom such waiver is claimed in
all other instances or for all other purposes to require full compliance with
such provision.
(c) Each of the parties hereto shall execute all such further instruments
and documents and take all such further action as any other party hereto may
reasonably require in order to effectuate the terms and purposes of this
Agreement.
(d) With a view to making available the benefits of certain rules and
regulations of the Commission that may permit the sale of the Registrable
Securities to the public without registration, the Company agrees to use its
best efforts to:
(i) Make and keep public information regarding the Company available
as those terms are understood and defined in Rule 144;
(ii) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange
Act; and
(iii) So long as a Holder owns any Registrable Securities, furnish
to the Holder forthwith upon written request a written statement by the
Company as to its compliance with the reporting requirements of Rule 144, a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents so filed as a Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing a
Holder to sell any such securities without registration.
Section 10. Assignment; Benefit. Except as otherwise expressly provided
-------------------
herein, this Agreement and all of the provisions hereof shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
Section 11. Miscellaneous.
-------------
11.1 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, without giving regard to the
conflict of laws principles thereof.
11.2 Notices. All notices and requests given pursuant to this Agreement
-------
shall be in writing and shall be made by hand delivery, first-class mail
(registered or certified, return
-13-
<PAGE>
receipt requested), confirmed facsimile or overnight air courier guaranteeing
next business day delivery to the relevant address specified below:
If to Holder, to:
Potlatch Corporation
601 West Riverside Avenue, Suite 1100
Spokane, WA 99201
Facsimile: (509) 835-1555
Attention: General Counsel
If to Company, to:
Timberland Growth Corporation
1242 North Second Street
Memphis, TN 38101
Facsimile: (901) ___-____
Attention: Chief Executive Officer
Except as otherwise provided in this Agreement, the date of each such notice and
request shall be deemed to be, and the date on which each such notice and
request shall be deemed given shall be: at the time delivered, if personally
delivered or mailed; when receipt is acknowledged, if sent by facsimile; and the
next business day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next business day delivery.
11.3 Entire Agreement; Integration. This Agreement supersedes all prior
-----------------------------
agreements between or among any of the parties hereto with respect to the
subject matter contained herein and therein, and such agreements embody the
entire understanding among the parties relating to such subject matter.
11.4 Injunctive Relief. Each of the parties hereto acknowledges that in
-----------------
the event of a breach by any of them of any material provision of this
Agreement, the aggrieved party may be without an adequate remedy at law. Each
of the parties therefore agrees that in the event of such a breach hereof the
aggrieved party may elect to institute and prosecute proceedings in any court of
competent jurisdiction to enforce specific performance or to enjoin the
continuing breach hereof. By seeking or obtaining any such relief, the
aggrieved party shall not be precluded from seeking or obtaining any other
relief to which it may be entitled.
11.5 Section Headings. Section headings are for convenience of reference
----------------
only and shall not affect the meaning of any provision of this Agreement.
11.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original and all of which shall together
constitute one and the same instrument. All signatures need not be on the same
counterpart.
-14-
<PAGE>
11.7 Severability. If any provision of this Agreement shall be invalid or
------------
unenforceable, such invalidity or unenforceability shall not affect the validity
and enforceability of the remaining provisions of this Agreement, unless the
result thereof would be unreasonable, in which case the parties hereto shall
negotiate in good faith as to appropriate amendments hereto.
11.8 Termination. The agreements of the Company contained in this
-----------
Agreement shall continue in full force and effect so long as the Holder holds
any Registrable Securities or limited partnership interests in the Partnership
that may be exchanged for Registrable Securities pursuant to Section 8.5 of the
Partnership Agreement (assuming the satisfaction, waiver or fulfillment of any
requirement for the passage of time, any election to deliver shares by the
Company and any other condition or limitation set forth in the Partnership
Agreement); provided that the right of the Holder to request registration or
--------
inclusion in any registration pursuant to Section 2 or Section 3 hereof shall
terminate at such time as all shares of Registrable Securities held (or which
may be held upon exchange of limited partnership interests in the Partnership
pursuant to Section 8.5 of the Partnership Agreement) by the Holder may
immediately be sold without restriction or limitation as to amount under Rule
144 during any 90-day period.
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date and year first above written.
POTLATCH CORPORATION
By
------------------------------
Name:
Title:
TIMBERLAND GROWTH CORPORATION
By
------------------------------
Name:
Title:
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<PAGE>
Exhibit 10.1
AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
TIMBERLAND GROWTH LIMITED PARTNERSHIP
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINED TERMS............................................... 1
ARTICLE II PARTNERSHIP ORGANIZATION AND IDENTIFICATION................. 10
2.1 Amendment and Continuation.................................. 10
2.2 Name, Office and Registered Agent........................... 10
2.3 Partners.................................................... 11
2.4 Term........................................................ 11
2.5 Filing of Certificate and Perfection of Limited Partnership. 11
ARTICLE III BUSINESS OF THE PARTNERSHIP................................. 11
3.1 Business.................................................... 11
3.2 Powers...................................................... 12
3.3 Authority and Responsibility of Partners.................... 12
ARTICLE IV CAPITAL CONTRIBUTIONS AND ACCOUNTS.......................... 12
4.1 Capital Contributions....................................... 12
4.2 Additional Capital Contributions and Issuances of Additional
Partnership Interests....................................... 12
(a) Issuances of Additional Partnership Interests......... 13
(i) General......................................... 13
(ii) Upon Issuance of New Securities................. 14
(b) Certain Deemed Contributions of Proceeds of Issuances
of Shares............................................. 15
(c) Minimum Limited Partnership Interest.................. 15
4.3 General Partner Loans....................................... 16
4.4 Capital Accounts............................................ 16
4.5 Percentage Interests........................................ 17
4.6 No Interest on Contributions................................ 17
4.7 Return of Capital Contributions............................. 17
4.8 No Deficit Restoration Obligation........................... 17
4.9 No Third-Party Beneficiary.................................. 17
4.10 Preemptive Rights........................................... 18
ARTICLE V PROFITS AND LOSSES; DISTRIBUTIONS........................... 18
5.1 Allocations................................................. 18
(a) General Allocation.................................... 18
(b) Limitation............................................ 18
(c) Allocations With Respect to Property.................. 19
(d) Minimum Gain Chargeback............................... 19
(e) Qualified Income Offset............................... 19
(f) Change in Percentage Interests........................ 19
(g) Recourse Debt......................................... 19
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<PAGE>
(h) Effect of Special Allocations on Subsequent=20
Allocations .......................................... 19
(i) Nonrecourse and Recourse Debt......................... 20
(j) State and Local Items................................. 20
5.2 Distribution of Cash........................................ 20
5.3 [Reserved].................................................. 21
5.4 No Right to Distributions in Kind........................... 21
5.5 Other Limitations on Distributions.......................... 21
5.6 Amounts Withheld............................................ 22
5.7 Accounting Allocations...................................... 22
5.8 Substantial Economic Effect................................. 22
ARTICLE VI RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL
PARTNER..................................................... 22
6.1 Management of the Partnership............................... 22
6.2 Delegation of Authority..................................... 25
6.3 Indemnification and Exculpation of Indemnitees.............. 25
6.4 Liability of the General Partner............................ 26
6.5 Expenditures by the Partnership............................. 27
6.6 Outside Activities.......................................... 28
6.7 Transactions with Affiliates................................ 28
6.8 General Partner Participation............................... 28
6.9 Title to Partnership Assets................................. 28
6.10 Repurchase or Redemption of Shares.......................... 29
6.11 Violations of Potlatch's Covenants.......................... 29
ARTICLE VII CHANGES IN GENERAL PARTNER.................................. 30
7.1 Transfer of the General Partner's Partnership Interest...... 30
7.2 Admission of a Substitute or Successor General Partner...... 31
7.3 Effect of Bankruptcy, Withdrawal, Death or Dissolution of
a General Partner........................................... 31
7.4 Removal of a General Partner................................ 32
ARTICLE VIII RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS.............. 33
8.1 Management of the Partnership............................... 33
8.2 Power of Attorney........................................... 33
8.3 Limitation on Liability of Limited Partners................. 33
8.4 Ownership by Limited Partner of Corporate General Partner or
Affiliate................................................... 33
8.5 Exchange Right.............................................. 34
8.6 Outside Activities of Limited Partners...................... 36
8.7 Sale or Pledge of Timberlands Contributed by Potlatch....... 36
8.8 Other Rights of Limited Partners............................ 37
8.9 Meetings of the Partners.................................... 39
8.10 In-Kind Distribution Upon Termination of Potlatch Timber
Agreement................................................... 40
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<PAGE>
ARTICLE IX TRANSFERS OF LIMITED PARTNERSHIP INTERESTS.................. 43
9.1 Purchase for Investment..................................... 43
9.2 Restrictions on Transfer of Limited Partnership Interests... 43
9.3 Admission of Substitute Limited Partner..................... 44
9.4 Rights of Assignees of Partnership Interests................ 45
9.5 Effect of Bankruptcy, Death, Incompetence or Termination of
a Limited Partner........................................... 45
9.6 Assignment of All Partnership Units......................... 46
9.7 Limitation on Transfer of Partnership Units and Other Rights
To Avoid Adverse Tax Effects................................ 46
ARTICLE X BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS.................. 46
10.1 Books and Records........................................... 46
10.2 Custody of Partnership Funds; Bank Accounts................. 47
10.3 Fiscal and Taxable Year..................................... 47
10.4 Annual Tax Information and Report........................... 47
10.5 Tax Matters Partner; Tax Elections; Special Basis
Adjustments ................................................ 47
10.6 Reports to Limited Partners................................. 48
ARTICLE XI AMENDMENT OF AGREEMENT...................................... 48
11.1 Amendment of Agreement...................................... 48
ARTICLE XII TERMINATION AND DISSOLUTION................................. 49
12.1 No Dissolution.............................................. 49
12.2 Events of Dissolution....................................... 50
12.3 Winding-up.................................................. 50
12.4 Final Accounting............................................ 50
12.5 Liquidation and Termination................................. 50
12.6 Distributions in Kind....................................... 51
ARTICLE XIII GENERAL PROVISIONS.......................................... 52
13.1 Notices..................................................... 52
13.2 Survival of Rights.......................................... 52
13.3 Additional Documents........................................ 52
13.4 Severability................................................ 52
13.5 Entire Agreement............................................ 52
13.6 Pronouns and Plurals........................................ 52
13.7 Headings.................................................... 52
13.8 Counterparts................................................ 52
13.9 Governing Law............................................... 53
13.10 Waiver...................................................... 53
13.11 Partition................................................... 53
13.12 No Third-Party Rights Created Hereby........................ 53
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AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
TIMBERLAND GROWTH LIMITED PARTNERSHIP
This AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF IMBERLAND
GROWTH LIMITED PARTNERSHIP (this "Agreement"), is entered into and effective
this ____ day of _______, 1998, by and between TIMBERLAND GROWTH CORPORATION,
a Delaware corporation, in its individual capacity (the "Company") and in its
capacity as General Partner (the "General Partner"), and POTLATCH CORPORATION,
a Delaware corporation, as Limited Partner ("Potlatch").
The parties hereto previously associated themselves and agreed to become
partners of the Partnership effective as of May ___, 1998. The Partners as of
the date hereof now desire to amend and restate their agreement of limited
partnership as provided for herein. In consideration of the mutual covenants
and agreements herein made and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound, the parties hereto agree as follows:
ARTICLE I
DEFINED TERMS
The following defined terms used in this Agreement shall have the meanings
specified below:
"Act" means the Delaware Revised Uniform Limited Partnership Act, as it may
be amended from time to time, and any successor to such statute.
"Additional Limited Partner" means a Person admitted to the Partnership as
a Limited Partner pursuant to Section 4.2 hereof.
"Administrative Expenses" means (i) all administrative and operating costs
and expenses of the Partnership, (ii) all administrative and operating costs
and expenses of the General Partner, including any salaries or other payments
to directors, officers or employees of the General Partner, and any accounting
and legal expenses of the General Partner, all of which costs and expenses,
the Partners have agreed, are expenses of the Partnership and not the General
Partner, and (iii) to the extent not included in clause (ii) above, REIT
Expenses.
"Administrative Services Agreement" means that certain Administrative
Services Agreement as of the date hereof among Potlatch, the Partnership and
the Company.
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"Affiliate" means, (i) any Person that, directly or indirectly, controls or
is controlled by or is under common control with such Person, (ii) any other
Person that owns, beneficially, directly or indirectly, 10% or more of the
outstanding capital stock, shares or equity interests of such Person, or (iii)
any officer, director, employee, partner or trustee of such Person or any
Person controlling, controlled by or under common control with such Person
(excluding trustees and persons serving in similar capacities who are not
otherwise an Affiliate of such Person). For the purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, through the ownership
of voting securities, partnership interests or other equity interests, by
contract or otherwise.
"Agreed Value" means the fair market value of a Partner's Capital
Contribution as agreed to by the Partners. The names and addresses of the
Partners, the number of Partnership Units issued to each Partner, and the
Agreed Value of the initial Capital Contributions are set forth on Exhibit A.
Exhibit A will be amended from time to time, as necessary, to reflect the
Agreed Value of any subsequent Capital Contribution.
"Agreement" means this Amended and Restated Agreement of Limited
Partnership, as amended, modified or supplemented from time to time, including
all exhibits and appendices hereto.
"Assignee" means a Person to whom one or more Partnership Units have been
transferred in a manner permitted under this Agreement, but who has not become
a Substitute Limited Partner.
"ATCO" means Anderson-Tully Company, a Mississippi corporation.
"ATCO Contribution Agreement" means that certain Contribution Agreement
dated as of the date hereof among ATCO, the Company and the Partnership.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized or required by law
to close.
"Capital Account" has the meaning provided in Section 4.4 hereof.
"Capital Contribution" means the total amount of capital contributed
(including amounts deemed pursuant to Section 4.2 hereof to be contributed) to
the Partnership by each Partner pursuant to the terms of this Agreement. Any
reference to the Capital Contribution of a Partner shall include the Capital
Contribution made by a predecessor holder of the Partnership Units of such
Partner. The paid-in Capital Contribution shall mean the cash amount or the
Agreed Value of other assets actually contributed by each Partner to the
capital of the Partnership.
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"Cash Amount" means an amount of cash per Partnership Unit equal to the
value of the REIT Shares Amount on the date of receipt by the General Partner
of a Notice of Exchange with respect to such Partnership Units. The value of
the REIT Shares Amount shall be based on the average of the daily market price
of REIT Shares for the ten (10) consecutive trading days immediately preceding
the date of receipt by the General Partner of a Notice of Exchange. The market
price for each such trading day shall be: (i) if the REIT Shares are listed or
admitted to trading on any securities exchange or the Nasdaq National Market,
the closing price, regular way, on such day, or if no sale takes place on such
day, the average of the closing bid and asked prices, on such day, (ii) if the
REIT Shares are not listed or admitted to trading on any securities exchange
or the Nasdaq National Market, the last reported sale price on such day or, if
no sale takes place on such day, the average of the closing bid and asked
prices on such day, as reported by a reliable quotation source designated by
the General Partner, or (iii) if the REIT Shares are not listed or admitted to
trading on any securities exchange or the Nasdaq National Market and no such
last reported sale price or closing bid and asked prices are available, the
average of the reported high bid and low asked prices on such day, as reported
by a reliable quotation source designated by the General Partner, or if there
shall be no bid and asked prices on such day, the average of the high bid and
low asked prices, as so reported, on the most recent day (not more than ten
(10) days prior to the date in question) for which prices have been so
reported; provided that if there are no bid and asked prices reported during
the ten (10) days prior to the date in question, the value of the REIT Shares
shall be determined by the General Partner acting in good faith on the basis
of such quotations and other information as it considers, in its reasonable
judgment, appropriate. In the event the REIT Shares Amount includes Rights,
then the value of such Rights shall be determined by the General Partner
acting in good faith on the basis of such quotations and other information as
it considers, in its reasonable judgment, appropriate.
"Certificate" means any instrument or document that is required under the
laws of the State of Delaware, or any other jurisdiction in which the
Partnership conducts business, to be signed and sworn to by the Partners of
the Partnership (either by themselves or pursuant to the power-of-attorney
granted to the General Partner in Section 8.2 hereof) and filed for recording
in the appropriate public offices within the State of Delaware or such other
jurisdiction to perfect or maintain the Partnership as a limited partnership,
to effect the admission, withdrawal or substitution of any Partner of the
Partnership, or to protect the limited liability of the Limited Partners as
limited partners under the laws of the State of Delaware or such other
jurisdiction.
"Certificate Date" has the meaning provided in Section 8.10 hereof.
"Code" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision in the Code at the date hereof and any
succeeding provision of the Code.
"Commission" means the U.S. Securities and Exchange Commission.
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"Company" means Timberland Growth Corporation, a Delaware corporation, in
its capacity other than as the General Partner.
"Conversion Factor" means one (1.0), provided that the Conversion Factor
shall be adjusted from time to time in the event that the Company (i) declares
or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a
distribution to all holders of its outstanding REIT Shares in REIT Shares,
(ii) subdivides its outstanding REIT Shares, or (iii) combines its outstanding
REIT Shares into a smaller number of REIT Shares. Each adjustment to the
Conversion Factor shall be calculated by multiplying the Conversion Factor
then in effect by a fraction, the numerator of which shall be the number of
REIT Shares issued and outstanding on the record date for such dividend,
distribution, subdivision or combination (assuming for such purposes that such
dividend, distribution, subdivision or combination has occurred as of such
record date), and the denominator of which shall be the actual number of REIT
Shares (determined without the above assumption) issued and outstanding on
such record date. Any adjustment to the Conversion Factor shall become
effective immediately after the effective date of such event retroactive to
the record date, if any, for such event (provided, however, that if a Notice
of Exchange is given prior to such a record date and the Specified Exchange
Date is after such a record date, the adjustment to the Conversion Factor
shall, with respect to the Exchanging Partner, be retroactive to the date of
such Notice of Exchange). It is intended that adjustments to the Conversion
Factor are to be made in order to avoid unintended dilution or anti-dilution
as a result of transactions in which REIT Shares are issued, redeemed or
exchanged without a corresponding issuance, redemption or exchange of
Partnership Units. If, prior to a Specified Exchange Date, Rights (other than
Rights issued pursuant to an employee benefit plan or other compensation
arrangement) were issued and have expired, and such Rights were issued with an
exercise price that, together with the purchase price for such Rights, was
below fair market value in relation to the security or other property to be
acquired upon the exercise of such Rights, and such Rights were issued to all
holders of outstanding REIT Shares or the issuance of such Rights did not
benefit the Limited Partners, then the Conversion Factor applicable upon a
Notice of Exchange shall be equitably adjusted in a manner consistent with
antidilution provisions in warrants and other instruments in the case of such
a below market issuance or exercise price. A similar equitable adjustment to
protect the value of Partnership Units shall be made in all events if any
Rights issued under a "Shareholder Rights Plan" became exercisable and expired
prior to a Specified Exchange Date.
"Defaulting Limited Partner" has the meaning provided in Section 5.2(b)
hereof.
"Distributed Properties" has the meaning provided in Section 12.5 hereof.
"Effective Date" means the date of closing of the Initial Offering.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Amount" means either the Cash Amount or the REIT Shares Amount,
as determined pursuant to Section 8.5(a) or (b) hereof, as applicable.
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"Exchange Right" has the meaning provided in Section 8.5(a) hereof.
"Exchanging Partner" has the meaning provided in Section 8.5(a) hereof.
"Event of Bankruptcy" as to any Person means the filing of a petition for
relief as to such Person as debtor or bankrupt under the Bankruptcy Code of
1978 or similar provision of law of any jurisdiction (except if such petition
is contested by such Person and has been dismissed within 90 days); insolvency
or bankruptcy of such Person as finally determined by a court proceeding;
filing by such Person of a petition or application to accomplish the same or
for the appointment of a receiver or a trustee for such Person or a
substantial part of his assets; commencement of any proceedings relating to
such Person as a debtor under any other reorganization, arrangement,
insolvency, adjustment of debt or liquidation law of any jurisdiction, whether
now in existence or hereinafter in effect, either by such Person or by
another, provided that if such proceeding is commenced by another, such Person
indicates his approval of such proceeding, consents thereto or acquiesces
therein, or such proceeding is contested by such Person and has not been
finally dismissed within ninety (90) days of filing.
"Event of Withdrawal" has the meaning provided in Section 7.3(a) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" of a specified asset means, as of the date of
determination, the cash price at which a willing seller would sell, and a
willing buyer would buy, each being apprised of all relevant facts and neither
acting under compulsion, such asset in an arms'-length negotiated transaction
with an unaffiliated third party without time constraints.
"Funding Loan" has the meaning provided in Section 4.3 hereof.
"GAAP" means United States generally accepted accounting principles,
consistently applied.
"General Partner" means Timberland Growth Corporation, a Delaware
corporation, in its capacity as General Partner of the Partnership, and any
Person who becomes a substitute or additional General Partner as provided
herein, and any of their successors as General Partner.
"General Partnership Interest" means the Partnership Interest held by the
General Partner.
"Higher Value" has the meaning provided in Section 8.10 hereof.
"Indebtedness" of any specified Person means any and all obligations of
such Person for money borrowed.
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"Indemnitee" means (i) any Person made a party to a proceeding by reason of
his status as (A) a Partner or an Affiliate of a Partner or (B) a director or
officer of the Partnership or a Partner or an Affiliate of a Partner or the
Partnership, and (ii) such other Persons as the General Partner may designate
in good faith from time to time, in its reasonable discretion, giving
consideration to the best interests of the Partnership.
"Initial Offering" means the initial offer and sale by the Company and the
purchase by the Underwriters (as defined in the Prospectus) of the shares of
Common Stock of the Company for sale to the public.
"Limited Partner" means any Person named as a Limited Partner on Exhibit A
attached hereto, and any Person who becomes a Substitute or Additional Limited
Partner, in such Person's capacity as a Limited Partner in the Partnership.
"Limited Partnership Interest" means the Partnership Interest of a Limited
Partner in the Partnership at any particular time, including the right of such
Limited Partner to any and all benefits to which such Limited Partner may be
entitled as provided in this Agreement and in the Act, together with the
obligations of such Limited Partner to comply with all the provisions of this
Agreement and of such Act. A Limited Partnership Interest may be expressed as
a number of Partnership Units.
"Lower Value" has the meaning provided in Section 8.10 hereof.
"Majority in Interest," when used with respect to the vote or consent or
other rights of the Limited Partners, means Limited Partnership Interests
constituting at least a majority of the Limited Partnership Interests then
outstanding.
"Minimum Limited Partnership Interest" means the lesser of (i) 1% or (ii)
if the total Capital Contributions to the Partnership exceed $50 million, 1%
divided by the ratio of the total Capital Contributions to the Partnership to
$50 million; provided, however, that the Minimum Limited Partnership Interest
shall not be less than 0.2% at any time.
"New Securities" has the meaning set forth in Section 4.2(a)(ii) hereof.
"Non-Permitted Assets" has the meaning provided in Section 8.8(b) hereof.
"Non-REIT Income" and "Non-REIT Assets" have the meanings provided in
Section 8.8(b) hereof.
"Notice Date" has the meaning provided in Section 8.10 hereof.
"Notice of Exchange" means the Notice of Exercise of Exchange Right
substantially in the form attached as Exhibit B hereto.
"NYSE" means the New York Stock Exchange.
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"Opportunities Agreement" means that certain Opportunities Agreement dated
as of _________, 1998 among Potlatch, the Partnership and the Company.
"Partner" means any General Partner or Limited Partner.
"Partnership Appraiser" has the meaning provided in Section 8.10 hereof.
"Partnership Interest" means an ownership interest in the Partnership by
either a Limited Partner or the General Partner and includes any and all
benefits to which the holder of such a Partnership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement. A Partnership Interest
may be expressed as a number of Partnership Units.
"Partnership Record Date" means the record date established by the General
Partner for the distribution of cash pursuant to Section 5.2 hereof, which
record date shall be the same as the record date established by the Company
for a distribution to its shareholders of some or all of its portion of such
distribution.
"Partnership Unit" means a fractional, undivided share of the Partnership
Interests of all Partners issued hereunder. The initial allocation of
Partnership Units among the Partners is as set forth on Exhibit A. Such
exhibit may be amended from time to time to reflect the issuance, redemption,
exchange or conversion of Partnership Units.
"Percentage Interest" means the percentage ownership interest in the
Partnership of each Partner, as determined by dividing the Partnership Units
owned by a Partner by the total number of Partnership Units then outstanding.
The initial Percentage Interest of each Partner is as set forth opposite its
respective name on Exhibit A, as such exhibit may be amended from time to
time.
"Permitted Assets" has the meaning provided in Section 8.8(b) hereof.
"Permitted Exceptions" means (i) liens, defects and encumbrances which
Potlatch determines, in its reasonable judgment, are immaterial, and (ii) any
mechanics' or materialmen's lien or other involuntary lien imposed in the
ordinary course of Partnership's business and disclosed to Potlatch, the
amount or validity of which Partnership is reasonably and in good faith
contesting by appropriate proceedings.
"Person" means any individual, partnership, limited liability company,
corporation, joint venture, trust or other entity.
"Potlatch" means Potlatch Corporation, a Delaware corporation.
"Potlatch Appraiser" has the meaning provided in Section 8.10 hereof.
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"Potlatch Contributed Properties" means the assets and liabilities
contributed to the Partnership by Potlatch pursuant to the Potlatch
Contribution Agreement (which include but are not limited to the Potlatch
Timberlands). "Potlatch Contribution Agreement" means that certain
Contribution Agreement by and between the Partnership and Potlatch, as Limited
Partner, relating to the contribution of the Potlatch Properties and certain
other assets and liabilities to the Partnership.
"Potlatch Party" has the meaning provided in Sections 8.10 and 12.5 hereof,
as applicable.
"Potlatch Timber Agreement" means that certain Timberlands Management and
Timber Purchase Agreement dated as of _________, 1998 between Potlatch and the
Partnership, as the same may be amended from time to time.
"Potlatch Timberlands" means the fee and leased Timberlands contributed to
the Partnership by Potlatch pursuant to the Potlatch Contribution Agreement.
"Prospectus" means the final prospectus delivered to purchasers of the
Company's Common Stock in the Initial Offering.
"Registration Rights Agreement" means that certain Registration Rights
Agreement dated as of _________, 1998 between Potlatch and the Company, as the
same may be amended from time to time.
"Regulations" means the Federal Income Tax Regulations issued under the
Code, as amended and as hereafter amended from time to time. Reference to any
particular provision of the Regulations shall mean that provision of the
Regulations on the date hereof and any succeeding provision of the
Regulations.
"REIT" means a real estate investment trust under Sections 856 through 860
of the Code.
"REIT Expenses" means (i) costs and expenses relating to the formation and
continuity of existence of the Company and any Subsidiaries thereof (which
Subsidiaries shall, for purposes of this definition, be included within the
definition of "Company"), including fees and assessments associated therewith,
any and all costs, expenses or fees payable to any director, officer, or
employee of the Company, (ii) costs and expenses relating to the public
offering and registration of securities by the Company and all statements,
reports, fees and expenses incidental thereto, including underwriting
discounts and selling commissions applicable to any such offering of
securities, (iii) costs and expenses associated with the preparation and
filing of any periodic reports by the Company under federal, state or local
laws or regulations, including filings with the Commission, (iv) costs and
expenses associated with compliance by the Company with laws, rules and
regulations promulgated by any regulatory body, including the Commission, and
(v) all other operating or administrative costs of the Company incurred in the
ordinary course of its
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business on behalf of the Partnership; provided, however, that REIT Expenses
shall not be construed to include (x) any cash distributed by the General
Partner to its stockholders or (y) any federal or state income, franchise,
withholding or similar taxes.
"REIT Share" means a share of Common Stock of the Company, par value $.01
per share.
"REIT Shares Amount" shall mean a number of REIT Shares equal to the number
of Partnership Units offered for exchange by an Exchanging Partner, multiplied
by the Conversion Factor in effect on the date of receipt by the General
Partner of a Notice of Exchange; provided that in the event the Company issues
to all holders of REIT Shares rights, options, warrants or convertible or
exchangeable securities entitling the shareholders to subscribe for or
purchase REIT Shares, or any other securities or property (collectively, the
"Rights"), then the REIT Shares Amount shall also include such Rights that a
holder of that number of REIT Shares would have been entitled to receive had
it exchanged Partnership Units for such REIT Shares as of the record date for
each such issuance of Rights.
"Rights" has the meaning provided in the definition of "REIT Shares Amount"
herein.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"Share" means a share of capital stock (of any class or series) of the
Company.
"Specified Exchange Date" means thirty (30) days after the receipt by the
Company of the Notice of Exchange.
"Subject Properties" has the meaning provided in Section 8.10 hereof.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership or other entity of which a majority of (i) the
voting power of the voting equity securities or (ii) the outstanding equity
interests is owned, directly or indirectly, by such Person.
"Substitute Limited Partner" means any Person admitted to the Partnership
as a Limited Partner pursuant to Section 9.3 hereof.
"Surviving Entity" has the meaning provided in Section 7.1(c) hereof.
"Third Appraiser" has the meaning provided in Section 8.10 hereof.
"Third Value" has the meaning provided in Section 8.10 hereof.
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"Timber" means a tree as it stands uncut in the woods.
"Timber Agreements" means the Potlatch Timber Agreement and any additional
timber purchase agreements entered into pursuant to Section 14.3 of the
Potlatch Timber Agreement.
"Timberlands" means real property that is used or anticipated to be used
primarily for the growing of timber (including, without limitation, Timber
which when cut would be used to produce pulp) for commercial purposes,
including without limitation real property that contains standing timber which
is (or upon the completion of the growth cycle then in process is expected to
become) of a commercial quantity and quality.
"Transfer" of a Partnership Interest, for purposes of Articles VII and IX
hereof, means the offer, sale, assignment, hypothecation, pledge, gift or
other transfer of such Partnership Interest (including by way of the merger,
consolidation or other combination of the applicable Partner with or into
another Person), in whole or in part, whether voluntarily or by operation of
law or at a judicial sale or otherwise.
"Underwriting Agreement" means the underwriting agreement relating to the
Initial Offering, among the Company and the underwriters of the Initial
Offering.
ARTICLE II
PARTNERSHIP ORGANIZATION AND IDENTIFICATION
2.1 Amendment and Continuation. A partnership known as Timberland Growth
Limited Partnership (the "Partnership") was formed under the Act on _________,
1998 pursuant to a partnership agreement dated as of ______, 1998 (the
"Original Partnership Agreement"). The Partners hereby amend and restate the
Original Partnership Agreement in its entirety as set forth in this Agreement
and agree to continue the Partnership on the terms set forth herein. Except as
expressly provided herein to the contrary, the rights and obligations of the
Partners and the administration and termination of the Partnership shall be
governed by the Act. The Partnership Interest of each Partner shall be
personal property for all purposes.
2.2 Name, Office and Registered Agent. The name of the Partnership shall be
Timberland Growth Limited Partnership. The General Partner may change the name
of the Partnership from time to time after written notice to the Limited
Partners. The specified office and place of business of the Partnership shall
be 1242 North Second Street, Memphis, Tennessee 38101. The General Partner may
at any time change the location of such office, after providing written notice
to the Partners of any such change. The name and address of the Partnership's
registered agent is Corporation Trust Company, 1209 Orange Street, Wilmington,
New Castle County, Delaware 19801.
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2.3 Partners.
(a) As of the date hereof, the General Partner of the Partnership is
Timberland Growth Corporation, a Delaware corporation. The General Partner's
principal place of business shall be the same as that of the Partnership. All
Partnership Units that are owned by the Company from time to time shall be
deemed held by it in its capacity as the General Partner and not in the
capacity of a Limited Partner, except as provided by Section 7.4(b) hereof.
(b) The Limited Partners shall be those Persons identified as Limited
Partners in Exhibit A hereto, as amended from time to time. The Limited
Partners are hereby admitted as Limited Partners of the Partnership.
2.4 Term. The term of the Partnership commenced on ______, 1998, the date
the certificate of limited partnership of the Partnership was filed and
recorded in the office of the Secretary of State of the State of Delaware. The
term of the Partnership shall continue until December 31, 2198, unless the
Partnership is earlier dissolved pursuant to Article 12 hereof.
2.5 Filing of Certificate and Perfection of Limited Partnership. The
General Partner shall execute, acknowledge, record and file at the expense of
the Partnership, the Certificate and any and all amendments thereto and all
requisite fictitious name statements and notices in such places and
jurisdictions as may be necessary to cause the Partnership to be treated as a
limited partnership under, and otherwise to comply with, the laws of each
state or other jurisdiction in which the Partnership conducts business, or as
may be necessary to perfect or maintain the Partnership as a limited
partnership, to effect the admission, withdrawal, or substitution of any
Partner of the Partnership, or to protect the limited liability of the Limited
Partners as limited partners under the laws of the State of Delaware or such
other jurisdiction.
ARTICLE III
BUSINESS OF THE PARTNERSHIP
3.1 Business. The purpose and nature of the business to be conducted by the
Partnership is (i) to conduct any business that may be lawfully conducted by a
limited partnership organized pursuant to the Act, (ii) to enter into any
partnership, joint venture or other similar arrangement to engage in any of
the foregoing or the ownership of interests in any entity engaged in any of
the foregoing, and (iii) to do anything necessary or incidental to the
foregoing; provided, however, that such business shall be limited to and
conducted in such a manner as to permit the Company at all times to qualify as
a REIT, unless the Company voluntarily terminates its status as a REIT or
otherwise ceases to qualify as a REIT. In connection with the foregoing, and
without limiting the Company's right in its sole discretion to cease
qualifying as a REIT, the Partners acknowledge that the Company's current
status as a REIT inures to the benefit of all of the Partners and not solely
to the
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Company. The General Partner shall also be empowered to do any and all acts
and things necessary or prudent to ensure that the Partnership will not be
classified as a "publicly traded partnership" for purposes of Section 7704 of
the Code.
3.2 Powers. The Partnership is empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described herein
and for the protection and benefit of the Partnership, provided that the
Partnership shall not take, and shall refrain from taking, any action which,
in the judgment of the General Partner, in its sole and absolute discretion,
(i) could adversely affect the ability of the Company to continue to qualify
as a REIT, (ii) could subject the General Partner to any additional taxes
under Section 857(b)(5) or Section 857(b)(6) of the Code, or (iii) could
violate any law or regulation of any governmental body or agency having
jurisdiction over the Company or its securities.
3.3 Authority and Responsibility of Partners. Except as otherwise provided
in this Agreement, no Partner shall have any authority to act for, bind,
commit or assume any obligation or responsibility on behalf of the
Partnership, its properties or any other Partner. No Partner, in its capacity
as a Partner under this Agreement, shall be responsible or liable for any
indebtedness or obligation of another Partner, nor shall the Partnership be
responsible or liable for any indebtedness or obligation of any Partner,
incurred either before or after the execution and delivery of this Agreement
by such Partner, except as to those responsibilities, liabilities,
indebtedness or obligations incurred in accordance with this Agreement and the
Act.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.1 Capital Contributions. The General Partner shall cause ATCO to
contribute to the capital of the Partnership the assets and liabilities
provided for in the ATCO Contribution Agreement. The Limited Partner has
contributed to the capital of the Partnership the assets and liabilities
provided for in the Potlatch Contribution Agreement. The Agreed Value of the
assets and liabilities that have been contributed to the Partnership pursuant
to the Potlatch Contribution Agreement is as set forth opposite Potlatch's
name (as Limited Partner) on Exhibit A, and the Agreed Values of the assets
and liabilities to be contributed to the Partnership pursuant to the ATCO
Contribution Agreement are as set forth opposite the General Partner's name on
Exhibit A.
4.2 Additional Capital Contributions and Issuances of Additional
Partnership Interests. Except as provided in Section 4.2 or Section 4.3, the
Partners shall have no right or obligation to make any additional Capital
Contributions or loans to the Partnership. The General Partner may contribute
additional capital to the Partnership, from time to time, and receive
additional Partnership Interests in respect thereof, in the manner
contemplated in this Section 4.2.
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(a) Issuances of Additional Partnership Interests.
(i) General. The General Partner is hereby authorized to cause the
Partnership to issue such additional Partnership Interests in the form of
Partnership Units for any Partnership purpose at any time or from time to
time, to the Partners (including the General Partner) or to other Persons
for such consideration and on such terms and conditions as shall be
established by the General Partner in its sole and absolute discretion
(subject to the limitations and restrictions set forth below), all without
the approval of any Limited Partners. Any additional Partnership Interests
issued by the General Partner may be issued to such Persons (including the
General Partner, subject to the limitations and restrictions set forth
below) in one or more classes, or one or more series of any of such
classes, with such designations, preferences and relative, participating,
optional or other special rights, powers and duties, including rights,
powers and duties senior to Limited Partnership Interests, all as shall be
determined by the General Partner in its sole and absolute discretion and
without the approval of any Limited Partner, subject to Delaware law and
including, without limitation, (x) the allocation of items of Partnership
income, gain, loss, deduction and credit to each such class or series of
Partnership Interests; (y) the right of each such class or series of
Partnership Interests to share in Partnership distributions; and (z) the
rights of each such class or series of Partnership Interests upon
dissolution and liquidation of the Partnership; provided, however, that for
so long as the Partnership Units held by all Limited Partners would, if all
such Partnership Units were exchanged for REIT Shares pursuant to Section
8.5 hereof (without regard to the passage of time or any other condition or
limitation), represent at least twenty percent (20%) of the REIT Shares
then outstanding (counting as outstanding all of the REIT Shares so issued
upon exchange of such Partnership Units), then, without the prior written
consent of a Majority in Interest of the Limited Partners, no such
additional Partnership Interests may be issued to any Person (including the
General Partner) that have preferences, rights, powers and duties senior
to, or more favorable than, the preferences, rights, power and duties of
the then outstanding Limited Partnership Interests on their date of
issuance; and provided, further, that without limiting the immediately
preceding proviso, no additional Partnership Interests shall be issued to
the General Partner (it being understood that all Partnership Interests
issued to the Company shall be deemed to be held as General Partnership
Interests, except as provided in Section 7.4(b) hereof)) unless either:
(1) (A) the additional Partnership Interests are issued in
connection with an issuance of Shares, which Shares have designations,
preferences and other rights such that the economic interests
attributable to such Shares are substantially similar to the
designations, preferences and other rights of the additional
Partnership Interests issued to the General Partner in accordance with
this Section 4.2(a)(i), and (B) the General Partner shall make a
Capital Contribution to the
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Partnership in an amount equal to the proceeds raised in connection
with the issuance of such Shares, or
(2) the additional Partnership Interests are issued to all Partners
in proportion to their respective Percentage Interests.
In the event that the Partnership issues Partnership Interests pursuant
to this Section 4.2(a)(i), the General Partner shall make such revisions to
this Agreement (without any requirement of receiving approval of the
Limited Partners) as it deems in good faith necessary to reflect the
issuance of such additional Partnership Interests (and any special rights,
powers and duties associated therewith) on an equitable basis, and the
Person to whom such Partnership Interests are issued shall be admitted as a
Partner upon compliance with Sections 9.1 and 9.3 hereof. Unless
specifically set forth otherwise by the General Partner, any Partnership
Interest issued after the Effective Date shall have the same rights, powers
and duties as the Partnership Interests issued on the Effective Date. By
way of example, in the event of the issuance (other than to all Partners in
proportion to their respective Percentage Interests) of additional
Partnership Interests with designations, preferences and other rights
identical to the Limited Partnership Interests outstanding on the date
hereof, then clause (1)(A) above would require the issuance of REIT Shares
equal in number to the product of the number of such Partnership Interests
multiplied by the Conversion Factor in effect on the date of such issuance.
Without limiting the foregoing, the General Partner is expressly authorized
to cause the Partnership to issue Partnership Units for less than fair
market value, so long as the General Partner concludes in good faith that
such issuance is in the best interests of the General Partner and the
Partnership.
(ii) Upon Issuance of New Securities. After the Initial Offering, the
Company shall not grant, award or issue additional Shares (other than REIT
Shares issued in connection with an exchange pursuant to Section 8.5
hereof) or rights, options, warrants or convertible or exchangeable
securities containing the right to subscribe for or purchase Shares
(collectively, "New Securities") other than to all holders of REIT Shares,
unless (A) the General Partner shall cause the Partnership to issue to the
Company Partnership Interests or rights, options, warrants or convertible
or exchangeable securities of the Partnership having designations,
preferences and other rights such that the economic interests attributable
to such Partnership Interests or Partnership rights, options, warrants or
convertible or exchangeable securities are substantially similar to those
of the New Securities, and (B) the Company contributes the proceeds (which
may consist of cash or other property) from the grant, award or issuance of
such New Securities to the Partnership. In addition, with respect to any
rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase Shares, upon the exercise
of any such right, the General Partner shall exercise
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its corresponding rights to purchase Partnership Interests and shall
contribute the proceeds from the exercise thereof to the Partnership.
Without limiting the foregoing, the Company is expressly authorized to
issue New Securities for less than fair market value, and to cause the
Partnership to issue to the General Partner corresponding Partnership
Interests, so long as (x) the General Partner concludes in good faith that
such issuance is in the best interests of the General Partner and the
Partnership (for example, and not by way of limitation, the issuance of
REIT Shares and corresponding Partnership Units pursuant to an employee
stock purchase plan providing for employee purchases of REIT Shares at a
discount from fair market value or employee stock options that have an
exercise price that is less than the fair market value of the REIT Shares,
either at the time of issuance or at the time of exercise), and (y) the
Company contributes all proceeds from such issuance to the Partnership. By
way of example, in the event the Company issues REIT Shares for a cash
purchase price and contributes all of the proceeds of such issuance to the
Partnership as required hereunder, the Company shall be issued a number of
additional Partnership Units equal to the product of (A) the number of such
REIT Shares issued by the Company the proceeds of which were so
contributed, multiplied by (B) a fraction, the numerator of which is one
(1.0) and the denominator of which is the Conversion Factor in effect on
the date of such contribution.
(b) Certain Deemed Contributions of Proceeds of Issuances of Shares. In
connection with any and all issuances of New Securities, the Company shall
contribute all of the proceeds raised in connection with such issuance as a
Capital Contribution to the Partnership, provided that if the proceeds
actually received by and contributed by the Company to the Partnership are
less than the gross proceeds of such issuance as a result of any underwriter's
discount or other expenses paid or incurred in connection with such issuance,
then the Company shall be deemed to have made a Capital Contribution to the
Partnership in the amount of the sum of the net proceeds of such issuance plus
the amount of such underwriter's discount and other expenses paid by the
Company, and the Partnership shall be deemed simultaneously to have incurred
such offering expenses in connection with the required issuance of additional
Partnership Units to the Company for such required Capital Contribution of the
offering proceeds pursuant to Section 4.2(a) hereof. In the case of employee
acquisitions of New Securities at a discount from fair market value or for no
value in connection with a grant of New Securities, the amount of such
discount representing compensation to the employee, as determined by the
General Partner, shall be treated as an expense of the issuance of such New
Securities.
(c) Minimum Limited Partnership Interest. In the event that either an
exchange pursuant to Section 8.5 hereof or an additional Capital Contribution
by the General Partner would result in the Limited Partners, in the aggregate,
owning less than the Minimum Limited Partnership Interest, the General Partner
and the Limited Partners shall form another partnership and contribute
sufficient Limited Partnership Interests together with such other Limited
Partners so that the Limited Partners own at least the Minimum Limited
Partnership Interest.
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4.3 General Partner Loans. The General Partner may from time to time
advance funds to the Partnership for any proper Partnership purpose as a loan
("Funding Loan"), provided that any such funds must first be obtained by the
General Partner from a third-party lender, and then all of such funds must be
loaned by the General Partner to the Partnership on the same terms and
conditions, including without limitation principal amount, interest rate,
repayment schedule and costs and expenses, as shall be applicable with respect
to or incurred in connection with such loan with such third-party lender.
Except for Funding Loans, the General Partner shall not assume or incur any
Indebtedness or guarantee any Indebtedness of any other Person.
4.4 Capital Accounts.
(a) A single capital account (a "Capital Account") shall be maintained for
each Partner (regardless of the class of interests owned by such Partner and
regardless of the time or manner in which such interests were acquired) in
accordance with the capital accounting rules of section 704(b) of the Code,
and the regulations thereunder (including without limitation section 1.704-
1(b)(2)(iv) of the Regulations). In general, under such rules, a Partner's
Capital Account shall be:
(i) increased by (A) the amount of money contributed by the Partner to
the Partnership (including the amount of any Partnership liabilities that are
assumed by such Partner other than in connection with distribution of
Partnership property), (B) the fair market value of property contributed by
the Partner to the Partnership, net of liabilities secured by such contributed
property that under section 752 of the Code the Partnership is considered to
assume or take subject to (which, with respect to the Potlatch Contributed
Properties, shall be the Agreed Value), and (C) allocations to the Partner of
Partnership income and gain (or items thereof), including income and gain
exempt from tax; and
(ii) decreased by (A) the amount of money distributed to the Partner
that are assumed by the Partnership other than in connection with
contribution of property to the Partnership), (B) the fair market value of
property distributed to the Partner by the Partnership (net of liabilities
secured by such distributed property that under section 752 of the Code
such Partner is considered to assume or take subject to), (C) allocations
to the Partner of expenditures of the Partnership not deductible in
computing its taxable income and not properly chargeable to capital
account, and (D) allocations to the Partner of Partnership loss and
deduction (or items thereof).
(b) Where section 704(c) of the Code applies to Partnership property or
where Partnership property is revalued pursuant to paragraph (b)(2)(iv)(f) of
section 1.704-1 of the Regulations, each Partner's Capital Account shall be
adjusted in accordance with paragraph (b)(2)(iv)(f) and (g) of section 1.704-1
of the Regulations and paragraph (d)(2) of section 1.704-3 of the Regulations
as to allocations to the Partners of depreciation, depletion, amortization and
gain or loss with respect to such property.
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(c) When Partnership property is distributed in kind (whether in connection
with liquidation and dissolution or otherwise), the Capital Accounts of the
Partners shall first be adjusted to reflect the manner in which the unrealized
income, gain, loss and deduction inherent in such property (that has not been
reflected in the Capital Account previously) would be allocated among the
Partners if there were a taxable disposition of such property for the fair
market value of such property on the date of distribution.
(d) The General Partner shall make or cause to be made all necessary
adjustments in each Partner's capital account as required by the capital
accounting rules of section 704(b) of the Code and the regulations thereunder.
4.5 Percentage Interests. If the number of outstanding Partnership Units
increases or decreases during a taxable year, each Partner's Percentage
Interest shall be adjusted to a percentage equal to the number of Partnership
Units held by such Partner divided by the aggregate number of Partnership Units
outstanding after giving effect to such increase or decrease. If the Partners'
Percentage Interests are adjusted pursuant to this Section 4.5, the items of
income, gain, loss and deduction for the taxable year in which the adjustment
occurs shall be allocated between the part of the year ending on the day when
the Partnership's property is revalued by the General Partner and the part of
the year beginning on the following day either (i) as if the taxable year had
ended on the date of the adjustment or (ii) based on the number of days in
each part. The General Partner, in its sole discretion, shall determine which
method shall be used to allocate such items for the taxable year in which the
adjustment occurs. The allocation of such items for the earlier part of the
year shall be based on the Percentage Interests before adjustment, and the
allocation of such items for the later part of the year shall be based on the
adjusted Percentage Interests.
4.6 No Interest on Contributions. No Partner shall be entitled to interest
on its Capital Contribution.
4.7 Return of Capital Contributions. No Partner shall be entitled to
withdraw any part of its Capital Contribution or its Capital Account or to
receive any distribution from the Partnership, except as specifically provided
in this Agreement. Except as otherwise provided herein, there shall be no
obligation to return to any Partner or withdrawn Partner any part of such
Partner's Capital Contribution for so long as the Partnership continues in
existence.
4.8 No Deficit Restoration Obligation. No Partner shall be required,
whether at the time of the liquidation of the Partnership or otherwise, to
make any capital contributions to the Partnership solely for the purpose of
reducing or eliminating any deficit or negative balance in its Capital Account.
4.9 No Third-Party Beneficiary. No creditor or other third party having
dealings with the Partnership shall have the right to enforce the right or
obligation of any Partner to make Capital Contributions or loans or to pursue
any other right or remedy hereunder or at law or in equity, it being
understood and agreed that the provisions of this Agreement shall be solely for
the benefit of, and may be enforced solely by, the parties hereto and their
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respective successors and assigns. None of the rights or obligations of the
Partners herein set forth to make Capital Contributions or loans to the
Partnership shall be deemed an asset of the Partnership for any purpose by any
creditor or other third party, nor may such rights or obligations be sold,
transferred or assigned by the Partnership or pledged or encumbered by the
Partnership to secure any debt or other obligation of the Partnership or of
any of the Partners. In addition, it is the intent of the parties hereto that
no distribution to any Limited Partner shall be deemed a return of money or
other property in violation of the Act. The payment of any such money or
distribution of any such property to a Limited Partner shall be deemed to be a
compromise within the meaning of Section 17-502(b) of the Act, and the Limited
Partner receiving any such money or property shall not be required to return
any such money or property to any Person, the Partnership or any creditor of the
Partnership. However, if any court of competent jurisdiction holds that,
notwithstanding the provisions of this Agreement, any Limited Partner is
obligated to return such money or property, such obligation shall be the
obligation of such Limited Partner and not of the General Partner. Without
limiting the generality of the foregoing, a deficit Capital Account of a
Partner shall not be deemed to be a liability of such Partner nor an asset or
property of the Partnership.
4.10 Preemptive Rights. No Person shall have any preemptive, preferential
or other similar right with respect to (i) additional Capital Contributions or
loans to the Partnership; or (ii) issuance or sale of any Partnership Units or
other Partnership Interests.
ARTICLE V
PROFITS AND LOSSES; DISTRIBUTIONS
5.1 Allocations. Each Partner's distributive share of the Partnership's
total income, gain, loss, deduction or credit (or items thereof), which total
shall be as shown on the annual federal income tax return prepared by or at
the direction of the General Partner or as finally determined by the United
States Internal Revenue Service or the courts, and as modified by the capital
accounting rules of section 704(b) of the Code and the Regulations thereunder,
as implemented by Section 4.4 hereof, as applicable, shall be determined as
follows:
(a) General Allocation. Except as otherwise provided in this Section 5.1,
items of income, gain, loss, deduction and credit shall be allocated among the
Partners proportionately in accordance with their Percentage Interests.
(b) Limitation. Notwithstanding anything in this Section 5.1 to the
contrary, items of loss and deduction allocated to any Partner pursuant to
this Section 5.1 with respect to any taxable year shall not exceed the maximum
amount of such items that can be so allocated to such Partner without causing
such Partner to have a deficit balance in its capital account in excess of the
amount of such Partner's obligation, if any, to restore such deficit capital
account, computed in accordance with the rules of section 1.704-1(b)(2)(ii)(d)
of the Regulations. Any such items of loss or deduction in excess of the
limitation set forth in the
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preceding sentence shall be allocated to those Partners who would not be
subject to such limitation, proportionately in accordance with their Percentage
Interests.
(c) Allocations With Respect to Property. Solely for tax purposes, in
determining each Partner's allocable share of the taxable income or loss of
the Partnership, depreciation, depletion, amortization and gain or loss with
respect to any contributed property, or with respect to revalued property where
the Partnership's property is revalued pursuant to paragraph (b)(2)(iv)(f) of
section 1.704-1 of the Regulations, shall be allocated to the Partners under
the remedial method as provided under Section 1.704-3(d) of the Regulations.
(d) Minimum Gain Chargeback. Notwithstanding anything to the contrary in
this Section 5.1, if there is a net decrease in "Minimum Gain" or "Partner
Nonrecourse Debt Minimum Gain" (as such terms are defined in sections 1.704-
2(b) and 1.704-2(i)(2) of the Regulations) during a taxable period of the
Partnership, then each Partner shall be allocated items of income and gain for
such year (and, if necessary, for subsequent years) in the manner provided in
section 1.704-2 of the Regulations.
(e) Qualified Income Offset. Subject to the provisions of Section 5.1(d),
but otherwise notwithstanding anything to the contrary in this Section 5.1, if
any Partner's capital account has a deficit balance in excess of such
Partner's obligation to restore its capital account balance, computed in
accordance with the rules of paragraph (b)(2)(ii)(d) of section 1.704-1 of the
Regulations, then sufficient amounts of income and gain (consisting of a pro
rata portion of each item of Partnership income, including gross income, and
gain for such year) shall be allocated to such Partner in an amount and manner
sufficient to eliminate such deficit as quickly as possible.
(f) Change in Percentage Interests. Except as otherwise required by law, if
the Percentage Interests of the Partners are changed during any taxable year,
all items to be allocated to the Partners for such entire taxable year shall
be prorated on the basis of the portion of such taxable year which precedes
each such change and the portion of such taxable year on and after each such
change according to the number of days in each such portion, and the items so
allocated for each such portion shall be allocated to the Partners in the manner
in which such items are allocated as provided in Section 5.1(a) during each such
portion of the taxable year in question.
(g) Recourse Debt. Items of deduction and loss attributable to "recourse
liabilities" of the Company within the meaning of section 1.752-2 of the
Income Tax Regulations (but excluding "partner nonrecourse debt"), shall be
allocated among the Partners in accordance with the ratio in which the Partners
share the economic risk of loss for such liabilities.
(h) Effect of Special Allocations on Subsequent Allocations. Any special
allocation pursuant to Sections 5.1(b), (e) and (g) hereof shall be taken into
account in computing subsequent allocations of income and gain pursuant to
this Section 5.1 so that the net amount of all such allocations to each
Partner shall, to the extent possible, be equal to the net amount that would
have been allocated to each such Partner pursuant to the
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provisions of this Section 5.1 if such special allocations had not occurred.
It is anticipated that all allocations pursuant to Sections 5.1(i) will be
offset by allocations pursuant to Section 5.1(d) hereof. To the extent the
General Partner determines that any amounts allocated pursuant to Section
5.1(i) hereof are unlikely to be offset by a countervailing allocation of income
from Section 5.1(d) hereof, then so much of such allocation as the General
Partner has determined is unlikely to be offset shall also be taken into
account in computing subsequent allocations of income and gain pursuant to this
Section 5.1 so that the net amount of all such allocations shall, to the extent
possible, equal the net amount that would be allocated to such Partners in the
absence of such special allocation.
(i) Nonrecourse and Recourse Debt. Items of deduction and loss attributable
to "partner nonrecourse debt" within the meaning of section 1.704-2(b)(4) of
the Regulations shall be allocated to the Partners bearing the economic risk
of loss with respect to such debt in accordance with section 1.704-2(i)(1) of
the Regulations. Items of deduction and loss attributable to "nonrecourse
debt" of the Partnership within the meaning of section 1.752-2 of the
Regulations shall be allocated to the Partners in proportion to their
respective Percentage Interests.
(j) State and Local Items. Items of income, gain, loss, deduction, credit
and tax preference for state and local income tax purposes shall be allocated
to and among the Partners in a manner consistent with the allocation of such
items for federal income tax purposes in accordance with the foregoing
provisions of this Section 5.1.
5.2 Distribution of Cash.
(a) The General Partner shall distribute cash on a quarterly (or, at the
election of the General Partner, more frequent) basis, in an amount determined
by the General Partner in its sole discretion (subject to Section 5.5 hereof),
to the Partners who are Partners on the Partnership Record Date with respect
to such quarter (or other distribution period) in accordance with their
respective Percentage Interests on the Partnership Record Date; provided,
however, that if a new or existing Partner acquires an additional Partnership
Interest in exchange for a Capital Contribution on any date other than a
Partnership Record Date, the cash distribution attributable to such additional
Partnership Interest relating to the Partnership Record Date next following
the issuance of such additional Partnership Interest shall be reduced in the
proportion that (i) the number of days that such additional Partnership
Interest is held by such Partner bears to (ii) the number of days between such
Partnership Record Date and the immediately preceding Partnership Record Date.
(b) Notwithstanding any other provision of this Agreement, the General
Partner is authorized to take any action that it determines to be necessary or
appropriate to cause the Partnership to comply with any withholding
requirements established under the Code or any other federal, state or local law
including, without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of
the Code. To the extent that the Partnership is required to withhold and pay
over to any taxing authority any amount resulting from the allocation or
distribution of income to the Partner or assignee (including by reason of
Section 1446 of the Code), either (i) if the actual amount to be distributed
to the Partner or assignee equals or exceeds
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the amount required to be withheld by the Partnership, the amount withheld
shall be treated as a distribution of cash in the amount of such withholding
to such Partner or assignee, or (ii) if the actual amount to be distributed to
the Partner or assignee is less than the amount required to be withheld by the
Partnership, the amount required to be withheld shall be treated as a loan (a
"Partnership Loan") from the Partnership to the Partner on the day the
Partnership pays over such amount to the applicable taxing authority. A
Partnership Loan shall be repaid through withholding by the Partnership with
respect to subsequent distributions to the applicable Partner or assignee. In
the event that a Limited Partner or assignee (collectively, a "Defaulting
Limited Partner") fails to pay any amount owed to the Partnership with respect
to the Partnership Loan within fifteen (15) days after demand for payment
thereof is made by the Partnership on the Defaulting Limited Partner, the
General Partner, in its sole discretion, may elect to make the payment to the
Partnership on behalf of such Defaulting Limited Partner. In such event, on
the date of payment, the General Partner shall be deemed to have extended a
loan (a "General Partner Loan") to the Defaulting Limited Partner in the amount
of the payment made by the General Partner and shall succeed to all rights and
remedies of the Partnership against the Defaulting Limited Partner as to that
amount. Without limitation, the General Partner shall have the right to receive
any distributions that otherwise would be made by the Partnership to the
Defaulting Limited Partner until such time as the General Partner Loan has been
paid in full, and any such distributions so received by the General Partner
shall be treated as having been received by the Defaulting Limited Partner and
immediately paid to the General Partner.
Any amounts treated as a Partnership Loan or a General Partner Loan
pursuant to this Section 5.2(b) shall bear interest at the lesser of (i) the
base rate on corporate loans at large United States money center commercial
banks, as published from time to time in The Wall Street Journal, or (ii) the
maximum lawful rate of interest on such obligation, such interest to accrue
from the date the Partnership or the General Partner, as applicable, is deemed
to extend the loan until such loan is repaid in full.
(c) In no event may a Partner receive a distribution of cash with respect
to a Partnership Unit if such Partner is entitled to receive a dividend with
respect to a REIT Share for which all or part of such Partnership Unit has
been or will be exchanged.
5.3 [Reserved].
5.4 No Right to Distributions in Kind. Except as otherwise provided herein,
no Partner shall be entitled to demand property other than cash in connection
with any distributions by the Partnership.
5.5 Other Limitations on Distributions. Notwithstanding any of the
provisions of this Article V, no Partner shall have the right to receive, and
the General Partner shall not have the right to make, a distribution unless
after giving effect to such distribution, the sum of all liabilities of the
Partnership does not exceed the fair market value of the Partnership's assets.
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5.6 Amounts Withheld. All amounts withheld pursuant to the Code or any
provisions of any state or local tax law and Section 5.2(b) hereof with
respect to any allocation, payment or distribution to the General Partner, the
Limited Partners or Assignees shall be treated as amounts distributed to the
General Partner, Limited Partners, or Assignees pursuant to Section 5.1 for all
purposes under this Agreement.
5.7 Accounting Allocations. For financial accounting purposes, profits and
losses will be allocated to the Partners in a manner determined in good faith
by the General Partner which follows, as closely as practicable, the "remedial
method" of allocating profits and losses for federal income tax purposes set
forth in section 704(c) of the Code and section 1.704-(3)(d) of the
Regulations.
5.8 Substantial Economic Effect. It is the intent of the Partners that the
allocations contained in this Agreement have substantial economic effect (or
be consistent with the Partners' interests in the Partnership in the case of
the allocation of losses attributable to nonrecourse debt) within the meaning
of Section 704(b) of the Code as interpreted by the Regulations promulgated
pursuant thereto. Article V and other relevant provisions of this Agreement
shall be interpreted in a manner consistent with such intent. Notwithstanding
the foregoing, nothing in this Section 5.8 shall increase the obligation or
liability of any Partner to the Partnership beyond that expressly set forth in
this Agreement, nor shall it change or modify in any manner the parties'
respective rights to receive distributions as expressly provided for in
Section 5.2 and Article 12 hereof.
ARTICLE VI
RIGHTS, OBLIGATIONS AND
POWERS OF THE GENERAL PARTNER
6.1 Management of the Partnership.
(a) Except as otherwise expressly provided in this Agreement, the General
Partner shall have full, complete and exclusive discretion to manage and
control the business of the Partnership for the purposes herein stated, and
shall make all decisions affecting the business and assets of the Partnership.
Subject to the restrictions specifically contained in this Agreement, the powers
of the General Partner shall include, without limitation, the authority to
take the following actions on behalf of the Partnership:
(i) to acquire, purchase, own, lease, encumber, mortgage, sell,
exchange and dispose of any real property, Timber and any other property or
assets on such terms as the General Partner determines to be necessary or
appropriate or in the best interests of the business of the Partnership;
(ii) subject to the terms of any applicable lease or contract, to
make or cause to be made improvements on the properties owned or leased by
the Partnership;
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(iii) to borrow money for the Partnership, issue evidences of
indebtedness in connection therewith, refinance, guarantee, increase the
amount of, modify, amend or change the terms of, or extend the time for the
payment of, any indebtedness or obligation of the Partnership, and to
secure such indebtedness by mortgage, deed of trust, pledge or other lien
on the Partnership's assets;
(iv) to pay, either directly or by reimbursement, all operating
costs and general administrative expenses of the General Partner or the
Partnership to third parties or to the General Partner as set forth in this
Agreement;
(v) to lease all or any portion of any of the Partnership's assets,
whether or not the terms of such leases extend beyond the termination date
of the Partnership and whether or not any portion of the Partnership's
assets so leased are to be occupied by the lessee, or, in turn, subleased
in whole or in part to others, for such consideration and on such terms as
the General Partner may determine;
(vi) without limiting the generality of the foregoing, to contract
to sell Timber owned by the Partnership, whether or not the terms of such
contracts extend beyond the termination date of the Partnership and whether
or not any such contracts or the Timber subject thereto are to be
subcontracted in whole or in part to others, for such consideration and on
such terms as the General Partner may determine;
(vii) to prosecute, defend, arbitrate, or compromise any and all
claims or liabilities in favor of or against the Partnership, on such terms
and in such manner as the General Partner may reasonably determine, and
similarly to prosecute, settle or defend litigation with respect to the
Partners, the Partnership, or the Partnership's assets; provided, however,
that the General Partner may not, without the consent of all of the
Partners, confess a judgment against the Partnership;
(viii) to file applications, communicate and otherwise deal with any
and all governmental agencies having jurisdiction over, or in any way
affecting, the Partnership's assets or any other aspect of the Partnership
business;
(ix) to make or revoke any election permitted or required of the
Partnership by any taxing authority;
(x) to maintain such insurance coverage for public liability, fire
and casualty, and any and all other insurance for the protection of the
Partnership, for the conservation of Partnership assets, or for any other
purpose convenient or beneficial to the Partnership, in such amounts and
such types, as it shall determine from time to time;
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(xi) to determine whether or not to apply any insurance proceeds for
any property to the restoration of such property or to distribute the
same;
(xii) to retain professionals including accountants, legal counsel,
consultants, real estate brokers (who may act in the same or similar
capacity for the Company or any Affiliate of the Company), and such other
persons, as the General Partner may deem necessary or appropriate in
connection with Partnership business and to pay therefor such remuneration
as the General Partner may deem reasonable and proper;
(xiii) to retain other services of any kind or nature in connection
with the Partnership business, and to pay therefor such remuneration as the
General Partner may deem reasonable and proper;
(xiv) to negotiate and conclude agreements on behalf of the
Partnership with respect to any of the rights, powers and authority
conferred upon the General Partner;
(xv) to maintain accurate accounting records and to file promptly
all federal, state and local income tax returns on behalf of the
Partnership;
(xvi) to distribute Partnership cash or other Partnership assets in
accordance with this Agreement;
(xvii) to form or acquire an interest in, and contribute property
to, any other limited or general partnerships, joint ventures or other
relationships that it deems desirable (including, without limitation, the
acquisition of interests in, and the contributions of property to, its
Subsidiaries and any other Person in which it has an equity interest from
time to time);
(xviii) to establish Partnership reserves for working capital,
capital expenditures, contingent liabilities, or any other valid
Partnership purpose;
(xix) to negotiate, execute and perform any contracts, leases,
deeds, mortgages, deeds of trust, conveyances or other instruments or
agreements that the General Partner considers useful or necessary to the
conduct of the Partnership's operations or the implementation of the
General Partner's powers under this Agreement, including contracting with
contractors, developers, consultants, accountants, legal counsel, other
professional advisors and other agents and the payment of their expenses
and compensation out of the Partnership's assets; and
(xx) to take such other action, execute, acknowledge, swear to or
deliver such other documents and instruments, and perform any and all other
acts the General Partner deems necessary or appropriate for the formation,
continuation and conduct of the business and affairs of the Partnership
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(including, without limitation, all actions consistent with allowing the
Company at all times to qualify as a REIT unless the Company voluntarily
terminates its REIT status) and to possess and enjoy all of the rights and
powers of a general partner as provided by the Act.
Except as otherwise provided herein, to the extent the duties of the
General Partner require expenditures of funds to be paid to third parties, the
General Partner shall not have any obligations hereunder except to the extent
that Partnership funds are reasonably available to it for the performance of
such duties, and nothing herein contained shall be deemed to authorize or
require the General Partner, in its capacity as such, to expend its individual
funds for payment to third parties or to undertake any individual liability or
obligation on behalf of the Partnership.
(b) The General Partner is expressly authorized to enter into, in the name
and on behalf of the Partnership, the Potlatch Timber Agreement and any
additional Timber Agreements provided for therein, the Administrative Services
Agreement and the Opportunities Agreement.
6.2 Delegation of Authority. The General Partner may delegate any or all of
its powers, rights and obligations hereunder, and may appoint, employ,
contract or otherwise deal with any Person for the transaction of the business
of the Partnership, which Person may, under supervision of the General
Partner, perform any acts or services for the Partnership as the General Partner
may approve.
6.3 Indemnification and Exculpation of Indemnitees.
(a) The Partnership shall indemnify an Indemnitee from and against any and
all losses, claims, damages, liabilities (joint or several), expenses
(including reasonable legal fees and expenses), judgments, fines, settlements,
and other amounts arising from any and all claims, demands, actions, suits or
proceedings, civil, criminal, administrative or investigative, that relate to
the operations of the Partnership as set forth in this Agreement in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, if the Indemnitee acted in good faith and in a manner it reasonably
believed to be in, or not opposed to, the best interests of the Partnership
and, with respect to any criminal proceeding, had no reasonable cause to
believe that its conduct was unlawful. The termination of any proceeding by
judgment, order or settlement shall not, of itself, create a presumption that
the Indemnitee did not meet the requisite standard of conduct set forth in
this Section 6.3(a). The termination of any proceeding by conviction or upon a
plea of nolo contendere or its equivalent, or an entry of an order of
probation prior to judgment, shall create a rebuttable presumption that the
Indemnitee acted in a manner contrary to that specified in this Section
6.3(a). Any indemnification pursuant to this Section 6.3 shall be made only
out of the assets of the Partnership.
(b) The Partnership shall reimburse an Indemnitee for reasonable expenses
incurred by an Indemnitee who is a party to a proceeding in advance of the
final disposition of the proceeding upon receipt by the Partnership of (i) a
written affirmation by the
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Indemnitee of the Indemnitee's good faith belief that the standard of conduct
necessary for indemnification by the Partnership as authorized in this Section
6.3 has been met, and (ii) a written undertaking by or on behalf of the
Indemnitee to repay the amount if it shall ultimately be determined that the
standard of conduct has not been met.
(c) The indemnification provided by this Section 6.3 shall be in addition
to any other rights to which an Indemnitee or any other Person may be entitled
under any agreement, pursuant to any vote of the Partners, as a matter of law
or otherwise, and shall continue as to an Indemnitee who has ceased to serve
in such capacity.
(d) The Partnership may purchase and maintain insurance, on behalf of the
Indemnitees and such other Persons as the General Partner shall determine,
against any liability that may be asserted against or expenses that may be
incurred by such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.
(e) For purposes of this Section 6.3, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants
or beneficiaries of the plan; excise taxes assessed on an Indemnitee with
respect to an employee benefit plan pursuant to applicable law shall constitute
fines within the meaning of this Section 6.3; and actions taken or omitted by
the Indemnitee with respect to an employee benefit plan in the performance of
its duties for a purpose reasonably believed by the Indemnitee to be in the
best interest of the participants and beneficiaries of the plan shall be
deemed to be for a purpose which is not opposed to the best interests of the
Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.3 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.3 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
6.4 Liability of the General Partner.
(a) Notwithstanding anything to the contrary set forth in this Agreement,
the General Partner shall not be liable for monetary damages to the
Partnership or any Partners for losses sustained or liabilities incurred as a
result of any act or omission taken or permitted by the General Partner in
connection with the conduct of the Partnership's
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business that is determined by the General Partner, in good faith, to be in or
not against the best interests of the Partnership, unless such act or omission
constitutes willful misconduct, fraud, gross negligence or a knowing violation
of law or this Agreement by the General Partner.
(b) The Limited Partners expressly acknowledge that the General Partner is
acting on behalf of the Partnership, the Company and the Company's
stockholders collectively, and that, except as expressly provided herein, the
General Partner is under no obligation to consider the separate interests of the
Limited Partners (including, without limitation, the tax consequences to the
Limited Partners) in deciding whether to cause the Partnership to take (or
decline to take) any actions, and the General Partner shall have no liability
for losses sustained or liabilities incurred, or for benefits not derived, by
any Limited Partner in connection with such decisions so long as the General
Partner has acted in accordance with Section 6.4(a) hereof. In the event of a
conflict between the interests of the stockholders of the Company on the one
hand and the Limited Partners on the other, the General Partner shall endeavor
in good faith to resolve the conflict in a manner not adverse to either the
stockholders of the Company or the Limited Partners; provided, however, that in
the event and for so long as the Company is the General Partner of the
Partnership, any such conflict that cannot be resolved in a manner not adverse
to either the stockholders of the Company or the Limited Partners shall be
resolved in favor of the stockholders.
(c) Subject to its obligations and duties as General Partner set forth in
Section 6.1 hereof, the General Partner may exercise any of the powers granted
to it under this Agreement and perform any of the duties imposed upon it
hereunder either directly or by or through its agents. The General Partner
shall not be responsible for any misconduct or negligence on the part of any
such agent appointed by it in good faith.
(d) Notwithstanding any other provisions of this Agreement or the Act, any
action of the General Partner on behalf of the Partnership or any decision of
the General Partner to refrain from acting on behalf of the Partnership,
undertaken in the good faith belief that such action or omission is necessary
or advisable in order (i) to protect the ability of the Company to continue to
qualify as a REIT or (ii) to prevent the Company from incurring any taxes
under Section 857(b)(5) or Section 857(b)(6) of the Code, is expressly
authorized under this Agreement and is deemed approved by all of the Limited
Partners.
(e) Any amendment, modification or repeal of this Section 6.4 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the General Partner's liability to the Partnership and the
Limited Partners under this Section 6.4 as in effect immediately prior to such
amendment, modification or repeal with respect to matters occurring, in whole
or in part, prior to such amendment, modification or repeal, regardless of
when claims relating to such matters may arise or be asserted.
6.5 Expenditures by the Partnership. The General Partner is hereby
authorized to pay compensation for accounting, administrative, legal,
technical, management and other services rendered to the Partnership. All of the
aforesaid expenditures (including Administrative Expenses) shall be obligations
of the Partnership, and the General Partner
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shall be entitled to reimbursement by the Partnership for any expenditure
(including Administrative Expenses) incurred by it on behalf of the
Partnership which is made other than out of the funds of the Partnership. The
Partnership shall also assume, and pay when due, all Administrative Expenses.
6.6 Outside Activities. Subject to any agreements entered into by the
General Partner or its Affiliates with the Partnership or a Subsidiary in
accordance with this Agreement, any officer, director, employee, agent,
trustee, Affiliate or stockholder of the General Partner (but not the General
Partner) shall be entitled to and may have business ventures and interests and
may engage in business activities in addition to those relating to the
Partnership. Neither the Partnership nor any Limited Partner nor any other
Person shall have any rights by virtue of this Agreement or the partnership
relationship established hereby in any such business ventures, interests or
activities, and the General Partner shall have no obligation pursuant to this
Agreement to offer any interest in any such business ventures, interests and
activities to the Partnership or any Limited Partner, even if such opportunity
is of a character which, if presented to the Partnership or any Limited
Partner, could be taken by such Person.
6.7 Transactions with Affiliates. Except as expressly permitted by this
Agreement, the Partnership shall not, directly or indirectly, sell, transfer
or convey any property to, or purchase any property from, or borrow funds
from, or lend funds to, any Partner or any Affiliate thereof or any Affiliate of
the Partnership that is not also a Subsidiary of the Partnership, except
pursuant to transactions that are on terms that are fair and reasonable to the
Partnership. The Partners hereby agree that the transactions contemplated by the
contracts listed in Exhibit D hereto are fair and reasonable.
6.8 General Partner Participation. The General Partner agrees that all
business activities of the General Partner, including activities pertaining to
the acquisition, development or ownership of property, shall be conducted
through the Partnership; provided that the General Partner may own all of the
capital stock of ATCO so long as ATCO contributes all of its assets to the
Partnership (pursuant to a contribution agreement satisfactory to Potlatch in
its sole discretion) and (i) thereafter does not acquire or assume any assets
or liabilities other than routine liabilities for franchise or other taxes
arising solely out of ATCO's continued existence as a corporation, and (ii) if
requested by Potlatch, merges with and into the Company or is liquidated, in
each case as promptly as reasonably practicable after the consummation of the
Initial Offering. The General Partner also agrees that all loans from the
General Partner to the Partnership shall constitute Funding Loans.
6.9 Title to Partnership Assets. Title to Partnership assets, whether real,
personal or mixed and whether tangible or intangible, shall be deemed to be
owned by the Partnership as an entity, and no Partner, individually or
collectively, shall have any ownership interest in such Partnership assets or
any portion thereof. Title to any or all of the Partnership assets may be held
in the name of the Partnership, the General Partner or one or more nominees,
as the General Partner may determine, including Affiliates of the General
Partner. The General Partner hereby declares and warrants that any Partnership
assets for which legal title is held in the name of the General Partner or any
nominee or
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Affiliate of the General Partner shall be held by the General Partner for the
use and benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that the General Partner shall use its best
efforts to cause beneficial and record title to such assets to be vested in
the Partnership as soon as reasonably practicable. All Partnership assets
shall be recorded as the property of the Partnership in its books and records,
irrespective of the name in which legal title to such Partnership assets is
held.
6.10 Repurchase or Redemption of Shares. In the event that the Company
purchases or redeems Shares (whether pursuant to a tender offer or otherwise)
for any purpose (including without limitation for purposes of delivering such
shares to satisfy an obligation under a dividend reinvestment program, stock
purchase plan or similar arrangement adopted by the General Partner, acquiring
such shares for retention as treasury stock or acquiring such shares for the
purpose of retiring them), the purchase price paid by the Company for such
shares and any other expenses incurred by the General Partner in connection
with such purchase shall be considered expenses of the Partnership and shall
be advanced to the General Partner or reimbursed to the General Partner,
subject to the condition that: (i) if such Shares subsequently are sold by the
General Partner, the General Partner shall pay to the Partnership any proceeds
received by the General Partner for such Shares (which sales proceeds shall
include the amount of dividends reinvested under any dividend reinvestment or
similar program provided that a transfer of Shares for Partnership Units
pursuant to Section 8.5 would not be considered a sale for such purposes); and
(ii) if such Shares are not retransferred by the General Partner within thirty
(30) days after the purchase thereof, or the General Partner otherwise
determines not to retransfer such Shares, then the General Partner shall cause
the Partnership to purchase from the General Partner Partnership Units having
designations, preferences and other rights such that the economic interests
associated with such Partnership Units are as similar as practicable to those of
such Shares (which, in the case of REIT Shares, will consist of that number of
Partnership Units equal to the product obtained by multiplying the number of
REIT Shares to be purchased or redeemed by the General Partner by a fraction,
the numerator of which is one (1) and the denominator of which is the
Conversion Factor, on the same terms and for the same aggregate consideration
paid by the General Partner for such REIT Shares).
6.11 Violations of Potlatch's Covenants. Notwithstanding anything to the
contrary herein, in no event shall the General Partner or the Partnership take
or agree to take any action or cause or permit any Subsidiary of the General
Partner or the Partnership to take or agree to take any action (including
without limitation the granting of any security interest or lien or the
incurrence, creation, assumption or guaranteeing of Indebtedness), if such
action would cause Potlatch to breach or violate any covenant in any of the
agreements and instruments listed in Exhibit C hereto (the "Existing
Covenants") or any other covenant made by Potlatch or any Subsidiary of Potlatch
from time to time after the date hereof (in each case, so long as such other
covenant is no more restrictive than the Existing Covenants and the General
Partner has been notified of the making of such covenant). For purposes of
this Section 6.11, "Potlatch" shall mean Potlatch and its successors and
Subsidiaries.
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ARTICLE VII
CHANGES IN GENERAL PARTNER
7.1 Transfer of the General Partner's Partnership Interest.
(a) The General Partner may not Transfer any of its General Partnership
Interest or withdraw as General Partner except as provided in Section 7.1(b)
or in connection with a transaction described in Section 7.1(c), or with the
prior consent of a Majority in Interest of the Limited Partners.
(b) Except as otherwise provided in Section 7.1(c) hereof, the General
Partner shall not engage in any merger, consolidation or other combination
with or into another Person or sale of all or substantially all of its assets,
or any reclassification, recapitalization or change of outstanding REIT Shares
(other than a change in par value, or from par value to no par value, or as a
result of a subdivision or combination of REIT Shares), unless the General
Partner obtains the prior consent of a Majority in Interest of the Limited
Partners.
(c) Notwithstanding Section 7.1(b), the General Partner may merge with or
into or consolidate with another entity if such merger or consolidation does
not result in material adverse tax consequences to a Majority in Interest of
the Limited Partners and immediately after such merger or consolidation (i)
substantially all of the assets of the successor or surviving entity (the
"Surviving Entity"), other than Partnership Units held by the General Partner,
are contributed, directly or indirectly, to the Partnership as a Capital
Contribution in exchange for Partnership Units with a fair market value equal
to the value of the assets so contributed as determined by the Surviving
Entity in good faith, (ii) stockholders of the General Partner immediately prior
to such merger or consolidation own securities upon consummation of such
transaction representing at least 70% of the outstanding voting power of the
Surviving Entity (or, if applicable, any Person in control of the Surviving
Entity), and (iii) the Surviving Entity (if other than the General Partner)
expressly agrees to assume, or acknowledge and ratify, all obligations of the
General Partner hereunder. Upon such contribution and assumption, the
Surviving Entity shall have the right and duty to amend this Agreement as set
forth in this Section 7.1(c). If the Surviving Entity is other than the
General Partner, the Surviving Entity shall in good faith arrive at a new
method for the calculation of the Cash Amount, the REIT Shares Amount and the
Conversion Factor for a Partnership Unit after any such merger or
consolidation so as to approximate the existing method for such calculation as
closely as reasonably possible. Such calculation shall take into account,
among other things, the kind and amount of securities, cash and other property
that was receivable upon such merger or consolidation by a holder of REIT
Shares or options, warrants or other rights relating thereto, and which a
holder of Partnership Units could have acquired had such Partnership Units
been exchanged for REIT Shares immediately prior to such merger or
consolidation. Such amendment to this Agreement shall provide for adjustment
to such method of calculation which shall be as nearly equivalent as may be
practicable to the adjustments provided for with respect to the Conversion
Factor. The Surviving Entity shall also in good faith modify the definition of
REIT Shares and make such amendments to Section 8.5 hereof so as to
approximate the
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existing rights and obligations set forth in Section 8.5 as closely as
reasonably possible. The above provisions of this Section 7.1(c) shall
similarly apply to successive mergers or consolidations permitted hereunder.
7.2 Admission of a Substitute or Successor General Partner. A Person shall
be admitted as a substitute, successor or additional General Partner of the
Partnership only if the following terms and conditions are satisfied:
(a) a Majority in Interest of the Limited Partners shall have consented in
writing to the admission of the substitute, successor or additional General
Partner;
(b) the Person to be admitted as a substitute or additional General Partner
shall have accepted and agreed to be bound by all the terms and provisions of
this Agreement by executing a counterpart thereof and such other documents or
instruments as may be required or appropriate in order to effect the admission
of such Person as a General Partner, and a certificate evidencing the
admission of such Person as a General Partner shall have been filed for
recordation and all other actions required by Section 2.5 hereof in connection
with such admission shall have been performed;
(c) if the Person to be admitted as a substitute or additional General
Partner is a corporation or a partnership it shall have provided the
Partnership with evidence satisfactory to counsel for the Partnership of such
Person's authority to become a General Partner and to be bound by the terms and
provisions of this Agreement; and
(d) counsel for the Partnership shall have rendered an opinion (relying on
such opinions from such other counsel as may be necessary) that the admission
of the person to be admitted as a substitute or additional General Partner is
in conformity with the Act, that none of the actions taken in connection with
the admission of such Person as a substitute or additional General Partner
will cause (i) the Partnership to be classified other than as a partnership
for federal income tax purposes, or (ii) the loss of any Limited Partner's
limited liability.
7.3 Effect of Bankruptcy, Withdrawal, Death or Dissolution of a General
Partner.
(a) Upon the occurrence of an Event of Bankruptcy as to a General Partner
(and its removal pursuant to Section 7.4(a) hereof) or the death, withdrawal,
removal or dissolution of a General Partner (except that if a General Partner
is, on the date of such occurrence, a partnership, the withdrawal, dissolution
or Event of Bankruptcy as to, or removal of a partner in, such partnership
shall be deemed not to be a dissolution or withdrawal of such General Partner
if the business of such General Partner is continued by the remaining partner
or partners) (any of the foregoing events and occurrences being referred to as
an "Event of Withdrawal" as to such General Partner), the Partnership shall be
dissolved and terminated as provided in Article XII, unless the Partnership is
continued pursuant to Section 7.3(b) hereof.
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(b) Following the occurrence of an Event of Withdrawal as to a General
Partner (and its removal pursuant to Section 7.4(a) hereof), the Limited
Partners, within 90 days after such occurrence, may elect to reconstitute the
Partnership and continue the business of the Partnership for the balance of
the term specified in Section 2.4 hereof by selecting, subject to Section 7.2
hereof and any other provisions of this Agreement, a substitute General
Partner by the vote or consent of a Majority in Interest of the Limited
Partners. If the Limited Partners elect to reconstitute the Partnership and
admit a substitute General Partner, the relationship with the Partners and of
any Person who has acquired an interest of a Partner in the Partnership shall
be governed by this Agreement.
7.4 Removal of a General Partner.
(a) Upon the occurrence of an Event of Withdrawal as to a General Partner,
such General Partner shall be deemed to be removed automatically.
(b) If a General Partner (the "Withdrawing Partner") has been removed
pursuant to this Section 7.4 and the Partnership is continued pursuant to
Section 7.3 hereof, such Withdrawing Partner's interest in the Partnership
shall be converted into a Partnership Interest solely as a Limited Partner,
having the same economic rights and terms as the Partnership Interest given in
exchange therefor, and a new General Partner shall be admitted to the
Partnership on the terms and conditions provided for in Section 7.2 hereof. In
the event of such conversion, (i) such Withdrawing Partner shall not have any
right to participate in the management or affairs of the Partnership, nor
shall it have any of the other rights granted to the General Partner hereunder
(including specifically, without limitation, the rights provided for in
Section 8.5(b) hereof relating to certain elections to purchase Partnership
Units), and shall only have the rights to receive its share of distributions,
profits and losses attributable to its Partnership Interest and such other
rights of a Limited Partner as are expressly provided for herein, (ii) such
Withdrawing Partner shall retain all of its obligations hereunder, including
its obligation to make Capital Contributions hereunder and be subject to all
of the other restrictions applicable to a Limited Partner as specifically set
forth herein (including, without limitation, the restrictions on transfer set
forth in Article IX). The foregoing provisions shall not be construed to limit
any action at law or in equity which may be brought or maintained by the
Partnership or any Partner against such Withdrawing Partner if such Event of
Withdrawal resulted in a breach of this Agreement.
(c) Potlatch is hereby irrevocably constituted and appointed as the true
and lawful attorney for each Withdrawing Partner, effective upon the
occurrence of an Event of Withdrawal with respect to such Withdrawing Partner,
to make, execute, consent to, swear to, acknowledge, deliver, record and file,
in the name, place and stead of each of such Partner and its successors and
assigns, an amended certificate of limited partnership to reflect the following
facts: (i) the Withdrawing Partner is no longer a General Partner of the
Partnership, (ii) such Withdrawing Partner's partnership interest has been
converted into an interest solely as a Limited Partner in the Partnership, and
(iii) such additional matters relating to the transaction or the identity of the
successor General Partner as may be deemed appropriate or necessary by Potlatch.
The Partnership shall bear the expense of such amendment. Additionally, the
Withdrawing Partner shall execute and deliver to the
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Partnership such additional documents as may be reasonably requested, for the
purpose of effectuating the conversion of the Withdrawing Partner's interest
in the Partnership to a Limited Partnership Interest; provided, however, that
no failure or refusal on the part of the Withdrawing Partner to comply with
this provision shall be construed as a condition to the effectiveness of such
conversion. For purposes of this Section 7.4(c), "Potlatch" means Potlatch and
its successor or assign.
(d) All Partners shall have given and hereby do give such consents, shall
take such actions and shall execute such documents as shall be legally
necessary and sufficient to effect all the foregoing provisions of this Section.
ARTICLE VIII
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
8.1 Management of the Partnership. The Limited Partners shall not participate
in the management or control of Partnership business nor shall they transact
any business for the Partnership, nor shall they have the power to sign for or
bind the Partnership, such powers being vested solely and exclusively in the
General Partner.
8.2 Power of Attorney. Each party to this Agreement does hereby constitute
and appoint the General Partner as its true and lawful representative and
attorney-in-fact, in its name, place and stead, to make, execute, sign and
file any amendment to the Certificate of Limited Partnership of the
Partnership required because of an amendment to this Agreement and all such
other instruments, documents and certificates which may from time to time be
required by the laws of the United States of America, the State of Delaware or
any other state in which the Partnership shall determine to do business, or any
political subdivision or agency thereof, to effectuate, implement and continue
the valid and subsisting existence of the Partnership. Such representative and
attorneys-in-fact shall not, however, have any right, power or authority to
amend or modify this Agreement when acting in such capacities.
8.3 Limitation on Liability of Limited Partners. No Limited Partner shall
be liable for any debts, liabilities, contracts or obligations of the
Partnership. A Limited Partner shall be liable to the Partnership only to make
payments of his Capital Contribution, if any, as and when due hereunder. After
his Capital Contribution is fully paid, no Limited Partner shall, except as
otherwise required by the Act, be required to make any further Capital
Contributions or other payments or lend any funds to the Partnership.
8.4 Ownership by Limited Partner of Corporate General Partner or Affiliate.
No Limited Partner shall at any time, either directly or indirectly, own any
stock or other interest in the General Partner or in any Affiliate thereof, if
such ownership by itself or in conjunction with other stock or other interests
owned by other Limited Partners would, in the opinion of counsel for the
Partnership, jeopardize the classification of the Partnership as a partnership
for federal income tax purposes. The General Partner shall be entitled to make
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such reasonable inquiry of the Limited Partners as is required to establish
compliance by the Limited Partners with the provisions of this Section.
8.5 Exchange Right.
(a) Subject to Sections 8.5(b)-(h) and Section 9.7, on or after the second
anniversary of the Effective Date, each Limited Partner shall have the right
(the "Exchange Right") to require the Partnership to exchange on a Specified
Exchange Date all or a portion of the Partnership Units held by such Limited
Partner for an exchange price payable by the Partnership equal to and in the
form of the Cash Amount. The Exchange Right shall be exercised pursuant to a
Notice of Exchange delivered to the Partnership (with a copy to the General
Partner) by the Limited Partner who is exercising the Exchange Right (the
"Exchanging Partner"); provided, however, that the Partnership shall not be
obligated to satisfy such Exchange Right if the General Partner elects to
purchase the Partnership Units subject to the Notice of Exchange pursuant to
Section 8.5(b). A Limited Partner may exercise the Exchange Right from time to
time, without regard to frequency, with respect to some or all of the
Partnership Units that it owns, as selected by such Limited Partner, but no
Limited Partner may exercise the Exchange Right for less than a number of
Partnership Units equal to ten thousand (10,000) Partnership Units multiplied
by the Conversion Factor or, if such Limited Partner holds less than such
number of Partnership Units, all of the Partnership Units held by such Limited
Partner. Notwithstanding the foregoing provisions of this Section 8.5(a), the
General Partner agrees to use its best efforts to cause the closing of the
acquisition of exchanged Partnership Units hereunder to occur as quickly as
reasonably possible. The Exchanging Partner shall have no right, with respect to
any Partnership Units so exchanged, to receive any distribution paid with
respect to such Partnership Units if the record date for such distribution is on
or after the Specified Exchange Date.
(b) Notwithstanding the provisions of Section 8.5(a), a Limited Partner
that exercises the Exchange Right shall be deemed to have offered to sell the
Partnership Units described in the Notice of Exchange to the General Partner,
and the General Partner may, in its sole and absolute discretion, elect to
purchase directly and acquire such Partnership Units by paying to the
Exchanging Partner either the Cash Amount, or the REIT Shares Amount, as elected
by the General Partner (in its sole and absolute discretion), on the Specified
Exchange Date, whereupon the General Partner shall acquire the Partnership Units
offered for exchange by the Exchanging Partner and shall be treated for all
purposes of this Agreement as the owner of such Partnership Units (and such
Partnership Units shall thereupon be deemed for all purposes to be General
Partnership Interests). If the General Partner shall elect to exercise its right
to purchase Partnership Units under this Section 8.5(b) with respect to a
Notice of Exchange, it shall so notify the Exchanging Partner within five
Business Days after the receipt by the General Partner of such Notice of
Exchange. Unless the General Partner (in its sole and absolute discretion)
shall exercise its right to purchase Partnership Units from the Exchanging
Partner pursuant to this Section 8.5(b), the General Partner shall have no
obligation to the Exchanging Partner or the Partnership with respect to the
Exchanging Partner's exercise of the Exchange Right. In the event the General
Partner shall exercise its right to purchase Partnership Units with respect to
the
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exercise of an Exchange Right in the manner described in the first sentence of
this Section 8.5(b), the Partnership shall have no obligation to pay any
amount to the Exchanging Partner with respect to such Exchanging Partner's
exercise of such Exchange Right, and each of the Exchanging Partner, the
Partnership and the General Partner shall treat the transaction between the
General Partner and the Exchanging Partner for federal income tax purposes as
a sale of the Exchanging Partner's Partnership Units to the General Partner.
Each Exchanging Partner agrees to execute such documents as the General
Partner may reasonably require in connection with the issuance of REIT Shares
upon exercise of the Exchange Right.
(c) Notwithstanding the provisions of Section 8.5(a) and Section 8.5(b), a
Limited Partner shall not be entitled to exercise the Exchange Right pursuant
to Section 8.5(a) if the delivery of REIT Shares to such Partner on the
Specified Exchange Date by the Company pursuant to Section 8.5(b) (regardless of
whether or not the Company would in fact exercise its rights under Section
8.5(b)) would (i) result in such Partner or any other person owning, directly or
indirectly, REIT Shares in excess of the Ownership Limit or the Look-Through
Ownership Limitation, if applicable (as defined in the Certificate of
Incorporation of the Company), and calculated in accordance therewith, except as
provided in such Certificate of Incorporation, (ii) result in REIT Shares
being owned by fewer than 100 persons (determined without reference to any
rules of attribution), except as provided in the Company's Certificate of
Incorporation, (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, (iv) cause the Company to own, directly
or constructively, 10% or more of the ownership interests in a tenant of the
General Partner or the Partnership within the meaning of Section 856(d)(2)(B)
of the Code, (v) cause the acquisition of REIT Shares by such Partner to be
"integrated" with any other distribution of REIT Shares and thereby cause the
Company to be in violation of the registration provisions of the Securities
Act, (vi) result in the Partnership being considered a "publicly traded
partnership" within the meaning of Section 7704 of the Code, or (vii)
otherwise result in the Company's inability to qualify as a real estate
investment trust under Sections 856 through 860 of the Code. The General
Partner, in its sole discretion, may waive the restriction on exchange set
forth in this Section 8.5(c); provided, however, that in the event such a
restriction is waived, the Exchanging Partner shall be paid the Cash Amount.
(d) Any Cash Amount to be paid to an Exchanging Partner pursuant to this
Section 8.5 shall be paid on or before the Specified Exchange Date.
Notwithstanding the foregoing, the General Partner and the Partnership agree
to use their best efforts to cause the closing of the acquisition of exchanged
Partnership Units hereunder to occur as quickly as reasonably possible.
(e) The Assignee of any Limited Partner may exercise the rights of such
Limited Partner pursuant to this Section 8.5 with respect to the Partnership
Interests assigned to such Assignee, and such Limited Partner will be deemed
to have assigned such rights to such Assignee and shall be bound by such
Assignee's exercise of such rights.
(f) Each Limited Partner covenants and agrees with the General Partner that
all Partnership Units delivered for exchange hereunder shall be delivered to
the Partnership or
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General Partner, as the case may be, free and clear of all liens, and further
agrees that, in the event any state or local property transfer tax is payable
as a result of the transfer of Partnership Units to the Partnership or the
General Partner (as the case may be), such Limited Partner shall assume and pay
such transfer tax. In the event that the General Partner permits the pledge of
a Limited Partner's Partnership Units to a lender, the General Partner may
agree, its sole discretion, to allow such lender, upon foreclosure of such
Partnership Units, to exchange such Partnership Units prior to the second
anniversary of the Effective Date; provided that any such exchange shall be
effected by the Partnership in the form of the Cash Amount.
(g) Notwithstanding any other provision of this Agreement, the General
Partner shall place appropriate restrictions on the ability of the Limited
Partners to exercise their Exchange Rights as and if deemed necessary to
ensure that the Partnership does not constitute a "publicly traded
partnership" under Section 7704 of the Code.
(h) If the General Partner notifies the Limited Partners pursuant to
Section 8.8(a) hereof, then notwithstanding any other provision herein the
Exchange Right shall be exercisable immediately, during the period commencing
on the date on which the General Partner provided such notice and ending on
the record date to determine the stockholders eligible to receive such
distribution or to vote upon the approval of such transaction (or, if no such
record date is applicable, ten (10) Business Days before the consummation of
such distribution or transaction). If this paragraph (h) applies, the
Specified Exchange Date shall be the date on which the Partnership and the
General Partner receive the Notice of Exchange, rather than the time specified
above.
(i) If any Person (other than the Company) makes a bona fide tender or
exchange offer for ten percent (10%) or more of the outstanding REIT Shares,
then notwithstanding any other provision herein the Exchange Right shall be
exercisable immediately.
8.6 Outside Activities of Limited Partners. Subject to any agreements
entered into by a Limited Partner or its Affiliates with the Partnership or a
Subsidiary in accordance with this Agreement, each Limited Partner and each
officer, director, employee, agent, trustee, Affiliate or stockholder of a
Limited Partner shall be entitled to and may have business ventures and
interests and may engage in business activities in addition to those relating
to the Partnership, including business ventures, interests and activities in
direct or indirect competition with the Partnership. Neither the Partnership
nor any of the Partners nor any other Person shall have any rights by virtue of
this Agreement or the partnership relationship established hereby in any such
business ventures, interests or activities, and any such Limited Partner shall
have no obligation pursuant to this Agreement to offer any interest in any
such business ventures, interests and activities to the Partnership or any
other Partner, even if such opportunity is of a character which, if presented
to the Partnership or any other Partner, could be taken by such Person.
8.7 Sale or Pledge of Timberlands Contributed by Potlatch. (a)
Notwithstanding anything herein to the contrary (except as provided in Section
8.7(b)), so long as Potlatch or its successor and their respective
Subsidiaries hold more than fifty percent (50%) of the
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Partnership Units held by Potlatch on the date hereof (as shown on Exhibit A
as in effect on the date hereof), the Partnership may not offer, sell, lease,
assign, hypothecate, pledge, dispose of or otherwise transfer (whether
voluntarily or involuntarily, and whether or not by operation of law, and
including without limitation by way of merger, consolidation or similar
business combination) any of the Potlatch Timberlands or any leasehold or other
interest therein, without the prior written consent of Potlatch or any successor
of Potlatch, in its sole and absolute discretion. Notwithstanding the
foregoing, as to any mechanics' or materialmen's lien or other involuntary lien,
Partnership's obligation to obtain consent prior to the imposition thereof under
this Section 8.7(a) shall be suspended so long as (i) Partnership is
reasonably and in good faith contesting the amount or validity of such lien by
appropriate proceedings, and (ii) Partnership shall take all actions necessary
(including payment of or bonding against such lien) to avoid a foreclosure of
any such lien.
(b) Notwithstanding Section 8.7(a), the Partnership shall have the right,
without the prior consent of Potlatch or any successor of Potlatch, from time
to time, to transfer a parcel or parcels of the Potlatch Timberlands, only
upon and subject to the terms and conditions of this Section 8.7(b). Partnership
may sell, from time to time, a parcel of the Potlatch Timberlands (a "Sale
Parcel"), provided that each of the following conditions is satisfied: (i) no
Sale Parcel shall be included in the Timberlands to be harvested pursuant to the
two-year Harvest Plan then in effect under the Potlatch Timber Agreement; (ii)
Potlatch receives prior written notice of such proposed transfer and copies of
all transfer and other related documents; (iii) the aggregate acreage of all
Sale Parcels transferred in any calendar year shall be less than five thousand
(5,000) acres; and (iv) the aggregate acreage of all Sale Parcels transferred
in any period of twenty (20) consecutive calendar years shall be less than the
sum of (A) twenty thousand (20,000) acres, plus (B) such acreage as contains
not more than the Net Volume Increase (as defined in the Potlatch Timber
Agreement). In addition to parcels sold in accordance with the preceding
sentence, Partnership may transfer, from time to time, in connection with an
Exchange (as defined below) a parcel of the Potlatch Timberlands (an "Exchange
Parcel"), provided that each of the following conditions is satisfied: (i) no
Sale Parcel shall be included in the Timberlands to be harvested pursuant to the
two-year Harvest Plan then in effect under the Potlatch Timber Agreement; (ii)
Potlatch receives prior written notice of such Exchange and copies of all
transfer and other related documents; (iii) in connection with such transfer, a
parcel or parcels of Additional Timberlands in the same Resource Region (the
foregoing terms as defined in the Potlatch Timber Agreement) as the Exchange
Parcel (a "Substitute Parcel") is acquired by Partnership in an exchange
pursuant to section 1031 of the Internal Revenue Code of 1986, as amended (an
"Exchange"), which Substitute Parcel is, in Potlatch's reasonable judgment,
reasonably equivalent to or better than the Exchange Parcel being transferred in
volume and species of Merchantable Timber (as defined in the Potlatch Timber
Agreement), proximity to a Potlatch Conversion Facility (as defined in the
Potlatch Timber Agreement) and other factors relevant to the desirability of
such Substitute Parcel; (iv) upon Partnership's acquisition of the Substitute
Parcel, it shall become subject to the Potlatch Timber Agreement in accordance
with Section 9.4 thereof (and the Substitute Parcel shall be deemed to be part
of the Potlatch Timberlands for purposes of this Section); and (v) the
aggregate acreage of all Exchange Parcels transferred pursuant to this Section
8.7(b) in any calendar year shall be less than ten thousand (10,000) acres.
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8.8 Other Rights of Limited Partners.
(a) Notice of Extraordinary Transaction of General Partner. The General
Partner shall not make any extraordinary distribution of cash or property to
its stockholders or effect a merger or consolidation (including without
limitation a merger or consolidation in which the General Partner survives), a
sale of all or substantially all of its assets or any other similar
extraordinary transaction without notifying the Limited Partners of its
intention to make or effect such distribution or transaction at least twenty
(20) Business Days prior to the record date to determine the stockholders
eligible to receive such distribution or to vote upon the approval of such
transaction (or, if no such record date is applicable, at least twenty (20)
Business Days before the consummation of such distribution or transaction).
This provision for notice shall not be deemed to permit any transaction
otherwise prohibited by this Agreement or that requires the vote or consent of
Partners. Each Limited Partner agrees, as a condition to the receipt of the
notice pursuant hereto, to keep confidential the information set forth therein
until the General Partner has made public disclosure thereof, and to use such
information during such period of confidentiality solely for the purpose of
determining whether to exercise the Exchange Right (it being understood that a
Limited Partner may disclose such information to its attorney, accountant and
financial adviser so long as such persons agree to hold such information
subject to the foregoing requirement of confidentiality).
(b) Acquisition of Non-Permitted Assets.
(i) Without the prior approval of at least a majority of the voting power
of all shares of capital stock of the General Partner then outstanding, the
General Partner shall not cause or permit the Partnership to effect or agree
to effect any transaction if, after the consummation thereof, the fair market
value of "Permitted Assets" (as defined below) of the Partnership and its
Subsidiaries would constitute less than fifty percent (50%) of the fair market
value of all of the assets of the Partnership and its Subsidiaries considered
as a whole. For purposes of this section, the fair market value of each asset
of the Partnership and its Subsidiaries, and whether a particular asset
constitutes a Permitted Asset, shall be determined in good faith by the Board
of Directors of the General Partner. "Permitted Assets" shall mean assets
(whether tangible or intangible) necessary, incidental or convenient to the
business of Timber and Timberlands ownership, sales, leasing and management,
including without limitation Timber, Timberlands and all other assets used in
purchasing, selling or leasing Timber or Timberlands, planting or otherwise
cultivating Timber, and planning or managing Timber growth and harvesting;
provided, however, that the Partnership may effect or agree to effect any
transaction which would otherwise violate the foregoing provision without such
prior stockholder approval if (1) the assets which would cause such violation
("Non-Permitted Assets") are to be acquired in connection with an acquisition
by the Partnership or its Subsidiaries of assets or other interests a majority
of the fair market value of which constitutes or is attributable to Permitted
Assets and (2) the Partnership undertakes to sell or otherwise dispose of its
interest in such Non-Permitted Assets (or to cause its Subsidiaries to do so,
as the case may be) as promptly as practicable after the acquisition thereof.
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(ii) Notwithstanding anything to the contrary provided for herein, unless
the Company has ceased to qualify as a REIT, or the Board of Directors of the
Company has determined that it is no longer in the best interest of the
Company to remain qualified as a REIT, the Partnership shall not enter into or
engage in, and the General Partner shall not have the right or power to enter
into or engage in on behalf of the Partnership, any transaction or arrangement
that would reasonably be expected to result in the Company's inability to
qualify as a real estate investment trust under the Code. Without limiting the
generality of the foregoing, the Partnership shall not enter into or engage in
any transaction or arrangement that is or is likely to result in the receipt
of income by the Partnership which would or would be likely to cause the
Company to fail to meet the income requirements of the Code applicable to REITs
("Non-REIT Income"), or which would result in the Partnership holding assets
which would cause the Company to fail to meet the asset ownership requirement
of the Code applicable to REITs ("Non-REIT Assets"). In the event that any
amendment to the Code or Regulations hereafter adopted or any other change in
the law that occurs after the date hereof or any change in the facts relating
to any transaction or arrangement would cause the Company to be considered to
have any Non-REIT Income or would cause the Company, in such a situation, to
be considered to hold any Non-REIT Assets, the General Partner shall use its
best efforts to modify or change the terms of such transaction in order to
eliminate such Non-REIT Income and eliminate or otherwise dispose of such Non-
REIT Assets.
8.9 Meetings of the Partners.
(a) Meetings of the Partners may be called by the General Partner and shall
be called upon the receipt by the General Partner of a written request by
Limited Partners holding twenty percent (20%) or more of the Limited
Partnership Interests. Upon request in writing to the General Partner by any
person(s) entitled to call a meeting, the General Partner shall cause notice to
be given (not less than fifteen (15) nor more than sixty (60) days after receipt
of request) to the Limited Partners that a meeting will be held at a time
requested by the person(s) calling the meeting. The call shall state the nature
of the business to be transacted. Notice of any such meeting shall be given to
all Partners not less than ten (10) days nor more than sixty (60) days prior
to the date of such meeting. Partners may vote in person or by proxy at such
meeting. Whenever the vote or consent of the Partners is permitted or required
under this Agreement, such vote or consent may be given at a meeting of the
Partners or may be given in accordance with the procedure prescribed in this
Section 8.9, and except as otherwise expressly provided in this Agreement, the
consent of the General Partner and a Majority in Interest of the Limited
Partners shall control.
(b) Any action required or permitted to be taken at a meeting of the
Partners may be taken without a meeting if a written consent setting forth the
action so taken is signed by the General Partner and a Majority in Interest of
the Limited Partners (or such other percentage as is expressly required by
this Agreement). Such consent may be in one instrument or in several
instruments, and shall have the same force and effect as a vote of the General
Partner and a Majority in Interest of the Limited Partners (or such other
percentage as is expressly required by this Agreement). Such consent shall be
filed with the
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General Partner. An action so taken shall be deemed to have been taken at a
meeting held on the effective date so certified.
(c) Each Limited Partner may authorize any Person or Persons to act for him
by proxy on all matters in which a Limited Partner is entitled to participate,
including waiving notice of any meeting, or voting or participating at a
meeting. Every proxy must be signed by the Limited Partner or his attorney-in-
fact. No proxy shall be valid after the expiration of eleven (11) months from
the date thereof unless otherwise provided in the proxy. Every proxy shall be
revocable at the pleasure of the Limited Partner executing it, such revocation
to be effective upon the Partnership's receipt of or written notice of such
revocation from the Limited Partner executing such proxy.
(d) Each meeting of Partners shall be conducted by the General Partner or
such other Person as the General Partner may appoint pursuant to such rules
for the conduct of the meeting as the General Partner or such other Person
deems appropriate in its sole discretion. Without limitation, meetings of
Partners may be conducted in the same manner as meetings of the stockholders of
the General Partner and may be held at the same time as, and as part of,
meetings of the stockholders of the General Partner.
8.10 In-Kind Distribution Upon Termination of Potlatch Timber Agreement.
(a) In the event that Potlatch (or its successor or permitted assign)
terminates the Potlatch Timber Agreement pursuant to Section 12.4(b) thereof,
then so long as Potlatch or its successor and their respective Subsidiaries
(collectively, the "Potlatch Party") hold more than 50% of the Partnership
Units held by Potlatch on the date hereof (as shown in Exhibit A as in effect
on the date hereof), the Potlatch Party may cause the Partnership to redeem
all (but not less than all) of the Partnership Units held by the Potlatch Party
on the date of such termination by delivering to the Partnership within forty-
five (45) days after such termination date written notice of the Potlatch
Party's election to cause such redemption. If such election is made, the
Partnership shall redeem such Partnership Units as promptly as practicable
after the Fair Market Value of the Potlatch Timberlands is determined as
provided below. The Partnership and the Potlatch Parties shall each use their
commercially reasonable efforts to effect such redemption, including by using
their respective commercially reasonable efforts to obtain any applicable
governmental approvals. Such redemption shall be effected by the Potlatch
Parties surrendering to the Partnership all Partnership Units held by Potlatch
Parties and the Partnership delivering to Potlatch limited warranty deeds
conveying the Subject Properties to Potlatch or its designee, free and clear
of all liens, defects and encumbrances made, done or suffered by the Partnership
except for Permitted Exceptions, together with such other transfer instruments
as may be reasonably appropriate to convey to Potlatch or its designee any
assets related to the Subject Properties.
(b) The price to be paid by the Partnership in redemption of such Partnership
Units shall be equal in amount to the Cash Amount calculated as if a Notice of
Exchange had been delivered to the General Partner on the date of delivery of
the written notice delivered to the Partnership in accordance with Section
8.10(a) above (the "Notice Date"). Such price shall be paid to the redeeming
Partner(s) in kind by transfer to the redeeming
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Partner(s) of all of the Partnership's right, title and interest in and to all
of the Potlatch Timberlands and all Timberlands acquired by the Partnership in
substitution or exchange for Potlatch Timberlands (collectively, the "Subject
Properties"), with a cash adjustment payable by the Partnership or the
Potlatch Party, as the case may be, for any difference between the price to be
paid by the Partnership in redemption for such Partnership Units and the Fair
Market Value of the Subject Properties to be transferred to the Potlatch Party
as of the Notice Date. Such cash adjustment shall be payable by the
Partnership or the Potlatch Party, as the case may be, with ten Business Days of
the final determination of the Fair Market Value of the Subject Properties as
provided below.
(c) The Fair Market Value, as of the date of determination, of the Subject
Properties shall be (x) the Fair Market Value thereof determined by mutual
agreement of the Partnership and the Potlatch Party or (y) if no such
agreement is reached within thirty (30) days of the relevant date of
determination, the Fair Market Value thereof determined as follows:
(i) Each of the Partnership and the Potlatch Party shall designate
by written notice to the other a firm of recognized national standing
experienced in appraisal techniques applicable to assets of the type being
evaluated to serve as an Appraiser pursuant to this Section 8.10 (the firms
designated by the Partnership and the Potlatch Party being referred to
herein as the "Partnership Appraiser" and the "Potlatch Appraiser,"
respectively) within 30 days after the failure to reach agreement in
accordance with the terms of clause (x) above.
(ii) Each Appraiser shall be directed to determine the Fair Market
Value of the Subject Properties. Each Appraiser will also be directed to
deliver a certificate stating such Fair Market Value (an "Appraiser's
Certificate") to both the Partnership and the Potlatch Party on or before
the forty-fifth (45th) day after their respective designation (the
"Certificate Date"), upon the conclusion of its evaluation, and each
Appraiser's Certificate once delivered may not be retracted or modified in
any respect. Each Appraiser will keep confidential all information
disclosed by the Partnership in the course of conducting its evaluation,
and, to that end, will execute such customary documentation as the
Partnership may reasonably request with respect to such confidentiality
obligation. The Partnership shall provide each Appraiser with such
information within the Partnership's possession as may be reasonably
requested in writing by the Appraiser for purposes of its evaluation
hereunder. The Appraisers may, but shall be under no obligation to, consult
with each other in the course of conducting their respective evaluations.
Each Appraiser will be directed to comply with the provisions of this
Section 8.10, and to that end each party will provide to its respective
Appraiser a complete and correct copy of this Section 8.10 (and the
definitions of capitalized terms used in this Section 8.10 that are defined
elsewhere in this Agreement).
(iii) The Fair Market Value of the Subject Properties shall be
determined on the basis of the Appraisers' Certificates in accordance with
the provisions of this subparagraph (iii). The higher of the Fair Market
Values set forth on the Appraisers'
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Certificates is hereinafter referred to as the "Higher Value" and the lower
of such Fair Market Values is hereinafter referred to as the "Lower Value."
If the Higher Value is not more than 110% of the Lower Value, the Fair
Market Value will be the arithmetic average of such two Values. If the
Higher Value is more than 110% of the Lower Value, a third appraiser shall
be selected in accordance with the provisions of subparagraph (iv) below,
and the Fair Market Value will be determined in accordance with the
provisions of subparagraph (v) below.
(iv) If the Higher Value is more than 110% of the Lower Value,
within fourteen (14) days thereafter the Partnership Appraiser and the
Potlatch Appraiser shall agree upon and jointly designate, by written
notice to each of the Partnership and the Potlatch Party, a third firm of
recognized national standing experienced in appraisal techniques applicable
to assets of the type being evaluated, and who shall have no current,
proposed or prior business or financial relationship with Potlatch, the
General Partner or the Partnership, to serve as an appraiser pursuant to
this Section 8.10 (the "Third Appraiser"). The Third Appraiser shall
determine the Fair Market Value of the Subject Properties (the "Third
Value") in accordance with the provisions of subparagraph (ii) above, and
shall deliver to each of the Partnership and the Potlatch Party an
Appraiser's Certificate on or before the thirtieth (30th) day after the
designation of such Appraiser hereunder. The Third Appraiser will be
directed to comply with the provisions of this Section 8.10, and to that
end the parties will provide to the Third Appraiser a complete and correct
copy of this Section 8.10.
(v) Upon the delivery of the Appraiser's Certificate of the Third
Appraiser, the Fair Market Value of the Subject Properties will be
determined as provided in this subparagraph (v). The Fair Market Value
will be (w) the Lower Value, if the Third Value is less than the Lower
Value, (x) the Higher Value, if the Third Value is greater than the Higher
Value, (y) the arithmetic average of the Third Value and the other Value
(Lower or Higher) that is closer to the Third Value if the Third Value
falls within the range between (and including) the Lower Value and the
Higher Value and (z) the Third Value, if the Lower Value and the Higher
Value are equally close to the Third Value.
(vi) Each of the Partnership and the Potlatch Party will bear the
cost of the Appraiser designated by it or on its behalf. If the Higher
Value is not more than 115% of the Lower Value, or if the Higher Value and
the Lower Value are equally close to the Third Value, each of the
Partnership and the Potlatch Party shall bear 50% of the cost of the Third
Appraiser, if any; otherwise, the party whose Appraiser's determination of
fair market value is further away from the Third Value shall bear the
entire cost of the Third Appraiser. The Partnership and the Potlatch Party
agree to pay when due the fees and expenses of the Appraisers in accordance
with the foregoing provisions.
(vii) To the fullest extent provided by law, the determination of
the Fair Market Value made pursuant to this Section 8.10 shall be final
and binding on the
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Partnership and the Partners, and such determination shall not be
appealable to any court, provided that the foregoing shall not limit a
Partner's rights to seek judicial enforcement of the obligations of the
other Partners and the Partnership hereunder.
ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP INTERESTS
9.1 Purchase for Investment.
(a) Each Limited Partner hereby represents and warrants to the General
Partner and to the Partnership that the acquisition of his Partnership
Interest is made as a principal for his account for investment purposes only and
not with a view to the resale or distribution of such Partnership Interest.
(b) Each Limited Partner agrees that he will not sell, assign or otherwise
Transfer his Partnership Interest or any fraction thereof, whether voluntarily
or by operation of law or at judicial sale or otherwise, to any Person who
does not make the representations and warranties to the General Partner set
forth in Section 9.1(a) above and similarly agrees not to sell, assign or
otherwise Transfer such Partnership Interest or fraction thereof to any Person
who does not similarly represent, warrant and agree.
9.2 Restrictions on Transfer of Limited Partnership Interests.
(a) Subject to the provisions of Section 9.1, Sections 9.2(b), (c), (d) and
(e) and Section 9.7 and any other restrictions expressly set forth herein, a
Limited Partner may Transfer all or any portion of its Limited Partnership
Interest, or any of such Limited Partner's economic rights as a Limited
Partner, with or without the consent of the General Partner. The General Partner
may require, as a condition of any Transfer, that the transferor assume all
costs reasonably incurred by the Partnership in connection therewith.
(b) No Limited Partner may Transfer his Limited Partnership Interest, in
whole or in part, if, in the opinion of legal counsel for the Partnership,
such proposed Transfer would require the registration of such Limited
Partnership Interest under the Securities Act or would otherwise violate any
applicable federal or state securities or "Blue Sky" law (including investment
suitability standards).
(c) No Transfer by a Limited Partner of his Partnership Units, in whole or
in part, may be made to any Person if (i) in the opinion of legal counsel for
the Partnership, the Transfer would result in the Partnership's being treated
as an association taxable as a corporation (other than a qualified REIT
subsidiary within the meaning of Section 856(i) of the Code), (ii) such Transfer
is effectuated through an "established securities market" or a "secondary
market (or the substantial equivalent thereof)" within the meaning of Section
7704 of the Code, (iii) such Transfer would cause the Partnership to become,
with respect to any employee benefit plan subject to Title I of ERISA, a "party-
in-interest" (as defined in
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Section 3(14) of ERISA) or a "disqualified person" (as defined in Section
4975(c) of the Code), (iv) such Transfer would cause the termination of the
Partnership under Section 708 of the Code, or (v) if such Transfer would, in
the opinion of counsel to the Partnership, cause any portion of the assets of
the Partnership to constitute assets of any employee benefit plan pursuant to
Department of Labor Regulations Section 2510.2-101.
(d) Any Transfer in contravention of any of the provisions of this Article
IX shall be void and ineffectual and shall not be binding upon, or recognized
by, the Partnership.
(e) No Transfer of any Partnership Units may be made to a lender to the
Partnership or to any Person who is related (within the meaning of Regulations
Section 1.752-4(b)) to any lender to the Partnership whose loan constitutes a
nonrecourse liability (within the meaning of Regulations Section 1.752-
1(a)(2)), without the consent of the General Partner, which may be withheld in
its sole and absolute discretion; provided, however, that as a condition to such
consent the lender will be required to enter into an arrangement with the
Partnership and the General Partner to exchange or redeem for the Cash Amount
any Partnership Units in which a security interest is held simultaneously with
the time at which such lender would be deemed to be a partner in the
Partnership for purposes of allocating liabilities to such lender under Section
752 of the Code.
9.3 Admission of Substitute Limited Partner.
(a) Subject to the other provisions of this Article IX, an assignee of the
Limited Partnership Interest of a Limited Partner (which shall be understood
to include any purchaser, transferee, donee or other recipient of any
disposition of such Limited Partnership Interest) shall be deemed admitted as a
Limited Partner of the Partnership only upon the satisfactory completion of all
of the following:
(i) The assignee shall have accepted and agreed to be bound by the
terms and provisions of this Agreement by executing a counterpart or an
amendment thereof, including a revised Exhibit A, and such other documents
or instruments as the General Partner may require in order to effect the
admission of such Person as a Limited Partner;
(ii) To the extent required, an amended Certificate evidencing the
admission of such Person as a signed, acknowledged and Limited Partner
shall have been filed in accordance with the Act;
(iii) The assignee shall have delivered a letter containing the
representation set agreement set forth in forth in Section Section 9.1(a)
hereof and 9.1(b) the hereof;
(iv) If the assignee is a corporation, limited liability company,
partnership or trust, the assignee shall have provided the General Partner
with evidence satisfactory to counsel for the Partnership of the assignee's
authority
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to become a Limited Partner under the terms and provisions of this
Agreement;
(v) The assignee shall have paid all reasonable legal fees of the
Partnership and costs in connection with his the General substitution as a
Limited Partner and filing Partner; and and publication
(vi) The assignee has obtained the prior written consent of the
General Partner to which consent may Partner's sole and absolute its
admission as a be given or discretion. Substitute Limited denied in
Partner, the exercise of General
(b) For the purpose of allocating profits and losses and distributing cash
received by the Partnership, a Substitute Limited Partner shall be treated as
having become, and appearing in the records of the Partnership as, a Partner
upon the filing of the Certificate described in Section 9.3(a)(ii) hereof or,
if no such filing is required, the later of the date specified in the transfer
documents or the date on which the General Partner has received all necessary
instruments of transfer and substitution.
(c) The General Partner shall cooperate with the Person seeking to become a
Substitute Limited Partner by preparing the documentation required by this
Section and making all official filings and publications. The Partnership
shall take all such action as promptly as practicable after the satisfaction
of the conditions in this Article IX to the admission of such Person as a
Limited Partner of the Partnership.
(d) The terms of this Section 9.3 shall also apply to the admission of a
Person as a Limited Partner upon the issuance of Partnership Interests to such
Person pursuant to Section 4.2 hereof.
9.4 Rights of Assignees of Partnership Interests.
(a) Subject to the provisions of Sections 9.1 and 9.2 hereof, except as
required by operation of law, the Partnership shall not be obligated for any
purposes whatsoever to recognize the assignment by any Limited Partner of his
Partnership Interest until the Partnership has received notice thereof.
(b) Any Person who is the assignee of all or any portion of a Limited
Partner's Limited Partnership Interests but does not become a Substitute
Limited Partner shall be considered an Assignee for purposes of this Agreement.
An Assignee shall be entitled to all of the rights of an assignee of a limited
partnership interests under the Act, including without limitation the right to
receive distributions from the Partnership, and shall have the rights granted
to the Limited Partners under Section 8.5 hereof, but shall not be deemed to
be a holder of Partnership Units for any other purpose under this Agreement,
and shall not be entitled to vote such Limited Partnership Interests in any
matter presented to the Limited Partners for a vote or consent (such Limited
Partnership Interests being deemed to have been voted on such matter in the
same proportion as all other Limited Partnership Interests
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are voted). If any such Assignee desires to make a further assignment of such
Limited Partnership Interest, such Assignee shall be subject to all the
provisions of this Article IX to the same extent and in the same manner as any
Limited Partner desiring to make an assignment of his Limited Partnership
Interest.
9.5 Effect of Bankruptcy, Death, Incompetence or Termination of a Limited
Partner. The occurrence of an Event of Bankruptcy as to a Limited Partner, the
death of a Limited Partner or a final adjudication that a Limited Partner is
incompetent (which term shall include, but not be limited to, insanity) shall
not cause the termination or dissolution of the Partnership, and the business
of the Partnership shall continue if an order for relief in a bankruptcy
proceeding is entered against a Limited Partner, the trustee or receiver of his
estate or, if he dies, his executor, administrator or trustee, or, if he is
finally adjudicated incompetent, his committee, guardian or conservator, shall
have the rights of such Limited Partner for the purpose of settling or managing
his estate property and such power as the bankrupt, deceased or incompetent
Limited Partner possessed to assign all or any part of his Partnership Interest
and to join with the assignee in satisfying conditions precedent to the
admission of the assignee as a Substitute Limited Partner.
9.6 Assignment of All Partnership Units. Any Limited Partner who shall
transfer all of his Partnership Units in a transfer permitted pursuant to this
Article IX shall cease to be a Limited Partner upon the admission of all
Assignees of such Partnership Units as Substitute Limited Partners. Similarly,
any Limited Partner who shall transfer all of his Partnership Units pursuant
to an exchange of all of his Partnership Units under Section 8.5 shall cease
to be a Limited Partner.
9.7 Limitation on Transfer of Partnership Units and Other Rights To Avoid
Adverse Tax Effects. Notwithstanding any provision in this Agreement to the
contrary, no transfer or purported transfer by any Limited Partner of any
Partnership Interest or Partnership Units, nor exercise of any Exchange Right
under Section 8.5, nor exercise of any other right or benefit provided under
this Agreement shall be effective or of any force or effect if, as a result of
such transfer or purported transfer or as a result of the exercise or
purported exercise of any such right or benefit, the Partnership will be taxed
as a corporation, association or publicly traded partnership, rather than as
a limited partnership, under the Code, any Regulations or any administrative
pronouncements of the Internal Revenue Service. The General Partner's good-
faith determination as to whether a particular transfer, exercise of Exchange
Rights or exercise of any other right or benefit will cause such effects shall
be conclusive and binding on the Limited Partners.
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
10.1 Books and Records. At all times during the continuance of the
Partnership, the Partners shall keep or cause to be kept at the Partnership's
specified office true and complete books of account in accordance with
generally accepted accounting principles,
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including: (a) a current list of the full name and last known business address
of each Partner, (b) a copy of the Certificate of Limited Partnership and all
certificates of amendment thereto, (c) copies of the Partnership's federal,
state and local income tax returns and reports, (d) copies of this Agreement
and any financial statements of the Partnership for the three most recent
years and (e) all documents and information required under the Act. Any Partner
or his duly authorized representative, upon paying the costs of collection,
duplication and mailing, shall be entitled to inspect or copy such records
during ordinary business hours.
10.2 Custody of Partnership Funds; Bank Accounts.
(a) All funds of the Partnership not otherwise invested shall be deposited
in one or more accounts maintained in such banking or brokerage institutions
as the General Partner shall determine, and withdrawals shall be made only on
such signature or signatures as the General Partner may, from time to time,
determine.
(b) All deposits and other funds not needed in the operation of the
business of the Partnership may be invested by the General Partner in such
instruments as are selected by the General Partner including investment grade
instruments (or investment companies whose portfolio consists primarily
thereof), government obligations, certificates of deposit, bankers'
acceptances and municipal notes and bonds. The funds of the Partnership shall
not be commingled with the funds of any other Person except for such
commingling as may necessarily result from an investment in those investment
companies permitted by this Section 10.2(b).
10.3 Fiscal and Taxable Year. The fiscal and taxable year of the Partnership
shall be the calendar year.
10.4 Annual Tax Information and Report. Within 75 days after the end of
each fiscal year of the Partnership, the General Partner shall furnish to each
person who was a Limited Partner at any time during such year the tax
information necessary to file such Limited Partner's individual tax returns as
shall be reasonably required by law.
10.5 Tax Matters Partner; Tax Elections; Special Basis Adjustments.
(a) The General Partner shall be the Tax Matters Partner of the Partnership
within the meaning of Section 6231(a)(7) of the Code. As Tax Matters Partner,
the General Partner shall have the right and obligation to take all actions
authorized and required, respectively, by the Code for the Tax Matters
Partner. The General Partner shall have the right to retain professional
assistance in respect of any audit of the Partnership by the Service and all
out-of-pocket expenses and fees incurred by the General Partner on behalf of
the Partnership as Tax Matters Partner shall constitute Partnership expenses.
In the event the General Partner receives notice of a final Partnership
adjustment under Section 6223(a)(2) of the Code, the General Partner shall
either (i) file a court petition for judicial review of such final adjustment
within the period provided under Section 6226(a) of the Code, a copy of which
petition shall be mailed to all Limited Partners on the date such
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petition is filed, or (ii) mail a written notice to all Limited Partners,
within such period, that describes the General Partner's reasons for
determining not to file such a petition.
(b) All elections required or permitted to be made by the Partnership under
the Code or under any applicable state law shall be made by the General
Partner in its sole discretion.
(c) In the event of a transfer of all or any part of the Partnership
Interest of any Partner, the Partnership, at the option of the General
Partner, may elect pursuant to Section 754 of the Code to adjust the basis of
the assets of the Partnership. Notwithstanding anything contained in Article V
hereof, any adjustments made pursuant to Section 754 of the Code shall affect
only the successor in interest to the transferring Partner and in no event
shall be taken into account in establishing, maintaining or computing Capital
Accounts for the other Partners for any purpose hereunder. Each Partner will
furnish the Partnership with all information necessary to give effect to such
election.
10.6 Reports to Limited Partners.
(a) As soon as practicable after the close of each fiscal quarter (other
than the last quarter of the fiscal year), but in no event later than thirty
(30) days thereafter, the General Partner shall cause to be mailed to each
Limited Partner a quarterly report containing financial statements (including
a balance sheet and statement of partners' capital as of the end of such
quarter, and statements of cash flow and income) of the Partnership, or of the
Company if such statements are prepared solely on a consolidated basis with
the Company, for such fiscal quarter, presented in accordance with generally
accepted accounting principles. As soon as practicable after the close of each
fiscal year, but in no event later than sixty (60) days thereafter, the
General Partner shall cause to be mailed to each Limited Partner an annual
report containing financial statements of the Partnership (including the items
referenced above), or of the Company if such statements are prepared solely on
a consolidated basis with the Company, for such fiscal year, prepared in
accordance with generally accepted accounting principles and accompanied by an
independent auditor's report and all supplementary schedules and information
prepared by the accountants related thereto. As a note to such annual
financial statements, the General Partner shall prepare a schedule of all
loans to the Partnership. Such schedule shall demonstrate that loans have been
made, used, carried on the books of the Partnership (and repaid, if
applicable) in accordance with the provisions of this Agreement. The annual
financial statements shall be audited by accountants selected by the General
Partner.
(b) Any Partner shall further have the right to a private audit of the
books and records of the Partnership, provided such audit is made for purposes
reasonably relating to such Partner's rights as a Partner, and is made during
normal business hours. Any such audit shall be at the expense of the Partner
requesting it.
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ARTICLE XI
AMENDMENT OF AGREEMENT
11.1 Amendment of Agreement.
(a) This Agreement may not be amended in any respect without the consent of
both the General Partner and of at least a Majority in Interest of the Limited
Partners.
(b) Notwithstanding Section 11.1(a), the General Partner shall have the
power, without the consent of the Limited Partners, to amend this Agreement as
may be required to facilitate or implement any of the following purposes:
(1) to add to the obligations of the General Partner or surrender
any right or power granted to the General Partner or any Affiliate of the
General Partner for the benefit of the Limited Partners;
(2) to reflect the admission, substitution, termination, or
withdrawal of Partners in accordance with this Agreement;
(3) to set forth and reflect in this Agreement the designations,
rights, powers, duties, and preferences of the holders of any additional
Partnership Interests issued pursuant to Section 4.2(a)(i) hereof;
(4) to reflect a change that is of an inconsequential nature and does
not adversely affect any Limited Partner, or to cure any ambiguity or
correct any provision in this Agreement in a manner not inconsistent with
law or with other provisions of this Agreement; and
(5) if required to comply with applicable laws or regulations.
The General Partner shall provide notice to the Limited Partners when any
action under this Section 11.1(b) is taken.
(c) Notwithstanding anything in this Article XI to the contrary, this
Agreement shall not be amended without the consent of each Partner that would
be adversely affected thereby, if such amendment would (i) convert a Limited
Partner's Partnership Interest into a General Partnership Interest, (ii)
modify the limited liability of a Limited Partner, or (iii) amend Articles V
or VI or Section 8.5 (and all related definitions including the definitions of
Cash Amount and REIT Shares Amount) hereof except as permitted pursuant to the
express terms thereof. In addition, notwithstanding anything in this Article
XI to the contrary, none of Sections 6.7, 6.8, 6.11, 8.7, 8.10 or 12.5 hereof
(or any of the related definitions or any other provision hereof referring to
any such section) may be amended or rescinded without the prior written
consent of Potlatch (or any successor to Potlatch by way of merger,
consolidation, sale of all or substantially all assets or similar fundamental
transaction) in its sole and absolute discretion.
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ARTICLE XII
TERMINATION AND DISSOLUTION
12.1 No Dissolution. The Partnership shall not be dissolved by the
admission of substituted Limited Partners or by the admission of a new General
Partner in accordance with the terms of this Agreement. The dissolution or
bankruptcy of a Limited Partner shall not cause a dissolution of the
Partnership.
12.2 Events of Dissolution. The Partnership shall dissolve upon the first
to occur of the following: (i) expiration of the term of the Partnership
specified in Section 2.4 hereof; (ii) an Event of Withdrawal as to a General
Partner unless the business of the Partnership is continued pursuant to
Section 7.3(b) hereof; (iii) dissolution being required by operation of law or
judicial decree including, without limitation, the withdrawal of the General
Partner where there is no remaining or surviving general partner; and (iv) the
determination by the General Partner with the affirmative consent of eighty
percent (80%) of the Limited Partnership Interests then outstanding.
Notwithstanding anything to the contrary in this Section 12.2, without the
unanimous consent of the Limited Partners, the General Partner agrees not to
voluntarily withdraw as a general partner of the Partnership.
12.3 Winding-up. Upon the occurrence of an event of dissolution, the
Partnership shall be wound up and liquidated. The General Partner or, if there
is no general partner or if the General Partner wrongfully caused the
dissolution of the Partnership, a liquidator appointed by a Majority in
Interest of the Limited Partners, shall proceed with the dissolution and the
final distribution. In the dissolution, the General Partner or such liquidator
shall use its best efforts to reduce to cash and cash equivalent items such
assets of the Partnership as the General Partner or such liquidator shall deem
it advisable to sell, subject to obtaining fair value for such assets and any
tax or other legal considerations. A reasonable time shall be allowed for the
orderly winding-up of the business and affairs of the Partnership and the
liquidation of its assets in order to minimize any losses otherwise attendant
upon such a winding-up.
12.4 Final Accounting. Upon the dissolution and winding-up of the
Partnership, an accounting shall be made of the Partnership's assets,
liabilities and operations from the date of the last previous accounting to
the date of such dissolution. Such accounting shall be prepared by or under
the direction of the General Partner or liquidator, and shall be made in a
manner consistent with the following conditions:
(a) The assets of the Partnership shall be valued at fair market
value; and
(b) A reasonable reserve for the expenses of liquidation and
contingent liabilities (including, but not limited to, litigation which
may occur after the liquidation) shall be established.
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12.5 Liquidation and Termination. Upon the dissolution and winding up of
the Partnership; the General Partner or liquidator shall apply the assets of
the Partnership (including the proceeds of any sale of assets of the
Partnership) in the following order:
(a) First, there shall be paid to Partnership creditors other than
the Partners (or set aside for payment in accordance with any reserve
established) Partnership funds, to the extent same are available,
sufficient to extinguish Partnership liabilities and obligations, including
expenses of liquidation; and
(b) Thereafter, the remaining assets of the Partnership, if any,
shall be distributed to the Partners in accordance with their relative
Capital Account balances; provided, however, that so long as Potlatch or
its successor and their respective Subsidiaries (collectively, the
"Potlatch Party") hold more than fifty percent (50%) of the Partnership
Units held by Potlatch on the date hereof (and shown on Exhibit A hereto as
in effect on the date hereof), any distribution made to the Potlatch Party
in its capacity as a Limited Partner shall be made in kind by transfer to
the Potlatch Party of all of the Partnership's right, title and interest in
and to all of the Potlatch Timberlands (and all Timberlands acquired by the
Partnership in substitution or exchange for any of the Potlatch
Timberlands) (collectively, the "Distributed Properties") with a cash
adjustment payable by the Partnership or the Potlatch Party, as the case
may be, for the difference between the Capital Account balance of the
Potlatch Party and the Fair Market Value of the Distributed Properties.
Such transfer shall be consummated in accordance with Section 8.10(a)
hereof. The Fair Market Value of the Distributed Properties shall be
determined as provided in Section 8.10 hereof with respect to the
determination of Fair Market Value of the Subject Properties (as defined
therein). To the fullest extent provided by law, the determination of the
Fair Market Value made pursuant to this Section 12.5 shall be final and
binding on the Partnership and the Partners, and such determination shall
not be appealable to any court, provided that the foregoing shall not limit
a Partner's rights to seek judicial enforcement of the obligations of the
other Partners and the Partnership hereunder.
12.6 Distributions in Kind. If the General Partner or liquidator shall
determine that any Partnership asset should be distributed in kind to the
Partners, the General Partner or liquidator shall reasonably determine the
fair market value of each such asset (other than distributions in kind to a
Potlatch Party required under Section 12.5, the valuation of which shall be
governed by such Section). Any unrealized gain or loss with respect to any asset
to be distributed in kind:
(a) shall be deemed to be realized as of the time distributed, and
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(b) shall be taken into account in computing the gains and losses of
the Partnership for the period during which such distribution occurs as
provided in Sections 4.4 and 5.1 hereof.
The distribution in kind of any such asset shall be considered a distribution
of an amount equal to the asset's value for all purposes of this Agreement.
ARTICLE XIII
GENERAL PROVISIONS
13.1 Notices. All communications required or permitted under this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally or upon deposit in the United States mail, registered, postage
prepaid, return receipt requested, to the Partners at the addresses set forth
in Exhibit A attached hereto; provided, however, that any Partner may specify
a different address by notifying the General Partner in writing of such
different address. Notices to the Partnership shall be delivered at or mailed
to its specified office.
13.2 Survival of Rights. Subject to the provisions hereof limiting
transfers, this Agreement shall be binding upon and inure to the benefit of
the Partners and the Partnership and their respective legal representatives,
successors, transferees and assigns.
13.3 Additional Documents. Each Partner agrees to perform all further acts
and execute, swear to, acknowledge and deliver all further documents which may
be reasonable, necessary, appropriate or desirable to carry out the provisions
of this Agreement or the Act.
13.4 Severability. If any provision of this Agreement shall be declared
illegal, invalid or unenforceable in any jurisdiction, then such provision
shall be deemed to be severable from this Agreement (to the extent permitted
by law) and in any event such illegality, invalidity or unenforceability shall
not affect the remainder hereof.
13.5 Entire Agreement. This Agreement and the exhibits attached hereto
constitute the entire Agreement of the Partners and supersede all prior
written agreements and prior and contemporaneous oral agreements,
understandings and negotiations with respect to the subject matter hereof.
13.6 Pronouns and Plurals. When the context in which words are used in the
Agreement indicates that such is the intent, words in the singular number
shall include the plural and the masculine gender shall include the neuter or
female gender as the context may require.
13.7 Headings. The Article and section headings in this Agreement are for
convenience only and shall not be used in construing the scope of this
Agreement or any particular Article or section hereof.
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13.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original copy and all of which together
shall constitute one and the same instrument binding on all parties hereto,
notwithstanding that all parties shall not have signed the same counterpart.
13.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to
principles of conflicts of law.
13.10 Waiver. No failure by any party to insist upon the strict performance
of any covenant, duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon a breach thereof shall constitute waiver of
any such breach or any other covenant, duty, agreement or condition.
13.11 Partition. No Partner nor any successor-in-interest to a Partner
shall have the right while this Agreement remains in effect to have any
property of the Partnership partitioned, or to file a complaint or to institute
any proceeding at law or in equity to have such property of the Partnership
partitioned, and each Partner, on behalf of itself and its successors and
assigns, hereby waives any such right. It is the intention of the Partners
that the rights of the parties hereto and their successors-in-interest to
Partnership property, as among themselves, shall be governed by the terms of
this Agreement, and that the rights of the Partners and their successors-in-
interest shall be subject to the limitations and restrictions as set forth in
this Agreement.
13.12 No Third-Party Rights Created Hereby. The provisions of this
Agreement are solely for the purpose of defining the interests of the
partners, inter se; and, except as provided in Section 6.3, no other person,
firm or entity (i.e., a party who is not a signatory hereto or a permitted
successor to such signatory hereto) shall have any right, power, title or
interest, by way of subrogation or otherwise, in and to the rights, powers,
title and provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunder affixed their
signatures to this Amended and Restated Agreement of Limited Partnership, all
as of the ______ day of ____________, 1998.
GENERAL PARTNER
TIMBERLAND GROWTH
CORPORATION, a Delaware corporation
By: ___________________________
Name: _________________________
Title: ________________________
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LIMITED PARTNER
POTLATCH CORPORATION, a Delaware
corporation
By: _____________________________
Name: ___________________________
Title: __________________________
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EXHIBIT A
SCHEDULE OF PARTNERS,
NUMBER OF PARTNERSHIP UNITS, PERCENTAGE INTERESTS AND
THE AGREED VALUE OF CAPITAL CONTRIBUTIONS
<TABLE>
<CAPTION>
Agreed Value of Number of
Capital Partnership Percentage
General Partner Contribution Units Interest
- --------------- --------------- ----------- -------------
<S> <C> <C> <C>
Timberland Growth
Corporation (1)
Limited Partner
- ---------------
Potlatch Corporation (2)
</TABLE>
(1) Equals the gross proceeds from the initial public offering of Timberland
Growth Corporation.
(2) Equals the amount of the capital contribution of Timberland Growth
Corporation, multiplied by a fraction which is equal to Potlatch's Percentage
Interest over Timberland Growth Corporation's Percentage Interest.
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EXHIBIT B
NOTICE OF EXERCISE OF EXCHANGE RIGHT
In accordance with Section 8.5 of the Amended and Restated Agreement of
Limited Partnership (the "Agreement") of Timberland Growth Limited
Partnership, the undersigned hereby irrevocably (i) presents for exchange
________ units of limited partnership interest ("Units") in Timberland Growth
Limited Partnership (the "Partnership") in accordance with the terms of the
Agreement and the "Exchange Right" referred to in Section 8.5 thereof, (ii)
surrenders such Units and all right, title and interest therein, (iii)
surrenders herewith any certificate or other writing evidencing the Units (and
requests that any Units so evidenced that are not exchanged be evidenced by
the issuance of a new certificate or writing) and (iv) directs that the "Cash
Amount" or "REIT Shares Amount" (as defined in the Agreement), as applicable,
deliverable upon exercise of the Exchange Rights be delivered to the address
specified below, and if REIT Shares are to be delivered, such REIT Shares be
registered or placed in the name(s) and at the address(es) specified below.
Dated: ______________
Name of Limited Partner:
-----------------------
(Type Name of Limited Partner)
By -----------------------
(Signature of Limited Partner)
Title (if applicable): _____________
-----------------------
(Mailing Address)
-----------------------
(City) (State) (Zip Code)
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Signature Guaranteed by:*
---------------------------
If REIT Shares are to be issued, issue to:
---------------------------
---------------------------
---------------------------
Please insert social security or identifying number:
---------------------------
- ----------------------
* Signature must be guaranteed by a guarantor institution that is a
member of a signature guarantee medallion program pursuant to Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended. Many banks and broker-
dealers are members of such a program.
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EXHIBIT C
1. Indenture dated as of April 1, 1986 between Potlatch Corporation and The
Bank of California, N.A., as Trustee (relating to 9.125% Credit Sensitive
Debentures due 2009);
2. Indenture dated as of November 27, 1990 between Potlatch Corporation and
Bankers Trust Company of California, N.A., as Trustee (relating to Medium-Term
Notes);
3. Indenture dated December 18, 1995 between Potlatch Corporation and First
Trust of California, N.A., as Trustee (relating to $100,000,000 principal
amount of 6.95% Debentures due December 15, 2015);
4. Reimbursement Agreement dated as of April 25, 1996 by and between
Potlatch Corporation and Credit Suisse relating to City of Cloquet, Minnesota
Taxable and Tax-Exempt Industrial Facilities Revenue Bonds; and
5. Credit Agreement dated as of August 27, 1996 among Potlatch Corporation,
Bank of America National Trust and Savings Association, as Agent, Morgan
Guaranty Trust Company of New York and The First National Bank of Chicago.
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EXHIBIT D
LIST OF CONTRACTS
. Contribution Agreement dated as of _________, 1998 between Potlatch
Corporation and the Partnership.
. Timberlands Management and Timber Purchase Agreement dated as of _____,
1998 between Potlatch Corporation and the Partnership.
. Opportunities Agreement dated as of _________, 1998 among Potlatch
Corporation, the Partnership and Timberland Growth Corporation.
. Administrative Services Agreement dated as of __________, 1998 among
Potlatch Corporation, Timberland Growth Corporation and the Partnership.
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EXHIBIT 10.2
TIMBERLAND MANAGEMENT AND TIMBER PURCHASE AGREEMENT
between
POTLATCH CORPORATION,
a Delaware corporation
and
TIMBERLAND GROWTH LIMITED PARTNERSHIP,
a Delaware limited partnership
____________, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 Purposes of Agreement; Construction......................... 2
1.1 Purposes of this Agreement.................................. 2
1.2 Construction................................................ 2
1.3 Adjustment in Dollar Amounts and Volumes.................... 3
1.4 Dispute Resolution.......................................... 3
ARTICLE 2 Definitions................................................. 3
2.1 Certain Terms Defined....................................... 3
2.2 Section References.......................................... 3
ARTICLE 3 Basic Agreement............................................. 3
3.1 Timberland Management....................................... 3
3.2 Purchase and Sale of Timber................................. 3
3.3 Term of Agreement........................................... 4
3.4 Timberlands Subject to this Agreement....................... 4
ARTICLE 4 Management of Timberlands................................... 4
4.1 Inventories................................................. 4
4.2 Management Plans............................................ 5
4.3 Management Duties........................................... 6
4.4 Compliance with Legal Requirements.......................... 6
4.5 Indemnity................................................... 7
4.6 Responsibility for Contractors.............................. 8
4.7 Construction and Maintenance of Roads....................... 8
ARTICLE 5 Harvest Plans............................................... 9
5.1 Contents of Harvest Plan.................................... 9
5.2 Requirements for Proposed Harvest Plan...................... 10
5.3 Potlatch Review and Approval of Proposed Harvest
Plan........................................................ 10
5.4 Final Harvest Plan.......................................... 12
5.5 Changes in Harvest Plan Due to Unforeseen
Circumstances............................................... 13
5.6 Partnership's Right to Modify Harvest Plan.................. 14
5.7 Compliance With Reporting and Other Legal
Requirements................................................ 15
5.8 Marking Timber and Boundaries............................... 15
ARTICLE 6 Purchase and Sale of Timber................................. 16
6.1 Obligation to Harvest; Required Volumes;
Obligation to Purchase and Sell............................. 16
6.2 Stumpage Prices............................................. 18
6.3 Monthly Payments............................................ 20
6.4 Determination and Payment of Total Purchase
Price....................................................... 21
6.5 Method of Payment; Late Payments............................ 22
6.6 Scaling..................................................... 22
6.7 Monthly Logging Reports..................................... 23
6.8 Allocation of Costs; Payment of Taxes....................... 23
6.9 Records; Audits............................................. 23
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6.10 Disclaimer of Warranties.................................... 24
6.11 Lump Sum Sale............................................... 25
ARTICLE 7 Logging Practices, Etc...................................... 25
7.1 Logging Practices in General................................ 25
7.2 Protection of Improvements; Boundaries;
Trespass.................................................... 25
7.3 Fire Safety; Environmental Matters.......................... 25
7.4 Post-Harvest Cleanup........................................ 26
7.5 Responsibility for Contractors.............................. 26
7.6 Notice of Violations........................................ 26
7.7 Indemnity................................................... 27
7.8 Partnership Inspection; Claims Relating to
Damage or Incomplete Harvest................................ 27
ARTICLE 8 Title Matters............................................... 28
8.1 Partnership's Title to Timberlands.......................... 28
8.2 Potlatch's Title to Growing Timber.......................... 30
8.3 Security Agreement.......................................... 30
8.4 Title and Risk of Loss to Cut Timber........................ 31
8.5 Grant of Access Rights...................................... 31
8.6 Potlatch to Permit No Liens................................. 32
ARTICLE 9 Disposition of Timberlands and Acquisition of
Additional Timberlands...................................... 32
9.1 No Transfer of Former Potlatch Lands Without
Potlatch Consent; Exceptions................................ 32
9.2 Transferred Timberlands Remain Subject to this
Agreement................................................... 34
9.3 Potlatch's Right to Timber on Additional Lands.............. 35
9.4 Additional Timberlands...................................... 36
9.5 Release of Timberlands...................................... 37
9.6 Protection of Lenders....................................... 37
ARTICLE 10 Insurance................................................... 38
10.1 Potlatch Insurance.......................................... 38
10.2 Potlatch Contractors........................................ 39
10.3 Policy Terms of Potlatch Insurance.......................... 39
10.4 Partnership Insurance....................................... 39
10.5 Partnership Contractors..................................... 40
10.6 Policy Terms of Partnership Insurance....................... 40
10.7 Claims...................................................... 41
ARTICLE 11 Suspension of Performance for Force Majeure................. 41
11.1 Suspension of Obligations................................... 41
11.2 Extension of Time........................................... 41
11.3 Force Majeure Peculiar to Potlatch.......................... 42
ARTICLE 12 Default; Remedies........................................... 42
12.1 Potlatch Default............................................ 42
12.2 Partnership Default......................................... 43
12.3 Remedies.................................................... 43
12.4 Limited Right To Rescind or Terminate....................... 43
12.5 Right of Other Party To Perform............................. 44
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ARTICLE 13 Resolution of Disputes...................................... 44
13.1 Determinations by Consulting Forester....................... 44
13.2 Arbitration................................................. 46
ARTICLE 14 Assignment.................................................. 48
14.1 Assignment Prohibited....................................... 48
14.2 Exception for Assignment to Corporate Successor............. 48
14.3 Partial Assignment by Potlatch Permitted.................... 48
ARTICLE 15 Condemnation................................................ 49
15.1 Effect of Condemnation...................................... 49
15.2 Condemnation Award.......................................... 49
15.3 Notice...................................................... 50
ARTICLE 16 Notices..................................................... 50
16.1 Notices..................................................... 50
ARTICLE 17 Miscellaneous............................................... 50
17.1 Successors and Assigns...................................... 50
17.2 No Agency or Fiduciary Relationship......................... 50
17.3 No Third-Party Beneficiaries................................ 51
17.4 Attorneys' Fees............................................. 51
17.5 Entire Agreement............................................ 51
17.6 Amendments; Waiver; Time Periods............................ 51
17.7 Governing Law............................................... 52
17.8 Counterparts................................................ 52
17.9 Partial Invalidity.......................................... 52
17.10 Further Assurances.......................................... 52
17.11 Headings.................................................... 52
17.12 Jurisdiction and Venue...................................... 53
Appendices and Exhibits
Appendix A Defined Terms
Appendix B Initial Long-Range Plan
Appendix C 1998 Management Plan
Appendix D Maps of Initial Resource Units
Exhibit A Description of Initial Timberlands
Exhibit B Example of Resource Unit Harvest Map
Exhibit C Example of Harvest Plan Data Sheet
Exhibit D Example of Harvest Plan Summary
Exhibit E 1993-1997 Harvest Volumes
Exhibit F Example of Monthly Logging Report
Exhibit G Form of Memorandum of Agreement
Exhibit H Form of Stumpage Bid Worksheet
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TIMBERLAND MANAGEMENT AND TIMBER PURCHASE AGREEMENT
THIS TIMBERLAND MANAGEMENT AND TIMBER PURCHASE AGREEMENT (as further
defined in Appendix A, this "Agreement"), dated as of ______________, 1998,
between POTLATCH CORPORATION, a Delaware corporation ("Potlatch"), and
TIMBERLAND GROWTH LIMITED PARTNERSHIP, a Delaware limited partnership
("Partnership"),
W I T N E S S E T H:
WHEREAS, Partnership owns (or leases) and controls the Initial Timberlands,
consisting of approximately 825,000 acres of timberlands owned by Partnership
in Arkansas and along the Mississippi River between Louisiana and Southern
Illinois, and approximately 13,600 acres of timberlands leased by Partnership
in Arkansas, all as more particularly described in Exhibit A attached hereto,
that are being held and managed to produce a sustainable supply of high
quality forest products;
WHEREAS, Partnership has considerable expertise in the management of
timberlands;
WHEREAS, Potlatch owns Potlatch Conversion Facilities in the vicinities of
the Initial Timberlands that would provide suitable markets for the
Merchantable Timber grown on the Timberlands;
WHEREAS, Potlatch desires to assure, on a long-term basis, a steady and
reliable source of raw materials for the Potlatch Conversion Facilities and
Partnership desires to assure, on a long-term basis, suitable markets for the
Merchantable Timber grown on the Timberlands; and
WHEREAS, both parties hereto desire to enter into an agreement under which
Partnership will manage the Timberlands for sustained Timber production and
Potlatch will annually harvest a portion of the Timber from the Timberlands
and will purchase such harvested Timber from the Partnership at the stump (the
parties intending that such purchases shall be governed by section 631(b) of
the Internal Revenue Code of 1986, as amended, so long as such section or any
similar successor provision is in effect), all as hereinafter more
specifically provided.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and for other valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Partnership hereby grants to Potlatch and its successors
and assigns the rights to harvest and take Merchantable Timber, upon and
subject to the terms and conditions of this Agreement, and Partnership and
Potlatch agree as follows:
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ARTICLE 1
Purposes of Agreement; Construction
1.1 Purposes of this Agreement. The following (the "Agreement Purposes")
are the major purposes of this Agreement:
(a) to secure to Potlatch, during each year of the Term, a dependable
source of Merchantable Timber to supply raw materials for the Potlatch
Conversion Facilities at a fair market price, in volumes generally comparable
to the volumes Potlatch (or ATCO, as Potlatch's predecessor-in-interest)
previously obtained from the Initial Timberlands (as such volumes may be
adjusted, from time to time, to reflect the continuing application of
Sustainable Forestry Principles and to reflect the volume of Merchantable
Timber on the Additional Timberlands acquired and Timberlands disposed of
during the Term);
(b) to secure to Partnership, during each year of the Term, an assured
customer to harvest and purchase substantially all of the maximum sustainable
annual volume of the Partnership's Merchantable Timber on the Timberlands at a
fair market price, such that the revenue obtained by Partnership each year
pursuant to this Agreement approximates the revenue that Partnership could
obtain in such year by selling in the open market in the respective Resource
Regions a volume of Merchantable Timber from the Timberlands consistent with
Sustainable Forestry Principles; and
(c) to assure that the Timberlands are managed, harvested and utilized so
that: (i) during each year of the Term the volume of Merchantable Timber
harvested from each Resource Unit does not exceed the volume which would
permit a long-term sustained yield of Merchantable Timber from such Resource
Unit; and (ii) to the extent economically practicable, the quality (as a wood
products resource) and growth rate of the Merchantable Timber on the
Timberlands is optimized through application of state-of-the-art silvicultural
practices.
1.2 Construction. In view of the long duration of the Term and the
possibility that customs and practices relating to Timber management, Timber
harvesting and Timber sales ("Industry Practice") may change in material
respects during the Term, the provisions of this Agreement shall be construed
liberally in a manner designed to secure to Potlatch and Partnership the
benefits of this Agreement and to achieve the Agreement Purposes. In the event
that, due to changes in Applicable Law or Industry Practice, any provision of
this Agreement becomes archaic or its enforcement becomes impracticable or
inappropriate in view of the Agreement Purposes, the parties shall negotiate,
diligently and in good faith, to seek to agree upon an appropriate amendment
to this Agreement. If the parties are unable to agree on an amendment, either
party may submit the matter to arbitration in accordance with Article 13. In
no
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event shall the arbitrator's decision terminate this Agreement or be
inconsistent with fulfillment of the Agreement Purposes.
1.3 Adjustment in Dollar Amounts and Volumes. (a) All specific dollar
amounts referred to in this Agreement (not including the Exhibits attached
hereto) shall be adjusted annually in proportion to increases in CPI between
the date of this Agreement and the anniversary of the date of this Agreement
occurring most recently prior to the date on which the provision of this
Agreement containing such dollar reference is being applied.
(b) All specific volumes of Timber, any subcategory of Timber, or any
Product referred to in this Agreement or in any Management Plan or Long-Range
Plan shall be adjusted in such a manner and to such extent as the parties may
reasonably agree to reflect the addition of any Additional Timberlands or the
disposition of any Released Timberlands or any casualty losses.
1.4 Dispute Resolution. Potlatch and Partnership desire to avoid all forms
of litigation and, therefore, this Agreement provides for alternative methods
of dispute resolution, all of which are intended to further the Agreement
Purposes.
ARTICLE 2
Definitions
2.1 Certain Terms Defined. As used in this Agreement, the terms listed in
Appendix A attached hereto shall have the meanings set forth therein (such
definitions to be equally applicable to the singular and plural forms of the
terms defined).
2.2 Section References. Unless otherwise provided herein, all references to
numbered sections, articles or exhibits shall refer to the sections and
articles of this Agreement and the exhibits attached to this Agreement.
ARTICLE 3
Basic Agreement
3.1 Timberland Management. Throughout the Term, Partnership shall own and
manage the Timberlands in accordance with the terms and provisions of Article
4 and the other applicable terms and provisions of this Agreement.
3.2 Purchase and Sale of Timber. During each Harvest Year, Potlatch shall
harvest and purchase from Partnership, and Partnership shall sell to Potlatch,
the Merchantable Timber designated to be harvested in such Harvest Year in the
applicable Harvest Plan, subject to and in accordance with the
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applicable terms and provisions of Article 6 and the other applicable terms
and provisions of this Agreement.
3.3 Term of Agreement. The initial term of this Agreement (as the same may
be extended pursuant to this Section 3.3, the "Term") shall commence on
__________ __, 1998 (the "Commencement Date") and shall expire on _________
__, 2018 (as such date may be extended pursuant to this Section 3.3, the
"Expiration Date"); provided that the Term shall automatically be extended for
up to eighteen (18) successive periods of ten (10) years each, if either
party, at its sole option, elects to extend this Agreement beyond the Expiration
Date then in effect by written notice to the other party unequivocally
exercising the option to so extend this Agreement, delivered no later than the
date two (2) years prior to the Expiration Date then in effect ("Extension
Deadline"); provided, however, that this Agreement shall not terminate unless,
after the Extension Deadline, one party informs the other party in writing
that it does not intend to exercise the right to extend the Term, and the
other party fails, within sixty (60) days after receipt of the ensuing notice,
to give written notice exercising the right to extend the Term. Effective upon
each such automatic extension, the Expiration Date shall be the last day of
the ensuing 10-year extension period.
3.4 Timberlands Subject to this Agreement. All of the Timberlands shall be
subject to this Agreement throughout the Term; provided that the Leasehold
Lands will not be included in the Timberlands unless and until the Partnership
elects, by notice to Potlatch, to include the Leasehold Lands in the
Timberlands.
ARTICLE 4
Management of Timberlands
4.1 Inventories. (a) Partnership at its expense shall maintain, and shall
continue throughout the Term to enhance (to the extent economically feasible),
its computer-based inventory system with the objective of having the ability,
at any time, to generate a reasonably current inventory, in graphic or textual
format, describing the estimated volume and species mix of each Fiber Category
of Timber then growing on the Timberlands and, as to each Stand or Resource
Unit, its condition, height and age classes, degree of stocking, and other
information commonly included in such inventories (the "Inventory Data").
Inventory Data shall be maintained on a Stand level (at least as to the Former
Potlatch Lands), a Resource Unit level, a Resource Region level and on an
aggregate basis for the Timberlands as a whole. Inventory Data may include
volume by species, size class, grade, and merchantability standard as
reasonably appropriate for the applicable Resource Region. Partnership shall
cruise and update the Inventory Data on each Stand at reasonable intervals, and
shall take such other steps (including use of computer-based
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growth models) as may be necessary to keep the Inventory Data reasonably
current at all times.
(b) Inventory Data pertaining to the Timberlands shall be made available to
Potlatch at all times for purposes reasonably related to Potlatch's business,
but shall otherwise be kept confidential by the Partnership and Potlatch,
except to the extent disclosure is required by law (including disclosure
required in connection with the issuance of securities and other financings by
Partnership, its general partner or any other entity which controls, is
controlled by or is under common control with Partnership) or in order to
facilitate the ordinary operation of the respective businesses of Potlatch and
Partnership. If practicable, Potlatch shall have access to the Inventory Data by
remote computer link. If remote computer link is not practicable, Partnership
shall provide Inventory Data to Potlatch by such means as the parties may
reasonably agree.
4.2 Management Plans. (a) Not less frequently than once every five (5)
years, Partnership shall prepare a five-year management plan (each a "Long-
Range Plan") for the Timberlands, each relating to a five (5) calendar year
period commencing within twelve (12) months after the date of preparation of
the Long-Range Plan. The initial Long-Range Plan covering calendar years 1998
through 2002 is attached hereto as Appendix B. Each subsequent Long-Range Plan
shall be prepared and delivered to Potlatch not less than one hundred twenty
(120) days prior to the first day of the first calendar year to which it
pertains. Each Long-Range Plan shall set forth, for each Resource Region, the
Timber management objectives for the applicable period and the means proposed
to achieve them, and shall set forth the Timber management activities to be
undertaken during each year of such period in reasonable detail. In addition,
each Long-Range Plan shall include reasonably detailed projections of annual
harvest volumes for the applicable five-year period and a 50-year projection
of annual harvest volumes.
(b) Partnership shall prepare a management plan (each a "Management Plan")
for the Timberlands on an annual basis for each calendar year during the Term.
The initial Management Plan covering the remainder of 1998 is attached hereto
as Appendix C. Each subsequent Management Plan shall be prepared and delivered
to Potlatch not less than one hundred twenty (120) days prior to the first day
of the calendar year to which it pertains. Each Management Plan shall set
forth, for each Resource Region, the Timber management objectives for such
year and the means proposed to achieve them, and shall set forth the Timber
management activities to be undertaken during such year in reasonable detail.
(c) In preparing each Long-Range Plan and each Management Plan, Partnership
may consult with Potlatch and Potlatch shall provide any suggestions it
considers appropriate. Potlatch shall have no right to object to any Long-Range
Plan or
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Management Plan unless such Long-Range Plan or Management Plan is inconsistent
with the Agreement Purposes or the provisions of this Article 4. If Potlatch
believes a Long-Range Plan or Management Plan is inconsistent with the
Agreement Purposes or the provisions of this Article 4, Potlatch shall give
Partnership written notice specifying Potlatch's objections within thirty (30)
days after receipt of such Long-Range Plan or Management Plan. If Potlatch
does not object to a Long-Range Plan or a Management Plan within such period,
Potlatch shall be deemed to have accepted such Long-Range Plan or Management
Plan. If Potlatch objects to a Long-Range Plan or Management Plan, Partnership
and Potlatch shall negotiate, diligently and in good faith, to resolve the
dispute and approve a Long-Range Plan or Management Plan not less than sixty
(60) days prior to the commencement of the calendar year to which the
Management Plan pertains (or the first calendar year of the period to which
the Long-Range Plan pertains). If such dispute cannot be resolved by the
parties within such time period, then the parties shall submit the dispute to
the Consulting Forester serving pursuant to Section 13.1. If no Consulting
Forester is then serving or if the Consulting Forester does not reach a
determination as to such dispute on or prior to the date thirty (30) days
prior to the commencement of the calendar year to which the Management Plan
pertains (or the first calendar year of the period to which the Long-Range
Plan pertains), then either party may submit the dispute to arbitration in
accordance with Section 13.2. During the resolution of the dispute,
Partnership shall carry out all un-disputed aspects of the Long-Range Plan or
Management Plan and shall, to the extent applicable, comply with the
previously approved Long-Range Plan pertaining to the subject year as to the
subject matter of the dispute.
(d) Each Long-Range Plan and each Management Plan, upon completion in
accordance with this Section 4.2, shall become a part of this Agreement as if
attached. Partnership may modify a Long-Range Plan or a Management Plan before
or during the period to which it pertains, subject to the approval of
Potlatch, which approval shall not be unreasonably withheld or delayed.
4.3 Management Duties. Throughout the Term, Partnership at its expense
shall manage and maintain the Timberlands pursuant to the applicable
Management Plan and in accordance with Applicable Laws, Prudent Management
Practices and the applicable terms and provisions of this Agreement.
4.4 Compliance with Legal Requirements. (a) Throughout the Term, Partnership
at its cost shall comply in all material respects with all Applicable Laws now
or hereafter in effect relating to the ownership, management and operation of
the Timberlands including applicable Environmental Laws, except to the extent
such compliance is the responsibility of Potlatch pursuant to Sections 5.7,
7.1 or 7.3(b). Without limiting the generality of the foregoing, Partnership
shall prepare and file with the applicable Governmental Authorities all
notices,
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reports, applications, statements or other filings required under Applicable
Laws, and shall obtain, as and when required under Applicable Laws, all
Governmental Approvals relating to the ownership, management and operation of
the Timberlands (except those for which Potlatch is responsible pursuant to
Section 5.7). Promptly upon Potlatch's request, Partnership shall deliver to
Potlatch copies of all required Governmental Approvals or other reasonable
evidence of Partnership's compliance with such Applicable Laws. Partnership
shall keep Potlatch generally apprised of material notices to or filings with
Governmental Authorities given or made by Partnership.
(b) If Partnership receives any notice from any Governmental Authority or
any other Person alleging that any part of the Timberlands or Partnership is
in violation of any Applicable Law or that Partnership has violated any rights
of such Person, and the amount of damages arising from the alleged violation,
or the cost of curing or correcting the violation, if adversely determined,
could reasonably be expected to exceed five hundred thousand dollars
($500,000), then Partnership shall, within ten (10) days after receiving such
notice, deliver to Potlatch a notice describing the allegation in reasonable
detail. The contents of any such notice shall be kept confidential, except to
the extent disclosure is required by law.
4.5 Indemnity. Partnership hereby agrees to indemnify, save, defend and
hold harmless Potlatch and its officers, agents, contractors, subcontractors,
licensees, invitees and employees ("Potlatch Indemnified Parties") from all
loss, cost, liability and expense resulting from injury to or death of any
person or persons (including, without limitation, Potlatch's officers, agents,
contractors, subcontractors, licensees, invitees and employees), or
destruction of or damage to property (including, without limitation, the
property of any Potlatch Indemnified Party), or any other claim of a third
party against any Potlatch Indemnified Party, arising out of or connected
with, either directly or indirectly, any failure by Partnership to perform its
obligations under this Agreement, the presence on the Timberlands of
Partnership or any partner, officer, agent, employee, contractor,
subcontractor, licensee or invitee of Partnership, or the condition of the
Timberlands or any portion thereof or improvement thereon, including, without
limitation, the presence on the Timberlands of any hazardous substances or the
failure of the Timberlands to comply with Applicable Laws, except to the
extent such injury, death, destruction, damage or other claim is caused by the
negligence or willful misconduct of any Potlatch Indemnified Party or the
breach by Potlatch of any of its obligations under this Agreement or is the
subject of Potlatch's indemnification obligation under Section 7.7 or under
section ___ of the Contribution Agreement. The obligations of Partnership
under this Section 4.5 shall survive the expiration or termination of this
Agreement.
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4.6 Responsibility for Contractors.
(a) In the event Partnership contracts with a contractor, or a subcontractor
of any tier is engaged, to perform any portion of the Timber management
operations described in this Agreement as being performed by Partnership, it
shall ensure that any such contractor or subcontractor shall be made aware of
and shall abide by all pertinent provisions of this Agreement.
(b) All obligations, duties, liabilities, and responsibilities of Partnership
arising pursuant to the provisions of this Agreement, or otherwise in law or
in equity, shall apply with equal force to the employees, agents, contractors
or subcontractors of any tier, licensees and suppliers of Partnership involved
in operations hereunder where the context permits, and Partnership shall be
responsible and liable to Potlatch for the activities of such parties.
(c) Specific use of the terms "subcontractor," "agent," "contractor," and
the like in certain sections of this Agreement, and omissions of such terms in
other sections shall not be deemed to nullify or restrict the force and effect
of this Section only to such sections where such terms are specifically used.
Use of the term "Partnership" in any section giving rise to duties or
obligations of Partnership shall be deemed to include the subcontractors,
agents, contractors, employees, and licensees of Partnership where the context
permits.
4.7 Construction and Maintenance of Roads. Partnership shall at its expense
design, construct and (except as otherwise provided in Section 7.8(b))
maintain, or shall cause its contractors to design, construct and maintain, a
system of roads throughout the Timberlands, and shall maintain river
transportation sites, all as necessary to perform management services,
logging, log transportation and fire prevention and control, including roads as
necessary for access during any Harvest Year to and from all Stands included in
the Harvest Plan for such Harvest Year (which access is not required to be
immediately adjacent to such a Stand if it is practicable to move equipment in
and out of such Stand and skid logs to a logging road across land adjacent to
such Stand). Notwithstanding the foregoing, to the extent it is customary in a
particular Resource Region for logging contractors to construct Temporary
Logging Roads or perform road maintenance work in connection with logging
operations, Potlatch may arrange for logging contractors to perform such work;
in such cases, the costs of such road work will be borne by Potlatch, but will
be reflected in Costs of Log and Haul. Potlatch shall be responsible for
obtaining any permits or licenses necessary for river transportation sites,
and Partnership shall provide reasonable cooperation in connection therewith.
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ARTICLE 5
Harvest Plans
5.1 Contents of Harvest Plan. No later than September 1 of each year,
Partnership shall prepare and deliver to Potlatch a proposed Harvest Plan for
each Resource Region for the ensuing two (2) Harvest Years (a "Proposed
Harvest Plan"). Each Proposed Harvest Plan shall include, for the applicable
Resource Region and for each Harvest Year covered by such Proposed Harvest Plan,
the following information:
(a) A map (a "Resource Unit Harvest Map") of each Resource Unit
proposed to be included in the Harvest Plan showing and identifying by
Stand Code Number each Stand proposed to be harvested, showing all logging
roads providing access to and from each such Stand, and showing the
location of any environmentally-sensitive areas which could be affected by
harvest operations pursuant to the Proposed Harvest Plan (an example of a
Resource Unit Harvest Map is attached hereto as Exhibit B);
(b) A listing (a "Harvest Plan Data Sheet"), broken down by Resource
Unit, of each Stand proposed to be harvested, and showing for each such
Stand (i) the acreage of the Stand; (ii) whether the Stand is to be
partially harvested or fully harvested (and if it is to be partially
harvested, describing in detail the marking codes or selection criteria
for the Timber proposed to be harvested); (iii) the estimated volumes to
be harvested of each Fiber Category in such Stand, and the estimated
volumes of each Product to be harvested in such Stand (excluding Products
which are estimated to constitute less than three percent (3%) of the
total volume of a Fiber Category in such Stand); and (iv) whether such
Stand is available for harvest throughout the Harvest Year or stating the
portion of such Harvest Year when the Stand will be available for harvest.
Each Harvest Plan Data Sheet shall describe any known special restrictions
or procedures (such as procedures to protect any environmentally-sensitive
areas) which will affect harvest operations (an example of a Harvest Plan
Data Sheet is attached hereto as Exhibit C);
(c) A summary compilation of the data set forth in the Harvest Plan
Data Sheets (a "Harvest Plan Summary"), broken down by Resource Unit and
showing totals for the Resource Region (an example of a Harvest Plan
Summary is attached hereto as Exhibit D).
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5.2 Requirements for Proposed Harvest Plan. Each Proposed Harvest Plan
shall be consistent with the following requirements (collectively, the "PHP
Requirements"):
(a) The Proposed Harvest Plan shall be consistent with the Agreement
Purposes and shall provide for the harvest of a volume of each Fiber
Category substantially equal to the maximum volume which may be harvested
consistent with Sustainable Forestry Principles, subject to such
exceptions as may be set forth in the applicable approved Long-Range Plan;
(b) As to each Fiber Category, the proposed harvest volumes shall be
not less than seventy-five percent (75%) for Sawtimber Fiber Categories
and fifty percent (50%) for Pulpwood Fiber Categories nor more than one
hundred twenty-five percent (125%) of the average annual harvest volume of
such Fiber Category in the Harvest Plans for the previous five (5) years
(for purposes of this determination during the first five (5) years of the
Term, the relevant harvest volumes for 1993-1997 are set forth in Exhibit
E attached hereto), subject to adjustment to reflect the effects of Force
Majeure and subject to such exceptions as may be set forth in the
applicable approved Long-Range Plan;
(c) Each Stand identified in the Proposed Harvest Plan shall, during
at least a reasonable portion of the Harvest Year, be accessible (directly
or across an adjacent Stand if practicable) by barge to a suitable landing
or by means of a logging road which will accommodate vehicles of the type
generally used in connection with harvest and transport operations;
(d) If harvest operations in some but not all portions of the
Resource Region are expected to be materially affected by standing water
or winter weather, the Proposed Harvest Plan shall include a reasonable
number of Stands which are located in areas where harvest operations may
be performed in winter weather or wet seasons, as the case may be, in
order to permit, to the extent practicable, a consistent level of harvest
throughout the year.
5.3 Potlatch Review and Approval of Proposed Harvest Plan.
(a) Within thirty (30) days after delivery of the Proposed Harvest Plan,
Potlatch may deliver to Partnership a written notice ("Objection Notice"): (i)
of any feature of the Proposed Harvest Plan which, in Potlatch's judgment, is
inconsistent with any of the PHP Requirements, in which case Potlatch shall
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propose a correction to achieve such consistency, or (ii) stating that
Potlatch wishes to modify the Proposed Harvest Plan for the ensuing Harvest
Year in accordance with Section 5.3(c), in which case Potlatch shall specify
the proposed modifications. If Potlatch does not deliver an Objection Notice
within such 30-day period, then the Proposed Harvest Plan shall be deemed
approved and shall constitute the Harvest Plan for the relevant Harvest Year,
subject to modification in accordance with Sections 5.5 and 9.4(a). If
Potlatch timely delivers an Objection Notice specifying a feature of the
Proposed Harvest Plan which Potlatch believes is inconsistent with the PHP
Requirements, Partnership shall, within fifteen (15) days after such delivery,
deliver to Potlatch a notice (an "Objection Response Notice") which either (A)
agrees that the Proposed Harvest Plan shall be modified as proposed in the
Objection Notice, (B) proposes an alternative modification to make the
Proposed Harvest Plan consistent with the PHP Requirements, or (C) states that
Partnership disputes Potlatch's judgment as to the inconsistency of the
Proposed Harvest Plan with the PHP Requirements. If Partnership does not
deliver an Objection Response Notice within such 15-day period, then
Partnership shall be deemed to have approved Potlatch's proposed modification
to the Proposed Harvest Plan, and the Harvest Plan shall reflect such
modification. If Potlatch timely delivers an Objection Notice proposing a
modification to the Proposed Harvest Plan pursuant to Section 5.3(c),
Partnership may, within fifteen (15) days after delivery of the Objection
Notice, notify Potlatch that such proposed modification is inconsistent with
Potlatch's rights under Section 5.3(c). If Partnership does not deliver such
notification within such 15-day period, Partnership shall be deemed to have
agreed to Potlatch's proposed modification, and the Harvest Plan shall reflect
such modification.
(b) If the parties disagree as to whether the Proposed Harvest Plan is
consistent with the PHP Requirements or as to whether any modifications to the
Proposed Harvest Plan proposed by Potlatch are consistent with Potlatch's
rights under Section 5.3(c), the parties shall each use diligent efforts in
good faith to negotiate an agreement promptly. If such negotiation does not
result in an agreement as to the Harvest Plan within sixty (60) days after the
Proposed Harvest Plan was delivered to Potlatch, then the parties shall submit
the dispute to the Consulting Forester serving pursuant to Section 13.1. If no
Consulting Forester is then serving or if the Consulting Forester does not
reach a determination as to such dispute on or prior to the date ninety (90)
days after the Proposed Harvest Plan was delivered to Potlatch, then either
party may thereafter submit such disagreement to arbitration in accordance with
Section 13.2.
(c) Potlatch shall have the right to modify a Proposed Harvest Plan,
pursuant to the procedures set forth in Section 5.3(a), by deleting specified
Stands identified in the Proposed
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Harvest Plan constituting not more than fifteen percent (15%) of the aggregate
acreage proposed to be harvested in the first Harvest Year of such Harvest
Plan, and substituting therefor other specified Stands ("Alternative Stands")
to be harvested in the Resource Region; provided that each of the following
requirements is satisfied:
(i) the Alternative Stands shall be Stands which the Proposed Harvest
Plan such Proposed Harvest designates to be Plan; harvested in the second
year of
(ii) the Harvest Plan, as so modified, would be consistent with the
PHP Requirements;
(iii) substitution of the Alternative Stands would not result in an
increase or volume of Merchantable Region during such decrease of more
Sawtimber to be first Harvest than five percent harvested in the Year;
(5%) in the total applicable Resource
(iv) substitution of the Alternative Stands could not reasonably be
expected to result Harvest Plan) of more than to be payable for the in a
decrease (as five percent (5%) in first Harvest compared with the the
Total Purchase Year under the Proposed Price Harvest Plan; and
(v) any deleted Stand must be harvested by Potlatch no later than
the fourth (4th) year after such Stand was first proposed to be harvested
in a Proposed Harvest Plan.
5.4 Final Harvest Plan. (a) When a Proposed Harvest Plan has been
approved (including approval of any proposed modifications pursuant to Section
5.3(c) and resolution of any disputes pursuant to Section 5.3(b)) ("Harvest
Plan"), Potlatch and Partnership shall cause their respective Authorized
Officers to sign the cover pages of two (2) counterparts of the Harvest Plan,
and each party shall take possession of one such counterpart. Notwithstanding
the preceding sentence, failure of either party to so evidence its approval
shall not affect the validity or effect of the Harvest Plan. Each Harvest Plan
upon completion and approval in accordance with this Article 5 shall become a
part of this Agreement as if attached hereto. Either party may propose
amendments to a Harvest Plan during the applicable Harvest Year, subject to
the approval of the other party, which approval shall not be unreasonably
withheld or delayed.
(b) In the event any dispute described in Section 5.3(b) remains
pending (or in the event a Harvest Plan has not been finalized for any other
reason) as of the beginning of the applicable Harvest Year, harvest operations
shall be carried out
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in a manner consistent with the undisputed portions of the Proposed Harvest
Plan until the Harvest Plan is finalized.
(c) If Partnership fails to deliver any Proposed Harvest Plan in accordance
with Section 5.1(a), Potlatch shall have the right, during the first calendar
year to which such Proposed Harvest Plan would apply, to harvest Timber
designated to be harvested during such calendar year pursuant to the previous
two-year Harvest Plan (under which such calendar year was the second year of
the two-year Harvest Plan).
5.5 Changes in Harvest Plan Due to Unforeseen Circumstances. (a) In the
event an area consisting of more than fifty (50) acres of the Timberlands is
affected by disease, pests, fire, severe windstorms or other events ("Timber
Damage Events"), but excluding ordinary mortality due to age, such that it
becomes necessary, in Partnership's reasonable judgment, for Potlatch to
harvest the affected Timber (or logs, as the case may be) promptly in order to
minimize the financial loss due to such events, then the provisions of this
Section 5.5 shall apply:
(i) Either party, upon obtaining knowledge of a Timber Damage Event,
shall promptly inform the other party;
(ii) The parties shall promptly confer and seek, in good faith and
with diligence, to negotiate a modification to the Harvest Plan to
provide for the prompt harvesting of Merchantable Timber in the areas
affected by the Timber Damage Events ("Salvage Timber"); provided,
however, that Potlatch shall not be obligated to accept a modification
which would (A) result in Potlatch obtaining a smaller volume of good
quality Sawtimber during the Harvest Year or the ensuing Harvest Year
than the volume to be harvested pursuant to the Harvest Plan, or (B)
increase the expenses to be borne by Potlatch in implementing the Harvest
Plan, unless Partnership shall agree to reimburse Potlatch for such
increase; and
(iii) unless Potlatch elects to harvest the Salvage Timber in addition
to the Timber to be harvested in accordance with the applicable Harvest
Plan, any Salvage Timber harvested by Potlatch in a Harvest Year shall be
credited toward the volumes of the respective Products Potlatch is
required to harvest during such Harvest Year in accordance with the
applicable Harvest Plan.
In the event that, after negotiation pursuant to this Section 5.5(a), Potlatch
does not agree to a modification to the Harvest Plan to provide for the
harvesting of Salvage Timber, then Partnership shall have the right to dispose
of the Salvage
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Timber by such means as Partnership may determine, including sale of such
Salvage Timber to any person; provided that no such transaction shall involve
the sale or other disposition of any Product other than Salvage Timber.
(b) In the event that, at any time, any Force Majeure impairs access to a
Stand which is to be harvested during the Harvest Year or if any Force Majeure
would materially impair harvest operations on such Stand, and either party
reasonably believes that suitable access for harvest equipment and logging
trucks will not be available, or that the impairment of harvest operations
will not be corrected, in time to complete the harvest of the affected Stand
during the Harvest Year, then the Harvest Plan shall be modified to delete the
affected Stand and substitute in its place a Stand or Stands in the same
Resource Region which is generally comparable in volumes and types of
Merchantable Timber available for harvest. Such substitute Stands shall be
selected by Potlatch from the Stands designated in the applicable Harvest Plan
for harvest during the following Harvest Year, and shall be identified by
written notice from Potlatch to Partnership, and unless Partnership reasonably
objects within five (5) days after receipt of such notice, the Harvest Plan
shall be deemed modified to reflect such substitution.
(c) In the event that, at any time during a Harvest Year, Potlatch
reasonably believes that the Stands which are to be harvested during the
Harvest Year will produce materially different volumes of any one or more
species or Fiber Categories than the volumes reflected in the Harvest Plan, then
Potlatch shall have the right to modify the Harvest Plan by deleting up to
fifteen percent (15%) of the aggregate acreage specified in the Harvest Plan or
by adding Alternative Stands, as the case may be, subject to the limitations
set forth in clauses (i) through (v) of Section 5.3(c). Such Alternative
Stands shall be identified by written notice from Potlatch to Partnership, and
unless Partnership reasonably objects within ten (10) days after receipt of
such notice, the Harvest Plan shall be deemed modified to reflect such
deletion, addition or substitution. The right to add, delete or substitute
Stands pursuant to this Section 5.5(c) is in addition to Potlatch's rights to
substitute Stands in a Proposed Harvest Plan pursuant to Section 5.3(c).
5.6 Partnership's Right to Modify Harvest Plan. Upon and subject to the
terms and conditions of this Section 5.6, Partnership shall have the right,
one (1) time only in any Harvest Year, by written notice to Potlatch ("Harvest
Plan Modification Notice"), to modify the Harvest Plan to increase the volume
of Merchantable Sawlogs to be harvested in the current Harvest Year (a
"Harvest Plan Modification") by an amount (as specified in the Harvest Plan
Modification Notice) up to ten (10%) of the volume to be harvested during such
Harvest Year pursuant to the Harvest Plan (i.e., such that the volume of
Merchantable Sawlogs would be up to one hundred ten percent
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(110%) of the volume for such Harvest Year contemplated by the Harvest Plan
prior to such modification), provided that each of the following requirements
is satisfied:
(i) the Harvest Plan, as so modified, would be consistent with the
PHP Requirements;
(ii) the Harvest Plan Modification Notice shall be delivered to
Potlatch no later than: (A) August 1 of the Harvest Year if the Harvest
Plan Modification Notice proposes an increase in volume of five percent
(5%) or less, or (B) July 1 of the Harvest Year if the Harvest Plan
Modification Notice proposes an increase in volume of more than five
percent (5%);
(iii) Potlatch shall have the right to select the additional
Merchantable Sawlogs to be harvested, which shall be selected from Stands
which the Harvest Plan designates to be harvested in the second year of
such Harvest Plan (and Potlatch shall have the right to select only
Softwood Sawtimber, only Hardwood Sawtimber or a combination); and
(iv) the additional volume harvested pursuant to the Harvest Plan
Modification shall be offset by an equivalent reduction in harvest volumes
of the relevant Sawlog Categories during the following five or fewer
Harvest Years, as Potlatch and the Partnership may reasonably agree.
5.7 Compliance With Reporting and Other Legal Requirements. In the event
that Applicable Law requires that any Governmental Authority or other Person
receive any notice, plan or information regarding a contemplated harvest of
forest products pursuant to this Agreement or requires that any Governmental
Approval be obtained in connection therewith or requires any other action
respecting a contemplated harvest, Potlatch shall take all actions reasonably
necessary to comply in all material respects with such Applicable Law.
Partnership shall provide such cooperation as may be necessary to enable
Potlatch to so comply, but Partnership shall not be required to incur any
material expense in providing such cooperation. Promptly upon Partnership's
request, Potlatch shall deliver to Partnership copies of all required
Governmental Approvals or other reasonable evidence of Potlatch's compliance
with such Applicable Laws. Potlatch shall keep Partnership generally apprised
of material notices to or filings with Governmental Authorities given or made
by Potlatch relating to the Timberlands or Potlatch's operations under this
Agreement.
5.8 Marking Timber and Boundaries. Prior to Potlatch's commencement of
harvest operations on any Stand, Partnership shall mark as needed the Stand
boundaries and any streamside management zones or other environmentally
sensitive areas on or
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adjacent to the Stand and, if the Stand is to be partially harvested,
Partnership shall mark the trees to be cut or shall provide a detailed written
description of the method by which Potlatch or its contractor is to determine
which trees are to be cut (collectively, "Site Marking"). If Potlatch gives
notice to Partnership of the date on which Potlatch proposes to commence
harvest operations on a Stand, then Partnership shall complete the Site Marking
of such Stand prior to such date (but Partnership shall have at least ten (10)
days after such notice to complete the Site Marking). If Partnership fails to
complete such Site Marking within such ten (10) day period, Partnership shall
reimburse any costs incurred by Potlatch as a result of delay in Site Marking
promptly after written demand.
ARTICLE 6
Purchase and Sale of Timber
6.1 Obligation to Harvest; Required Volumes; Obligation to Purchase and
Sell.
(a) During each Harvest Year, upon and subject to the terms of this
Agreement, Potlatch shall cut and remove the Merchantable Timber to be
harvested in accordance with the Harvest Plan for such Harvest Year (as such
Harvest Plan may be modified in accordance with the provisions of Article 5).
Upon and subject to the terms and conditions of this Agreement, Potlatch shall
purchase and Partnership shall sell all Merchantable Timber cut by Potlatch.
(b) If, in a Harvest Year, Potlatch cuts and scales a volume of any Sawlog
Category which is more than ninety-five percent (95%) but less than one
hundred percent (100%) of the volume of such Sawlog Category to be harvested in
such Harvest Year pursuant to the applicable Harvest Plan, as such Harvest
Plan may theretofore have been modified (a "Harvest Deficit"), then the Harvest
Deficit shall be added to the volume of such Sawlog Category to be harvested in
the following Harvest Year pursuant to the applicable Harvest Plan, and the
Harvest Plan for such following year shall be modified to reflect such
additional volume; provided, however, that the foregoing requirement shall not
apply if such Harvest Deficit resulted from Force Majeure or inaccuracies in the
estimated volumes set forth in the Harvest Plan. If, in a Harvest Year,
Potlatch cuts and scales a volume of any Sawlog Category equal to more than one
hundred five percent (105%) of the volume of such Sawlog Category to be
harvested in such Harvest Year pursuant to the applicable Harvest Plan, as such
Harvest Plan may theretofore have been modified (a "Harvest Excess"), then the
Harvest Excess shall be subtracted from the volume of such Sawlog Category to be
harvested in the following Harvest Year pursuant to the applicable Harvest Plan,
and the Harvest Plan for such following year shall be modified to reflect such
reduced volume. Notwithstanding anything to the contrary in this Agreement,
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Potlatch shall not be required to cut, remove or purchase any Negative Value
Product except in accordance with the provisions of Section 6.1(e).
(c) Potlatch's failure (except to the extent resulting from Force Majeure
or inaccuracies in the estimated volumes set forth in the Harvest Plan) in any
Harvest Year to cut and scale a volume of any Sawlog Category equal to ninety-
five percent (95%) or more of the volume of such Fiber Category to be
harvested in such Harvest Year pursuant to the applicable Harvest Plan, as
such Harvest Plan may theretofore have been modified, shall constitute a
breach of this Agreement by Potlatch, unless Potlatch shall commence to cure
such failure within seventy-five (75) days after the end of such Harvest Year,
and thereafter diligently continue such cure, and shall fully cure such
failure within one hundred eighty (180) days after the end of such Harvest
Year.
(d) Potlatch shall use reasonable efforts to perform its harvest operations
on a fairly continuous basis throughout each Harvest Year, to the extent
practicable in light of weather conditions and other factors outside of
Potlatch's control. Potlatch may log the Stands specified in the Harvest Plan
in such order as Potlatch may elect (subject to any schedule restrictions set
forth in the Harvest Plan), but Potlatch shall provide written notice to
Partnership not less than three (3) business days prior to commencing logging on
a Stand, which notice shall specify the Stand by Stand Code Number and the
dates on which Potlatch intends to commence and complete logging. In
scheduling harvests, Potlatch shall make reasonable accommodations to permit
Partnership to perform scheduled silvicultural activities. In the event that
any Site Marking on a Stand required under the Harvest Plan will not have been
completed on the date specified in such notice as the date Potlatch intends to
commence logging, Partnership shall so notify Potlatch within one (1) business
day after receipt of Potlatch's notice and the provisions of Section 5.8 shall
apply.
(e) Notwithstanding anything to the contrary in this Agreement, Potlatch
shall have no obligation to cut, remove or purchase any Product if the Costs
of Log and Haul allocable to such Product would exceed the Delivered Log Price
for such Product (a "Negative Value Product"), unless Partnership shall have
notified Potlatch in writing that Partnership (i) wishes Potlatch to cut and
remove such Product and (ii) will pay Potlatch the amount (the "Net Cost") by
which such allocable Costs of Log and Haul exceeds such Delivered Log Price.
Upon delivery of such notice, Partnership shall be obligated to pay the Net
Cost of such Product to Potlatch within twenty (20) days after delivery to
Partnership of an invoice specifying the amount owed and a reasonably detailed
accounting of the calculation thereof. In the alternative, Potlatch may offset
the Net Cost of such Product against Monthly Payments due after delivery of
such invoice. In the event that Partnership is able
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to arrange for the harvest of a Negative Value Product by a Person other than
Potlatch at a cost less than the Net Cost calculated as set forth above (or
for a positive purchase price), then Partnership shall have the right to enter
into such an arrangement; provided that no such arrangement shall involve the
sale or other disposition of any Product other than Negative Value Products.
6.2 Stumpage Prices. (a) Potlatch shall purchase all Merchantable Timber
cut and scaled in a calendar quarter for a price (per MBF, per cord or per
green ton, as applicable under then current Industry Practice) equal to the
Market Stumpage Price prevailing during the relevant Pricing Period for the
applicable Product in the applicable Resource Region, as determined in
accordance with this Section 6.2. Market Stumpage Prices shall be established
each calendar quarter for each Resource Region, for each Fiber Category and,
if Market Stumpage Prices are different for different species, diameter
classes or other classifications within a Fiber Category, for each specific
Product to be harvested.
(b) Except as otherwise provided in Section 6.2(d), the term "Market
Stumpage Price" shall mean, as to any Product, the fair market price being
paid for the Product on a stumpage basis in arm's-length transactions in the
relevant Resource Region during the relevant Pricing Period. Subject to the
dispute resolution provisions of this Section 6.2, the Market Stumpage Price of
each Product shall be determined by good faith negotiations between the
parties. In determining Market Stumpage Prices, the parties shall take into
account both Net Log Prices in "purchased at mill" transactions and Stumpage
Sale Prices. Relevant transactions will include all transactions during the
Pricing Period in which Potlatch is the buyer (or a bidder in the case of
Stumpage Sale Transactions) or the seller and other transactions as to which the
parties agree the price, volume and other relevant terms are reasonable and
verifiable, but excluding transactions between Potlatch and Partnership.
Relevant transactions may include transactions reported or reflected in
recognized trade publications if Partnership and Potlatch agree, in the
particular case, that the data pertaining to such transactions are relevant.
The parties intend that, at least initially, Net Log Prices and Stumpage Sale
Prices will, as to Products for which reliable data is available respecting
both types of transactions, be treated as equally relevant in the calculation
of Market Stumpage Prices. The parties may, if they so agree in a given
calendar quarter, use a mathematical formula or other agreed upon methodology
for determining the Market Stumpage Price of any Product based on available
data regarding Net Log Prices and Stumpage Sale Prices. In assessing the
comparability of any transaction, the parties may take into account any
verifiable information they consider relevant, including the quality of the
Timber or logs involved in the transaction.
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(c) As to each Stumpage Sale Transaction in which only a single Product is
sold, for purposes of determining the unit price (per mbf, per ton, etc.) paid
for such Product in the Stumpage Sale Transaction, such unit price shall be
based upon Potlatch's reasonable estimate (as set forth in the Stumpage Bid
Worksheet for such Stumpage Sale Transaction prepared by Potlatch and reviewed
by Partnership), or other reasonable evidence, of the volume of the Product
included in the Stumpage Sale Transaction. As to each Stumpage Sale
Transaction in which more than one Product is sold for a single lump sum, for
purposes of determining the unit price paid in the Stumpage Sale Transaction for
each particular Product included in that Stumpage Sale Transaction, such unit
price shall be based upon Potlatch's reasonable estimates (as set forth in the
Stumpage Bid Worksheet for such Stumpage Sale Transaction prepared by Potlatch
and reviewed by Partnership), or other reasonable evidence, of (1) the volumes
of each Product included in the Stumpage Sale Transaction, and (2) the
relative values (per mbf, per ton, etc.) of the respective Products.
(d) In the event that Potlatch disposes of a portion of the Merchantable
Timber to be harvested pursuant to this Agreement by assigning the right to
harvest a specified Stand or Stands designated in the applicable Harvest Plan
to a third party on a stumpage basis (a "Stumpage Outsale"), and if such
Stumpage Outsale is made on a competitive bid basis or is otherwise at a price
approved by Partnership, then the "Market Stumpage Price" for the Merchantable
Timber sold in such Stumpage Outsale shall be the price paid to Potlatch by
the assignee in such Stumpage Outsale, minus the product of (i) the Average
Administrative Cost multiplied by (ii) the number of tons of Timber sold in
such Stumpage Outsale (which tonnage shall be reasonably agreed by the
parties). This Section 6.2(d) shall not apply to assignments of this Agreement
other than assignments of the right to harvest a specified Stand or Stands
designated in a then-current Harvest Plan.
(e) For purposes of determining the amount of the Monthly Payments to be
made pursuant to Section 6.3 during each respective calendar quarter,
commencing no later than the date forty-five (45) days prior to the commencement
of the calendar quarter, Partnership and Potlatch shall confer (in person or
by such other means as they may agree) and seek, through diligent and good
faith negotiations, to agree upon the Estimated Market Stumpage Prices for the
Products to be harvested during the calendar quarter. If the parties are
unable to reach agreement as to the Estimated Market Stumpage Price of any
Product on or prior to the date thirty (30) days prior to the commencement of
the calendar quarter, then the parties shall submit the dispute to the
Consulting Forester serving pursuant to Section 13.1, who shall determine such
Estimated Market Stumpage Price no later than the first day of the calendar
quarter. If no Consulting Forester is then serving or if the Consulting
Forester does not reach a determination within fifteen (15) days after the
dispute
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shall have been submitted to the Consulting Forester, then at either party's
election, the Estimated Market Stumpage Price shall be determined by
arbitration in accordance with Section 13.2.
(f) [reserved]
(g) In the event the Estimated Market Stumpage Price for any Product has
not been determined by the first day of a calendar quarter, then until such
Estimated Market Stumpage Price has been determined, the Monthly Payments
shall be calculated as if the Market Stumpage Price for such Product for the
immediately preceding calendar quarter (or, if such Market Stumpage Price has
not been finally determined, then the most recently determined Estimated
Market Stumpage Price for such Product) were the Estimated Market Stumpage
Price for the current calendar quarter. When the Estimated Market Stumpage Price
has been determined in accordance with Section 6.2(e), a retroactive reconciling
payment shall be made, concurrently with the next Monthly Payment, to adjust
Monthly Payments previously made during the calendar quarter.
6.3 Monthly Payments. (a) No later than fifteen (15) days after the last
day of each calendar month, Potlatch shall pay Partnership an amount (the
"Monthly Payment") equal to the estimated purchase price payable under this
Agreement for all Merchantable Timber cut and scaled during such month, based
upon the Estimated Market Stumpage Prices of the respective Products purchased
and the respective volumes of such Products scaled during such month as set
forth in the Monthly Logging Report for such month. Each Monthly Payment shall
be credited toward payment of the Total Purchase Price for the subject
calendar quarter.
(b) In the event that, during any month of the Term, either party believes
that the volume of any Product reportedly scaled during any prior month in
such Harvest Year, as set forth in the Monthly Logging Report for such Month,
is greater or less than the actual volume of such Product scaled during such
month, then such party may, by notice to the other party (a "Volume Reset
Notice"), require that the Monthly Payment paid with respect to such month be
recalculated to reflect such difference in volume. Upon delivery of a Volume
Reset Notice, the parties shall negotiate diligently and in good faith to
reach an agreement as to whether and to what extent such Monthly Payment shall
be recalculated. In the event any dispute as to a Monthly Payment
recalculation based upon a Volume Reset Notice is not resolved through
negotiation within fifteen (15) days after delivery of such Volume Reset
Notice, then the parties shall submit the dispute to the Consulting Forester
serving pursuant to Section 13.1, who shall determine such Monthly Payment
recalculation. If no Consulting Forester is then serving or if the Consulting
Forester does not reach a determination as to such dispute on or prior to the
date forty-five (45) days after
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delivery of such Volume Reset Notice, then at either party's election, the
Monthly Payment recalculation shall be determined by arbitration in accordance
with Section 13.2. If it is determined pursuant to this Section 6.3(b) that a
Monthly Payment was miscalculated and should have been in a higher or lower
amount, then within fifteen (15) days after such determination, Potlatch shall
pay Partnership any underpayment or Partnership shall pay Potlatch any
overpayment, as the case may be, together with interest thereon from the last
day of the relevant month until paid, at a variable rate equal to the sum of
(i) the Prime Rate then in effect, plus (ii) two percent.
6.4 Determination and Payment of Total Purchase Price. (a) Commencing no
later than the date thirty (30) days prior to the last day of each calendar
quarter, Partnership and Potlatch shall confer (in person or by such other
means as they may agree) and seek, through diligent and good faith
negotiations, to agree upon the Market Stumpage Prices for the Products
harvested and scaled (or to be harvested and scaled) during such calendar
quarter. Each party shall provide evidence available to it of the prevailing
Delivered Log Prices and prices paid in Stumpage Sale Transactions in the
relevant Resource Regions during the relevant Pricing Period and of the
Average Procurement Cost for the Harvest Year. If the parties are unable to
reach agreement as to the Market Stumpage Price of any Product on or prior to
the date twenty (20) days prior to the last day of such calendar quarter, then
the parties shall submit the dispute to the Consulting Forester serving
pursuant to Section 13.1, who shall determine such Market Stumpage Price on or
prior to the date five (5) days after the last day of the calendar quarter.
Subject to the terms of Section 13.1, the Consulting Forester shall consider
such evidence and utilize such procedures as the Consulting Forester may deem
appropriate. If no Consulting Forester is then serving or if the parties agree
that the Consulting Forester is not likely to reach a determination as to such
Market Stumpage Price on or before the date five (5) days after the last day
of the calendar quarter, then at the election of either party any time after
the last day of the calendar quarter, the Market Stumpage Price shall be
determined by arbitration in accordance with Section 13.2.
(b) Within ten (10) days after the later of (i) final determination of all
Market Stumpage Prices for a calendar quarter pursuant to Section 6.4(a), and
(ii) delivery and approval of the Quarterly Logging Audit for such Harvest
Year, as described in Section 6.9(b), (A) if the Total Purchase Price for such
calendar quarter exceeds the aggregate amount of the Monthly Payments
previously made with respect to such calendar quarter, then Potlatch shall pay
the amount of such excess to Partnership, or (B) if the aggregate amount of
the Monthly Payments previously made with respect to such calendar quarter
exceed the Total Purchase Price for such calendar quarter, then Partnership
shall reimburse such amount to Potlatch (the amount of such payment by
Potlatch or Partnership is referred to herein
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as the "Adjustment Amount"). The Adjustment Amount shall bear interest from
the last day of the relevant calendar quarter until paid, at a variable rate
equal to the sum of (i) the Prime then in effect, plus (ii) two percent, which
interest shall be payable together with payment of the Adjustment Amount. In
the event of a dispute as to the amount of the Total Purchase Price, any
undisputed portion of the Adjustment Amount shall be paid within sixty (60) days
after the last day of the calendar quarter.
6.5 Method of Payment; Late Payments. (a) All payments to be made under
this Agreement by either party to the other shall be made in lawful money of
the United States to the other party at its address for notices as provided in
Section 16.1, or at the request of the party entitled to payment, by wire
transfer or automatic funds transfer to such account as such party may
designate in writing from time to time.
(b) Any amount payable under this Agreement which is not paid when due
shall bear interest, from the date payment is due through the date paid, at a
variable rate (the "Default Rate") equal to the sum of (i) the Prime Rate then
in effect, plus (ii) four (4) percent.
6.6 Scaling. (a) Except as may otherwise be specifically provided herein,
the Merchantable Timber cut under this Agreement shall be scaled as promptly
as practicable after cutting, at Potlatch's Conversion Facility at which the
shipment is to be processed (the "Destination Mill") or such other place as
Potlatch may designate, by a competent and qualified log scaler employed or
contracted by Potlatch (or, in the case of logs delivered to a site other than
a Potlatch Conversion Facility, by a competent and qualified log scaler
reasonably designated by Potlatch). The scaler shall keep complete log scaling
records, and the scaler's records and procedures shall be subject to checking
and inspection by the representatives of Potlatch and Partnership at all
reasonable times. The cost of such scaling shall be borne by Potlatch and
shall not constitute Costs of Log and Haul.
(b) The scaler shall provide scale tickets in three (3) parts for
distribution to Partnership, Potlatch and Potlatch's logger.
(c) Potlatch and Partnership agree that the scaler shall employ customary
scaling standards in accordance with Industry Practice in the Resource Region.
Sample scaling using a reasonable sampling of each shipment shall be
permitted.
(d) No Merchantable Timber shall be removed from the place or places fixed
for scaling until scaled or measured.
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(e) Potlatch shall not be entitled to any credit or deduction for
mismanufactured Products or Products damaged in logging or transport.
6.7 Monthly Logging Reports. No later than five (5) business days after the
last day of each calendar month, Potlatch shall deliver to Partnership a
report (a "Monthly Logging Report") setting forth: (a) for each Stand from
which any Product was scaled during such month, the volume of each shipment of
such Product scaled, the Estimated Market Stumpage Price then in effect for
such Product shipment, the estimated price for such Product shipment derived
by applying such Estimated Market Stumpage Price to such volume, and the total
estimated price for all Products scaled from such Stand derived by adding
together all such estimated Product shipment prices; and (b) for each Resource
Region, the totals for such month of the Product shipment volumes and
estimated Product prices of each Product included in the portion of the Monthly
Logging Report described in clause (a) above (an example of a Monthly Logging
Report is attached hereto as Exhibit F).
6.8 Allocation of Costs; Payment of Taxes. (a) Potlatch shall pay all Costs
of Log and Haul, but the parties acknowledge that the amounts thereof are to
be taken into account in determining Net Log Prices in accordance with Section
6.2(b). Except as otherwise expressly set forth in this Agreement or in cases
where Industry Practice imposes specific costs upon a stumpage purchaser,
Partnership shall pay all other costs and expenses arising from or related to
the ownership, management and operation of the Timberlands. Potlatch shall use
commercially reasonable efforts to minimize Costs of Log and Haul to the
extent consistent, in Potlatch's reasonable judgment, with maintaining an
appropriate level of quality and value in its wood products.
(b) All yield taxes, sales taxes, harvest taxes, severance taxes and other
taxes assessed in respect of Timber harvested shall be paid when due by
Partnership or Potlatch in accordance with Industry Practice in the relevant
state or Resource Region (i.e., if local custom calls for the mill owner to
pay, Potlatch shall pay), except so long as the validity or amount of such
taxes is being diligently protested in good faith and by appropriate proceedings
(provided that the protesting party shall pay any interest and penalties).
Partnership shall pay all other taxes, assessments and other governmental
impositions relating to the ownership, management and operation of the
Timberlands when due, except so long as the validity or amount of such taxes
is being diligently protested in good faith and by appropriate proceedings
(provided that Partnership shall be responsible for any interest and
penalties).
6.9 Records; Audits. (a) Potlatch shall maintain detailed operating and
financial records of all harvest operations carried out pursuant to this
Agreement, including (i) operating
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records setting forth the volumes of each Product cut and scaled and the date
and location of each scaling, and (ii) financial records setting forth the
Total Administrative Cost and the Costs of Log and Haul and invoices or other
evidence of all such costs. Potlatch shall maintain such records relating to
each Harvest Year for not less than five (5) years after the end of such Harvest
Year. Such records shall be available for review by Partnership or its
representatives at Potlatch's offices at any time during normal business hours
on not less than three (3) days prior written notice.
(b) As promptly as practicable but in no event later than five (5) business
days after the last day of each calendar quarter, Potlatch shall cause to be
delivered to Partnership a report (a "Quarterly Logging Audit") setting forth
for such calendar quarter the total volume of each Product cut and scaled
pursuant to this Agreement, the Total Administrative Costs and the Total Costs
of Log and Haul for the relevant Harvest Year and such other information
(other than prices) as may be necessary to establish the Total Purchase Price
for such calendar quarter. The Quarterly Logging Audit shall be prepared and
certified by Potlatch. Unless Potlatch or Partnership objects to a Quarterly
Logging Audit within ten (10) days after delivery thereof, the payment of the
Adjustment Amount for such calendar quarter shall be based upon the Quarterly
Logging Audit. In the event of an objection, any undisputed amount shall be
paid and Potlatch and Partnership shall use diligent efforts in good faith to
resolve such dispute promptly. Potlatch and Partnership shall have the right to
audit and review the Quarterly Logging Audit and the related records and
information respecting any calendar quarter provided that such audit shall be
commenced not later than the date one (1) year after delivery of the Quarterly
Logging Audit for such calendar quarter, and shall be completed not later than
the date two (2) years after delivery of the Quarterly Logging Audit for such
calendar quarter. Unless Potlatch or Partnership shall have timely commenced and
completed such an audit, the Quarterly Logging Report as to such calendar
quarter shall be final and binding as of the date two (2) years after delivery
of such Quarterly Logging Audit. In the event any such audit results (through
negotiation or arbitration) in an adjustment to the Total Purchase Price for
the relevant calendar quarter, the party owing such adjustment shall pay the
amount of such adjustment within twenty (20) days after such amount shall have
been determined, together with interest thereon from the last day of the
relevant calendar quarter until paid, at a variable rate equal to the sum of (i)
the Prime Rate then in effect, plus (ii) two percent.
6.10 Disclaimer of Warranties. EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT, PARTNERSHIP MAKES NO WARRANTY, EXPRESS OR IMPLIED, IN FACT, BY LAW
OR OTHERWISE, CONCERNING THE QUALITY, QUANTITY OR CHARACTER OF THE TIMBER
PURCHASED HEREUNDER
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AND HEREBY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
ANY PARTICULAR PURPOSE.
6.11 Lump Sum Sale. Potlatch will consider in good faith any request made
by Partnership, from time to time, to revise a Harvest Plan to provide for the
sale of certain portions of the Merchantable Timber to be harvested during the
Harvest Year for a lump sum advance payment in such amount as the parties
might agree and on such other terms as the parties might agree.
ARTICLE 7
Logging Practices, Etc.
7.1 Logging Practices in General. Potlatch shall cut all Merchantable
Timber being purchased by Potlatch hereunder in accordance with the applicable
Harvest Plan and remove all Merchantable Timber cut from the logging areas.
Potlatch agrees to cut and remove the Merchantable Timber purchased pursuant
to this Agreement in accordance with Prudent Logging Practices and to conform
in all material respects to the applicable Harvest Plan and all Applicable
Laws in conducting logging operations hereunder. All logging and transportation
contractors engaged by Potlatch shall meet such competency standards as
Potlatch and Partnership may reasonably agree from time to time.
7.2 Protection of Improvements; Boundaries; Trespass. (a) In conducting its
logging operations, Potlatch shall take reasonable precautions to avoid damage
to fences, utility poles and lines, and all other structures and improvements.
Potlatch shall, with reasonable promptness, repair any such damage at its
cost. Costs incurred in repairing such damage shall not be included in "Costs
of Log and Haul."
(b) Potlatch shall use diligent efforts to avoid the commission of any
trespass onto lands which are not part of the Timberlands, and Potlatch shall
be solely responsible for any damages arising from any trespass onto any such
lands, except that Partnership shall be responsible for any such trespass (i)
as set forth in Section 8.1(a), and (ii) to the extent resulting from
incomplete or inaccurate Site Marking. Costs incurred in repairing such damage
shall not be included in "Costs of Log and Haul."
7.3 Fire Safety; Environmental Matters. (a) In conducting its logging
operations, Potlatch shall exercise and shall cause its contractors to
exercise every reasonable precaution against fire. In the event any fire
results from Potlatch's logging operations, Potlatch shall promptly exert
every reasonable effort to suppress such fire. Costs incurred by Potlatch in
such fire suppression efforts due to fires resulting from Potlatch's
operations shall be Potlatch's sole responsibility and shall not constitute
Costs of Log and Haul.
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(b) In conducting its logging operations, Potlatch shall exercise and shall
cause its contractors to exercise every reasonable precaution against damage
to streams, lakes, riparian areas and other environmentally sensitive areas of
which it has knowledge, and shall comply in all material respects with
applicable restrictions and requirements in the applicable Harvest Plan and
with all applicable Environmental Laws. Potlatch shall be responsible for any
violations of applicable Environmental Laws to the extent resulting from the
operations of Potlatch under this Agreement. Potlatch shall remedy any damage
arising from any such violation, and shall be responsible for the costs of
such remediation in proportion to its allocable share of responsibility for
the damage. Such costs shall not be included in Costs of Log and Haul.
7.4 Post-Harvest Cleanup. When logging of a logging site has been completed,
Potlatch shall (a) remove from such logging site all equipment, supplies and
waste, and (b) take such other post-harvest actions as are customarily performed
by logging contractors in the particular Resource Region.
7.5 Responsibility for Contractors.
(a) In the event Potlatch contracts with a contractor, or a subcontractor
of any tier is engaged, to perform any portion of the logging or
transportation operations described in this Agreement as being performed by
Potlatch, it shall ensure that any such contractor or subcontractor shall be
made aware of and shall abide by all pertinent provisions of this Agreement.
(b) All obligations, duties, liabilities, and responsibilities of Potlatch
arising pursuant to the provisions of this Agreement, or otherwise in law or
in equity, shall apply with equal force to the employees, agents, contractors
or subcontractors of any tier, licensees and suppliers of Potlatch involved in
logging or transportation operations hereunder where the context permits, and
Potlatch shall be responsible and liable to Partnership for the activities of
such parties.
(c) Specific use of the terms "subcontractor," "agent," "contractor," and
the like in certain sections of this Agreement, and omissions of such terms in
other sections shall not be deemed to nullify or restrict the force and effect
of this Section only to such sections where such terms are specifically used.
Use of the term "Potlatch" in any section giving rise to duties or obligations
of Potlatch shall be deemed to include the subcontractors, agents,
contractors, employees, and licensees of Potlatch where the context permits.
7.6 Notice of Violations. If Potlatch receives any notice from any
Governmental Authority or any other Person alleging that Potlatch's logging or
transportation operations in connection with this Agreement are in violation
of any Applicable Law or that Potlatch, in conducting such operations,
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has violated any rights of such Person, and the amount of damages arising from
the alleged violation, or the cost of curing or correcting the violation, if
adversely determined, could reasonably be expected to exceed five hundred
thousand dollars ($500,000), then Potlatch shall, within ten (10) days after
receiving such notice, deliver to Partnership a notice describing the
allegation in reasonable detail. The contents of any such notice shall be kept
confidential, except to the extent disclosure is required by law.
7.7 Indemnity. Potlatch hereby agrees to indemnify, save, defend and hold
harmless Partnership and its officers, agents, contractors, subcontractors,
licensees, invitees and employees ("Partnership Indemnified Parties") from all
loss, cost, liability and expense resulting from injury to or death of any
person or persons (including, without limitation, Partnership's officers,
agents, contractors, subcontractors, licensees, invitees and employees), or
destruction of or damage to property (including, without limitation, the
property of any Partnership Indemnified Party), or any other claim of a third
party against any Partnership Indemnified Party, arising out of or connected
with, either directly or indirectly, any failure by Potlatch to perform its
obligations under this Agreement, the presence on the Timberlands of Potlatch
or any partner, officer, agent, employee, contractor, subcontractor, licensee
or invitee of Potlatch, except to the extent such injury, death, destruction,
damage or other claim is caused by the negligence or willful misconduct of any
Partnership Indemnified Party or the breach by Partnership of any of its
obligations under this Agreement or is the subject of Partnership's
indemnification obligation under Section 4.5. The obligations of Potlatch
under this Section 7.7 shall survive the expiration or termination of this
Agreement.
7.8 Partnership Inspection; Claims Relating to Damage or Incomplete
Harvest. (a) If Partnership or its representatives inspect any logging site
during logging operations, such inspection shall be conducted in a manner so
as to minimize interference with Potlatch's performance under this Agreement.
Partnership shall take all reasonable precautions to protect the safety of its
representatives and its property in connection with any such inspection.
(b) As to each Stand being harvested, Potlatch shall give Partnership
notice of the date on which Potlatch expects to complete logging operations on
such Stand not less than three (3) business days prior to such date. If, upon
Partnership's inspection of a Stand, Partnership notifies Potlatch on or prior
to such expected completion date of damage (other than ordinary wear and tear)
caused by Potlatch to the logging site, adjacent areas or logging roads,
Potlatch shall cause such damage to be repaired promptly (or, if such damage
cannot be repaired, Potlatch shall be liable for money damages, which damages
shall be in an amount reasonably determined by Partnership and shall be paid
within twenty (20) days after Partnership notifies
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Potlatch of such determination; provided that, if Potlatch reasonably disputes
such determination, such dispute shall be submitted to arbitration pursuant to
Section 13.2). If upon such inspection, Partnership notifies Potlatch on or
prior to such expected completion date that Potlatch has failed to complete
the harvest of such Stand in accordance with the Harvest Plan (e.g., failure
to cut or remove all Timber required to be harvested), Potlatch shall cure
such failure promptly. If Partnership does not notify Potlatch of any such
damage (other than damage occurring after a Partnership inspection or damage
which is obvious) or any such incomplete harvest prior to such expected
completion date, Potlatch shall have no obligation to repair any damage or
cure any failure to complete the harvest, and Partnership hereby waives any
claim for such damage (other than damage occurring after the Partnership
inspection or damage which is obvious) or failure unless notice thereof is
given prior to completion of logging operations. Potlatch shall cause to be
promptly repaired any such damage occurring after a Partnership inspection.
(c) Partnership shall have the right, by notice to Potlatch, to suspend
logging operations on a logging site at any time that Partnership reasonably
determines that, due to wet or muddy conditions at the logging site, harvest
operations would cause excessive rutting or other damage to the land. Such
suspension shall continue until such conditions cease to exist, as reasonably
determined by Partnership. In the event of such a suspension, the provisions
of Section 5.5(b) shall apply. If, due to wet or muddy conditions at any
logging site, it could reasonably be expected that harvest operations would
cause excessive rutting or other damage to the land, then Potlatch may request
a Partnership inspection. If, upon such request, Partnership either agrees
that logging operations may proceed or fails to respond to such request by
inspecting the site within three (3) business days after such request, then
notwithstanding the provisions of Section 7.8(b), Potlatch shall have no
obligation to repair any damage attributable to such wet or muddy conditions,
and Partnership hereby waives any claim for such damage.
ARTICLE 8
Title Matters
8.1 Partnership's Title to Timberlands. (a) Partnership hereby represents
and warrants that, except as provided in the following sentence, Partnership
is, and covenants that (except as otherwise provided herein) it will
throughout the Term remain, the owner of fee title to all of the Timberlands
(or, as to the Leasehold Lands, the owner of leasehold title) and will defend
the same and the validity and priority of Potlatch's rights under this
Agreement against the lawful claims of all Persons whomsoever; and Partnership
further represents and warrants that, except as provided in the following
sentence, the
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Timberlands are, and covenants that the Timberlands will throughout the Term
remain, free and clear of all liens and encumbrances of any kind, nature or
description, which could reasonably be expected, individually or in the
aggregate, to materially impair the rights of Potlatch under this Agreement or
materially reduce the value of Potlatch's interests under this Agreement.
Notwithstanding the preceding sentence, Partnership shall not be liable for
any failure of Partnership to hold title or any defect in title to the extent
such failure or defect would constitute a breach of the warranties of title by
Potlatch to Partnership given in connection with Potlatch's conveyance of the
Former Potlatch Lands to Partnership. Potlatch shall have no claim for breach
of Partnership's representations and warranties in this Section 8.1(a) unless
such breach results, directly or indirectly, in a claim by a third party
against Potlatch for, or in the nature of, trespass to timber.
(b) Partnership shall neither voluntarily nor involuntarily permit the
Former Potlatch Lands or any part thereof to become subject to any lien,
mortgage, security interest or monetary encumbrance of any kind whatsoever
(except (i) those which Potlatch determines, in its reasonable judgment, are
immaterial, and (ii) those which arise through the conduct of Potlatch),
without the prior written consent of Potlatch, and the imposition of any such
lien, mortgage, security interest or encumbrance shall constitute a
Partnership Event of Default. If any such lien, mortgage, security interest or
encumbrance is not released or reconveyed within twenty (20) days after notice
to Partnership, then Potlatch shall have the right, in addition to any other
rights and remedies Potlatch may have, at its sole option to pay to the holder
of such lien, mortgage, security interest or encumbrance the principal amount
thereof and all interest accrued and unpaid thereon (together with any other
amounts necessary to obtain a release or reconveyance of such lien, mortgage,
security interest or encumbrance), whereupon Partnership shall immediately pay
Potlatch the amount Potlatch shall have paid to such holder, together with
interest thereon at the Default Rate. Notwithstanding the foregoing, as to any
mechanics' or materialmen's lien or other involuntary lien, Partnership's
obligations under this Section 8.1(b) shall be suspended so long as (i)
Partnership is reasonably and in good faith contesting the amount or validity
of such lien by appropriate proceedings, and (ii) Partnership shall take all
actions necessary (including payment of or bonding against such lien) to avoid
a foreclosure of any such lien.
(c) Partnership shall have the right to grant easements, rights of way,
licenses or other limited use rights to third parties (e.g., for grazing,
hunting or recreational use of the Timberlands) only so long as (i) no such
grant and no such use shall cause material diminution in the value of or
material damage to the Timberlands or materially interfere with Potlatch's
operations on the Timberlands, and (ii) any such easement, rights of way,
license or other right (other than
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utility easements) shall be made expressly subject and subordinate to
Potlatch's rights under this Agreement.
8.2 Potlatch's Title to Growing Timber. From and after the Commencement
Date and during the entire Term, Potlatch shall have, as to all of the Timber
growing on the Timberlands from time to time, the rights to purchase such
Timber as provided in this Agreement. Potlatch's interest in the Timberlands
shall be, and Partnership hereby grants to Potlatch and its successors and
assigns, an exclusive and irrevocable profit a prendre with respect to all
growing Timber on the Timberlands, which interest shall endure for the entire
Term. The interest hereby granted shall run with the land and be binding upon
the successors and assigns of Partnership. Potlatch shall have no leasehold
estate or possessory interest in the Timberlands, and the Partnership shall
retain possession and control of the Timberlands to the extent consistent with
this Agreement. On or before the Commencement Date, Potlatch and Partnership
shall execute, acknowledge and deliver counterparts of a Memorandum of Agreement
in the form of Exhibit G attached hereto (a "Memorandum of Agreement") which
shall be recorded in the official real property records of each county or
other recording jurisdiction wherein any portion of the Timberlands is located.
8.3 Security Agreement. (a) In order to secure the performance of
Partnership's obligations to sell Merchantable Timber to Potlatch under this
Agreement, Partnership hereby grants, transfers, warrants, conveys, assigns
and mortgages to Potlatch, and grants to Potlatch a first priority security
interest in, all of the Timber from time to time located on the Timberlands and
all present and future proceeds and products of, increases, replacements and
accessions to, and documents covering or received by Partnership on account of
any such property (collectively, the "Collateral"), all for the benefit and
security of Potlatch. The grant of Collateral to Potlatch hereunder is as
security only and shall not subject Potlatch to, or transfer or in any way
affect or modify, any obligation or liability of Partnership relating to the
Collateral. The security interest granted pursuant to this Section 8.3 shall
not secure any monetary obligations of Partnership, but only the obligation to
sell Merchantable Timber in accordance with this Agreement.
(b) Partnership (i) shall do, execute, acknowledge and deliver all and
every such further acts, supplemental agreements, assignments, instruments,
notices of assignments, financing statements, continuation statements,
transfers, assurances and other instruments, documents, writings and
agreements (herein collectively called "Other Assurances") as Potlatch may from
time to time reasonably deem necessary or advisable, for the better assuring,
conveying, assigning, transferring, hypothecating, pledging and confirming unto
Potlatch the Collateral and rights hereby granted, conveyed or assigned, or
which Partnership may be or may hereafter become
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bound to convey or assign to Potlatch, or for carrying out the intention of or
facilitating the performance of the terms of this Section 8.3, or for filing,
registering or recording the security interest hereby granted or subjecting
any portion of the Collateral to the lien and security interest hereof with
the priority required therefor hereunder; and (ii) upon request, shall
execute, deliver or file, and hereby authorizes Potlatch to execute, deliver or
file one or more Other Assurances, and hereby irrevocably appoints Potlatch to
be its attorney for and in its name and on its behalf for such purposes, and
generally to use its name in the exercise of all or any of the powers hereby
conferred on Potlatch with full power of substitution. The power and authority
hereby given and granted by Partnership to Potlatch shall be deemed coupled with
an interest and shall not be revocable by Partnership.
(c) Without the prior written consent of Potlatch, Partnership shall not
file or authorize or permit to be filed in any jurisdiction any financing
statement or like instrument covering or relating to any Collateral in which
Potlatch is not named as the secured party.
(d) Partnership shall not change the location of its chief executive office
unless Partnership, at least 30 days prior to such change, notifies Potlatch
of such change and takes all action necessary or that Potlatch may reasonably
request to preserve, perfect, confirm and protect Potlatch's liens and
security interests in the Collateral.
(e) Upon the occurrence of an Event of Default, in addition to, and not by
way of limitation of, any right which Potlatch may have hereunder, or under
applicable law or otherwise, Potlatch shall have all of the remedies of a
secured party under the Uniform Commercial Code, as in effect from time to
time in the State of Arkansas.
8.4 Title and Risk of Loss to Cut Timber. Title to all Timber included in
this Agreement remains in Partnership (i) until it has been felled in the case
of standing Timber, or (ii) in the case of down or wind thrown Timber until it
has been bucked. All risk of loss to felled Timber or down Timber bucked by
Potlatch pursuant to the terms of this Agreement shall be borne by Potlatch
and Potlatch shall not be entitled to any scale adjustment when such Timber is
scaled, by reason of decay, insect infestation, fire or other loss or damage
which occurs and affects such Timber after it has been felled in the case of
standing Timber, or bucked in the case of down or wind thrown Timber.
8.5 Grant of Access Rights. During the entire Term, Partnership shall
provide, and hereby grants to, Potlatch and its officers, agents, employees,
contractors, subcontractors and consultants full and free access at all times
to the Timberlands and the nonexclusive right to use all roads, river
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transportation sites and other means of ingress to and egress from the
Timberlands (subject to any applicable limitations under any easements or
other access agreements and subject to such access restrictions as may be
reasonably necessary to address environmental concerns) to the extent such
access is reasonably necessary or helpful in connection with Potlatch's rights
and obligations under this Agreement. Without limiting the generality of the
foregoing, Partnership hereby assigns to Potlatch (subject to any express
restrictions on such assignment) the nonexclusive right to use any easement,
right of way, license or permit for access heretofore or hereafter granted to
Partnership ("Access Rights") by any Person to the extent necessary or useful
to Potlatch in connection with this Agreement. To the extent such assignment
of any Access Right requires the consent or approval of the grantor of such
Access Right, Partnership shall use diligent efforts to obtain such consent
and deliver the same to Potlatch. At Potlatch's request, Partnership shall
(subject to the limitations described above) execute and deliver to Potlatch a
separate assignment of any Access Right, in such form as Potlatch may reasonably
request.
8.6 Potlatch to Permit No Liens. Potlatch shall not permit or suffer any
lien or liens to be enforced on or against the Timberlands, or any of the
improvements thereon or any Timber thereon, for work, labor, materials,
supplies or equipment furnished by or at the request of Potlatch, and Potlatch
shall hold Partnership harmless against and defend Partnership against any and
all such liens. If Potlatch fails to remove or bond against any such lien
within twenty (20) days after written notice thereof to Potlatch, Partnership
shall have the right, but shall have no obligation, to pay any amount required
to release and discharge any such lien or liens, or to defend any action
brought thereon, and to pay any judgment entered therein, and Potlatch shall
be liable to Partnership for all reasonable costs (including reasonable
attorneys fees) incurred by Partnership or for the payment of any of said
liens or any judgments obtained thereon, plus interest thereon at the Default
Rate; provided, however, that Potlatch's obligations under this Section 8.6
shall be suspended so long as (i) Potlatch is reasonably and in good faith
contesting the amount or validity of such lien by appropriate proceedings, and
(ii) Potlatch shall take all actions necessary (including payment of or
bonding against such lien) to avoid a foreclosure of any such lien.
ARTICLE 9
Disposition of Timberlands and
Acquisition of Additional Timberlands
9.1 No Transfer of Former Potlatch Lands Without Potlatch Consent;
Exceptions. (a) Except as set forth in Section 9.1(b) hereof, without the
prior written consent of Potlatch (which
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consent Potlatch may grant or withhold in its sole discretion), Partnership
shall not sell, transfer, assign or convey the Former Potlatch Lands, whether
voluntarily or by operation of law (but a transfer of partnership interests,
or other direct or indirect ownership interests, in Partnership shall not
constitute a "transfer by operation of law"). Any such sale, transfer,
assignment or conveyance of all or any portion of the Former Potlatch Lands,
whether voluntarily or by operation of law, without the prior written consent
of Potlatch shall constitute a Partnership Event of Default. Notwithstanding
anything contained herein to the contrary, Partnership hereby waives any right
it now has or may hereafter have to require Potlatch to prove an impairment of
its rights or any damages as a condition to enforcing Partnership's covenants
under this Section 9.1.
(b) Partnership shall have the right, from time to time, to transfer a
parcel or parcels of the Former Potlatch Lands, only upon and subject to the
terms and conditions of this Section 9.1(b). Partnership may sell, from time
to time, a parcel of the Former Potlatch Lands (a "Sale Parcel"), provided
that each of the following conditions is satisfied: (i) no Sale Parcel shall
be included in the Timberlands to be harvested pursuant to the two-year
Harvest Plan then in effect; (ii) Potlatch receives prior written notice of
such proposed transfer and copies of all transfer and other related documents;
(iii) the aggregate acreage of all Sale Parcels transferred in any calendar
year shall be less than five thousand (5,000) acres; and (iv) the aggregate
acreage of all Sale Parcels transferred in any period of twenty (20) consecutive
calendar years shall be less than the sum of (A) twenty thousand (20,000) acres,
plus (B) such acreage as contains not more than the Net Volume Increase. In
addition to parcels sold in accordance with the preceding sentence,
Partnership may transfer, from time to time, in connection with an Exchange (as
defined below) a parcel of the Former Potlatch Lands (an "Exchange Parcel"),
provided that each of the following conditions is satisfied: (i) no Sale
Parcel shall be included in the Timberlands to be harvested pursuant to the
two-year Harvest Plan then in effect; (ii) Potlatch receives prior written
notice of such Exchange and copies of all transfer and other related
documents; (iii) in connection with such transfer, a parcel or parcels of
Additional Timberlands in the same Resource Region as the Exchange Parcel (a
"Substitute Parcel") is acquired by Partnership in an exchange pursuant to
section 1031 of the Internal Revenue Code of 1986, as amended (an "Exchange"),
which Substitute Parcel is, in Potlatch's reasonable judgment, reasonably
equivalent to or better than the Exchange Parcel being transferred in volume
and species of Merchantable Timber, proximity to a Potlatch Conversion
Facility and other factors relevant to the desirability of such Substitute
Parcel; (iv) upon Partnership's acquisition of the Substitute Parcel, it shall
become a part of the Timberlands and shall become subject to this Agreement in
accordance with Section 9.4 (and the Substitute Parcel shall be
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deemed to be part of the Former Potlatch Lands for purposes of this Section
9.1); and (v) the aggregate acreage of all Exchange Parcels transferred
pursuant to this Section 9.1(b) in any calendar year shall be less than ten
thousand (10,000) acres. Any sale or transfer of any portion of the Former
Potlatch lands which does not comply with the foregoing terms and conditions
shall constitute a Partnership Event of Default. In the event of a transfer
permitted under this Section 9.1(b), Potlatch shall release the Sale Parcel or
Exchange Parcel being transferred in accordance with Section 9.5.
9.2 Transferred Timberlands Remain Subject to this Agreement. (a) As to any
transfer of a portion of the Timberlands (other than a transfer permitted
under Section 9.1(b)): (a) Potlatch must receive, for its review and approval,
copies of all transfer documents, (b) except as otherwise provided in Section
9.2(b), either the transferred property shall remain subject to this Agreement
in all respects or the transferee must be approved by Potlatch and must enter
into a written undertaking, in form and substance satisfactory to Potlatch,
whereunder the transferee agrees to manage the transferred property and make
the Timber thereon available to Potlatch, and (c) Partnership must pay all
reasonable costs and expenses in connection with such transfer including,
without limitation, all fees and expenses incurred by Potlatch. Except as
otherwise provided in Section 9.2(b), in the event the ownership of the
Timberlands, or any part thereof, shall become vested in a Person other than
Partnership, whether with or without the prior written consent of Potlatch,
Potlatch may, without notice to Partnership, deal with such successor or
successors in interest with reference to the Timberlands or such portion
thereof and this Agreement in the same manner and to the same extent as with
Partnership without in any way vitiating or discharging Partnership's liability
hereunder. Except as otherwise provided in Sections 9.1(b) or 9.2(b), no sale,
transfer or conveyance of the Timberlands or any portion thereof shall operate
to release, discharge, modify, change, or affect the original liability of
Partnership hereunder, either in whole or in part, nor to impair Potlatch's
right, title and interest in and to this Agreement or the Timberlands unless
expressly set forth in writing executed by Potlatch.
(b) Partnership shall have the right, from time to time, to require
Potlatch to release, in accordance with Section 9.5, a parcel or parcels of
the Former ATCO Lands specified in a written notice to Potlatch (an "ATCO
Parcel Release Request") which parcel or parcels the Partnership has sold or
transferred, or proposes to sell or transfer (an "ATCO Release Parcel"),
provided that each of the following conditions is satisfied: (i) no ATCO
Release Parcel shall be included in the Timberlands to be harvested pursuant to
the two-year Harvest Plan then in effect; (ii) Potlatch shall have received
prior written notice of such proposed transfer and copies of all transfer and
other related documents; (iii) the aggregate acreage of all ATCO
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Release Parcels to be released in any calendar year shall be less than five
thousand (5,000) acres; and (iv) the aggregate acreage of all ATCO Release
Parcels released in any period of twenty (20) consecutive calendar years shall
be less than the sum of (A) twenty thousand (20,000) acres, plus (B) such
acreage as contains not more than the Net Volume Increase. In addition to
parcels released in accordance with the preceding sentence, Partnership shall
have the right, from time to time, to require Potlatch to release, in
accordance with Section 9.5, a parcel or parcels of the Former ATCO Lands
specified in an ATCO Parcel Release Request which parcel or parcels the
Partnership has transferred, or proposes to transfer in connection with an
Exchange (an "ATCO Exchange Parcel"), provided that each of the following
conditions is satisfied: (i) no ATCO Exchange Parcel shall be included in the
Timberlands to be harvested pursuant to the two-year Harvest Plan then in
effect; (ii) Potlatch shall have received prior written notice of such
Exchange and copies of all transfer and other related documents; (iii) in
connection with such transfer, a Substitute Parcel or Parcels in same Resource
Region as the ATCO Exchange Parcel s acquired by Partnership in an Exchange,
which Substitute Parcel is, in Potlatch's reasonable judgment, reasonably
equivalent to or better than the ATCO Exchange Parcel being transferred in
volume and species of Merchantable Timber, proximity to a Potlatch Conversion
Facility and other factors relevant to the desirability of such Substitute
Parcel; (iii) upon Partnership's acquisition of the Substitute Parcel, it shall
become a part of the Timberlands and shall become subject to this Agreement in
accordance with Section 9.4 (and the Substitute Parcel shall be deemed to be
part of the Former ATCO Lands for purposes of this Section 9.2); and (iv) the
aggregate acreage of all Exchange Parcels transferred pursuant to this Section
9.2(b) in any calendar year shall be less than ten thousand (10,000) acres. In
the event of an ATCO Parcel Release Request and satisfaction of the conditions
set forth in this Section 9.2(b), Potlatch shall release the specified ATCO
Release Parcel or ATCO Exchange Parcel in accordance with Section 9.5,
effective upon Partnership's sale or transfer thereof.
9.3 Potlatch's Right to Timber on Additional Lands. (a) In the event that
Partnership proposes to acquire fee or leasehold title to any Timber-producing
property and Potlatch has the right pursuant to section 3 of the Opportunities
Agreement to cause such property to be added to the Timberlands (a "Potential
Addition"), Partnership shall give notice to Potlatch (a "Potential Addition
Notice") setting forth a general description of the Potential Addition
(acreage, location(s), degree of stocking, character of Timber) and offering
Potlatch the right to cause the Potential Addition to be added to the
Timberlands. Potlatch shall use reasonable efforts to determine promptly
whether Potlatch is interested in pursuing its rights under this Section 9.3 as
to any Potential Addition, and shall promptly inform Partnership, by written
notice, of any determination that Potlatch is not so interested. Unless
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Potlatch shall have delivered a notice in accordance with the preceding
sentence, Potlatch may, at any time within thirty (30) days after delivery of
the Potential Addition Notice, request additional information regarding the
Potential Addition or access to inspect the Potential Addition. At any time
prior to the later of (i) thirty (30) days after the date on which Partnership
shall have provided to Potlatch all requested information reasonably available
respecting the Potential Addition, or (ii) thirty (30) days after the date on
which Potlatch shall have been afforded reasonable access to inspect the
Potential Addition, or (iii) the date sixty (60) days after delivery of the
Potential Addition Notice if Potlatch shall have requested no additional
information or access (the "Timber Addition Deadline"), Potlatch shall have
the right, by giving notice to Partnership (a "Timber Addition Notice"), to
have all or any geographic part of the Potential Addition added to the
Timberlands if and when Partnership acquires the Potential Addition. Upon
Potlatch's timely delivery of a Timber Addition Notice, the Potential
Addition, or the portion thereof designated in the Timber Addition Notice,
shall be added to the Timberlands if and when Partnership acquires the Potential
Addition. If Potlatch does not timely deliver a Timber Addition Notice, then
Potlatch shall have no right to have the Potential Addition added to the
Timberlands. Until the Timber Addition Deadline or Potlatch's earlier notice
declining to have the Potential Addition added to the Timberlands, Partnership
shall not grant (or permit the reservation of) any rights respecting the
Potential Addition which would be inconsistent with Potlatch's rights which
would arise upon delivery of the Timber Addition Notice.
9.4 Additional Timberlands. (a) Immediately upon Partnership's acquisition
of any property as to which Potlatch has exercised its right to have such
property added to the Timberlands (or, if such exercise occurs after such
acquisition, then immediately upon such exercise), such property shall become
part of the Timberlands and shall be subject to all of the applicable terms
and provisions of this Agreement. The parties may, but shall not be required
to, modify the Management Plan or the Harvest Plan for the year in which the
property becomes Additional Timberlands to reflect the addition thereof. In
any event, Management Plans and Harvest Plans for subsequent years shall
include the Additional Timberlands.
(b) Promptly after any property becomes Additional Timberlands, Potlatch
and Partnership shall execute, acknowledge and deliver counterparts of a
Memorandum of Agreement with respect to the Additional Timberlands which shall
be recorded in the official real property records of each county or other
recording jurisdiction wherein any portion of the Additional Timberlands is
located.
(c) Commencing within sixty (60) days after any property becomes Additional
Timberlands, Potlatch and Partnership shall
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negotiate, with diligence and in good faith, appropriate modifications to this
Agreement (if any) which are reasonably necessary to reflect the addition of
such Additional Timberlands. By way of example, such modifications may be
required to supplement the provisions of this Agreement regarding logging
practices, scaling procedures or timberland management requirements if the
Additional Timberlands are in a new Resource Region or include a new species
of Timber.
9.5 Release of Timberlands. In the event that any portion of the Timberlands
ceases to be subject to this Agreement or is required to be released from this
Agreement, either pursuant to Sections 9.1(b), 9.2(b), 9.6(a) or 15.1 or
pursuant to Potlatch's voluntary agreement ("Released Timberlands"), Potlatch
shall at Partnership's request execute and deliver such documents and
instruments as may reasonably be required to evidence the termination or
release of Potlatch's rights respecting such Released Timberlands under this
Agreement.
9.6 Protection of Lenders. (a) Promptly upon the request of any Major
Lender, Potlatch shall enter into an agreement (a "Lender Protection
Agreement") with such Major Lender, in such form as Potlatch and such Major
Lender may agree, whereunder the parties agree that: (i) notwithstanding any
contrary provision of this Agreement (including Section 9.1), at any time during
a Default Period, any Timberlands may be sold or transferred (including
through foreclosure of a mortgage or judgment lien) without Potlatch's consent,
upon not less than thirty (30) days' notice to Potlatch; (ii) notwithstanding
any contrary provision of this Agreement (including Section 9.2), if, during
any Default Period, any of the Timberlands are sold or transferred ("Default
Sale Timberlands"), then at the option of the Major Lender or the purchaser or
transferee, exercised by written notice ("Release Notice") to Potlatch
delivered prior to or within thirty (30) days after the sale or transfer, the
Default Sale Timberlands shall cease to be subject to this Agreement, and
Potlatch's rights under this Agreement with respect to such Default Sale
Timberlands shall terminate, effective sixty (60) days after delivery of the
Release Notice; and, promptly upon delivery of a Release Notice, Potlatch
shall comply with the requirements of Section 9.5 to evidence the release of
such Default Sale Timberlands; (iii) Potlatch's security interest pursuant to
Section 8.3 with respect to the Timber on any Default Sale Timberlands shall
be subordinate to the rights of the Major Lender or any purchaser or
transferee pursuant to clause (ii) above; (iv) the Major Lender shall deliver
to Potlatch, simultaneously with delivery to Partnership, any notice demanding
performance of any obligation set forth in, or asserting a default by
Partnership under, any document or instrument evidencing or pertaining to the
indebtedness of Partnership to such Major Lender ("Loan Documents"); and
Potlatch shall have the right, but not the obligation, to perform such
obligation or cure such asserted default on behalf of Partnership; and the
Major Lender shall accept such
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performance or cure as if performed by Partnership; and (v) at any time during
a Default Period, Potlatch shall have the right, on not less than fifteen (15)
days' notice to the Major Lender, to purchase from the Major Lender, and the
Major Lender shall sell to Potlatch, all of Major Lender's right, title and
interest in, to and under the Loan Documents and the indebtedness evidenced
thereby, for a price equal to the total sum owed by Partnership to the Major
Lender under the Loan Documents, including all outstanding principal, accrued
and unpaid interest and other fees or costs owing.
(b) At the request of Potlatch or the Major Lender, Partnership shall join
as a party to any Lender Protection Agreement.
(c) Partnership and Potlatch agree that the provisions of this Section 9.6
shall not be amended or modified in any material respect, without the written
approval of any Major Lender then in existence.
ARTICLE 10
Insurance
10.1 Potlatch Insurance. Potlatch agrees to carry and maintain at all times
during the term of this Agreement:
(a) a policy or policies of commercial general liability insurance
with limits of not less than $5,000,000 protecting Potlatch and
Partnership against sums payable as damages because of personal injuries
or property damage, including the loss of the use thereof, arising out of
an occurrence directly connected with the logging operations herein
described or other operations of Potlatch, its employees, agents,
contractors, subcontractors, licensees, invitees or business visitors
incidental to such logging and other operations; provided that Potlatch
shall not be required to insure against damage to or destruction of
standing Timber or felled or bucked Timber.
(b) a policy of insurance covering automobile, bodily injury
liability, and property damage on its automobiles with coverage for death
or injury to persons and property damage and a limit of not less than
$3,000,000. (The word "automobile" shall mean any land motor vehicle,
trailer or semitrailer used for transporting logs, goods or passengers.)
(c) Workers' Compensation Insurance in compliance with the laws of the
respective States in which the subject Timberlands are located.
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10.2 Potlatch Contractors. During the term of this Agreement, Potlatch
shall assure that any contractor (of any tier) or agent employed by Potlatch
to perform any of the work described herein shall be covered by insurance with
such coverages as Potlatch and the Partnership shall, from time to time,
reasonably agree are customary for such contractors.
10.3 Policy Terms of Potlatch Insurance. Any insurance carried by Potlatch
hereunder shall be written by licensed insurance companies with a Best's
Rating of A-VII or better. Each policy shall be endorsed to provide that:
(a) With the exception of workers' compensation coverage, Partnership
shall be an additional insured with the understanding that any obligation
imposed upon Potlatch (including, without limitation, the liability to pay
premiums) shall be the sole obligation of Potlatch and not that of
Partnership;
(b) The insurer thereunder waives all rights of subrogation against
Partnership, any right of set off and counterclaim and any other right to
deduction whether by attachment or otherwise;
(c) Such insurance shall be primary without right of contribution of
any other insurance carried by Partnership with respect to its interests
as such in the Timberland;
(d) If such insurance is cancelled for any reason whatsoever,
including nonpayment of premium, or any substantial change is made in the
coverage which affects the interests of Partnership, such cancellation or
change shall not be effective as to Partnership for thirty (30) days after
receipt by Partnership of written notice sent by registered mail from each
insurer of such cancellation or change; and
(e) Any liability insurance policy shall be endorsed to provide
that, inasmuch as the policy is written to cover more than one (1)
insured, all terms, conditions, insuring agreements and endorsements, with
the exception of limits of liability shall operate in the same manner as
if there were a separate policy covering such insured.
Potlatch shall provide Partnership with certificates evidencing the insurance
carried by Potlatch hereunder at reasonable intervals as requested by
Partnership.
10.4 Partnership Insurance. Partnership agrees to carry and maintain at all
times during the term of this Agreement:
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(a) a policy or policies of commercial general liability insurance
with limits of not less than $5,000,000 protecting Partnership and
Potlatch against sums payable as damages because of personal injury or
property damage, including the loss of the use thereof, arising out of an
occurrence directly connected with the operations herein described or
other operations of Partnership, its employees, agents, contractors,
subcontractors, licensees, invitees or business visitors incidental to
such operations; provided that Partnership shall not be required to insure
against damage to or destruction of standing Timber or felled or bucked
Timber.
(b) a policy of insurance covering automobile, bodily injury
liability, and property damage on its automobiles with coverage for death
or injury to persons and property damage and a limit of not less than
$3,000,000. (The word "automobile" shall mean any land motor vehicle,
trailer or semitrailer used for transporting logs, goods or passengers.)
(c) Workers' Compensation Insurance in compliance with the laws of
the respective States in which the Timberlands are located.
10.5 Partnership Contractors. During the term of this Agreement, Partnership
shall assure that any contractor (of any tier) or agent employed by
Partnership to perform any of the work described herein shall be covered by
insurance with such coverages as Potlatch and the Partnership shall, from time
to time, reasonably agree are customary for such contractors. 10.6 Policy
Terms of Partnership Insurance. Any insurance carried by Partnership hereunder
shall be written by licensed insurance companies with a Best's Rating of A-VII
or better. Each policy shall be endorsed to provide that:
(a) With the exception of workers' compensation coverage, Potlatch
shall be an additional insured with the understanding that any obligation
imposed upon Partnership (including, without limitation, the liability to
pay premiums) shall be the sole obligation of Partnership and not that of
Potlatch;
(b) The insurer thereunder waives all rights of subrogation against
Potlatch, any right of set off and counterclaim and any other right to
deduction whether by attachment or otherwise;
(c) Such insurance shall be primary without right of contribution of
any other insurance carried by Potlatch with respect to its interests as
such in the Timberlands;
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(d) If such insurance is cancelled for any reason whatsoever,
including nonpayment of premium, or any substantial change is made in the
coverage which affects the interests of Potlatch, such cancellation or
change shall not be effective as to Potlatch for thirty (30) days after
receipt by Potlatch of written notice sent by registered mail from each
insurer of such cancellation or change; and
(e) Any liability insurance policy shall be endorsed to provide
that, inasmuch as the policy is written to cover more than one (1)
insured, all terms, conditions, insuring agreements and endorsements, with
the exception of limits of liability shall operate in the same manner as
if there were a separate policy covering such insured.
Partnership shall provide Potlatch with certificates evidencing the insurance
carried by Partnership hereunder at reasonable intervals as requested by
Potlatch.
10.7 Claims. With regard to any claim under the policies of insura nce
carried by either party, the party responsible for carrying such insurance
under this Article 10 shall be responsible for adjusting claims under such
policy.
ARTICLE 11
Suspension of Performance for Force Majeure
11.1 Suspension of Obligations. Any obligations, covenants or conditions
imposed upon either party under this Agreement shall (subject to the terms of
Section 5.5(b)) be suspended while and to the extent that compliance or
performance by such party (the "Excused Party") is substantially impaired or
prevented, directly or indirectly, by any one or more of the following: fires,
drought, infestation, pestilence, disease, floods and the elements, earth
movement, accidents, riots, wars, delays in transportation, interference by
government action, changes in Applicable Laws, strikes, lock-outs, picketing
or other form of labor trouble (whether or not participated in by the
employees of the Excused Party or arising from a dispute with or unfair labor
practices charged against the Excused Party) or any other causes beyond the
reasonable control of the Excused Party, whether similar or dissimilar to the
causes specifically mentioned (each a "Force Majeure"). Unless a Force Majeure
permanently renders performance of an obligation impossible or impracticable,
such Force Majeure shall only suspend the time for performance of, and shall
not discharge or release, any obligation.
11.2 Extension of Time. Within ten (10) days after commencement (or
discovery) of any Force Majeure, the Excused Party shall forward written
notice thereof to the other party
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and thereupon all time periods set forth in this Agreement or any plan
prepared pursuant to this Agreement for performance of an obligation shall be
extended for a period equal to each period of suspension during which the
Excused Party is prevented from performing its obligations under this Agreement
by reason of the Force Majeure. Upon discontinuance or termination of the any
Force Majeure, the Excused Party shall resume within a reasonable time and
prosecute with due diligence the obligations so suspended and endeavor to
complete the performance of such obligation with reasonable promptness.
11.3 Force Majeure Peculiar to Potlatch. In the event that a Force Majeure
renders it impossible or impracticable for Potlatch to harvest Merchantable
Timber in accordance with this Agreement for a continuous period in excess of
one hundred twenty (120) days, and such Force Majeure would not render it
impossible or impracticable for another Person to harvest such Merchantable
Timber, then Partnership shall have the right to sell to another Person or
otherwise dispose of Merchantable Timber designated for harvesting pursuant to
the Harvest Plan then in effect, provided that Partnership shall not sell or
dispose of a volume of Merchantable Timber in excess of the percentage of the
Merchantable Timber designated for the then current Harvest Year in the
Harvest Plan which is equal to the percentage of the relevant Harvest Year
during which Potlatch was subject to such Force Majeure.
ARTICLE 12
Default; Remedies
12.1 Potlatch Default. Each of the following events (each a "Potlatch Event
of Default") shall constitute an event of default by Potlatch hereunder:
(a) Potlatch fails to pay Partnership any amount owed hereunder within ten
(10) business days after receipt of written notice from Partnership that such
amount is due;
(b) Potlatch fails to perform or comply with any other material obligation
of Potlatch under this Agreement and fails to remedy such default within
thirty (30) days after receipt of written notice from Partnership to do so
(or, where the default cannot be cured by the payment of money and cannot be
completely remedied within said thirty (30) days, Potlatch fails to commence to
remedy such default within that period or fails after commencement to prosecute
the remedying thereof with reasonable diligence or complete the remedying
thereof within a reasonable time); and
(c) Potlatch is dissolved or liquidated without this Agreement being or
having been assigned to a Corporate Successor in accordance with Section 14.2.
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12.2 Partnership Default. Each of the following events (each a "Partnership
Event of Default") shall constitute an event of default by Partnership
hereunder:
(a) Partnership fails to pay Potlatch any amount owed hereunder within ten
(10) business days after receipt of written notice from Potlatch that such
amount is due;
(b) the occurrence of a Partnership Event of Default described in Section
9.1 with respect to a material portion of the Former Potlatch Lands;
(c) Partnership fails to perform or comply with any other material
obligation of Partnership under this Agreement and fails to remedy such
default within thirty (30) days after receipt of written notice from Potlatch
to do so (or, where the default cannot be cured by the payment of money and
cannot be completely remedied within said thirty (30) days, Partnership fails to
commence to remedy such default within that period or fails after commencement
to prosecute the remedying thereof with reasonable diligence or complete the
remedying thereof within a reasonable time); and
(d) Partnership is dissolved or liquidated without this Agreement being or
having been assigned to a Corporate Successor in accordance with Section 14.2.
12.3 Remedies. Upon the occurrence of an Event of Default by either party
hereto, or in the event either party fails to perform any obligation or
observe any of the terms or provisions of this Agreement and such failure
causes damage to the other party (irrespective of the cure periods set forth in
Sections 12.1 and 12.2), the non-defaulting party shall, subject to Section
12.4, have the right to pursue all remedies available to such party at law or
in equity in connection with such Event of Default, including the right:
(a) to money damages in the amount necessary to compensate the
non-defaulting party for all reasonably foreseeable losses and costs caused
by the Event of Default or failure to perform, together with interest on
any award of money damages from the date of the Event of Default or failure
to perform until paid at the Default Rate; and
(b) to injunctive or other equitable relief, including the right to
specific enforcement of the defaulting party's obligations (the parties
each acknowledging that money damages may be an inadequate remedy for a
default under this Agreement).
12.4 Limited Right To Rescind or Terminate. (a) Notwithstanding anything to
the contrary in this Agreement, except as otherwise expressly provided in
Section 12.4(b), this Agreement
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may not be rescinded or terminated at any time prior to the Expiration Date by
either party, by any other Person or by operation of law, notwithstanding the
occurrence of an Event of Default or any other occurrence, condition or event.
Potlatch and Partnership intend that neither party shall have any right to
rescind or terminate this Agreement or the obligations of the parties
hereunder, except as expressly provided in Section 12.4(b).
(b) This Agreement may be terminated:
(i) by Potlatch (A) upon the occurrence of a Partnership Event of
Default described in Section 12.2(b) or Section 12.2(d), or (B) if
Partnership, willfully and without reasonable justification, repudiates
this Agreement or fails continuously for a period in excess of ninety (90)
days to substantially perform its material obligations under this
Agreement; or
(ii) by Partnership (A) upon the occurrence of a Potlatch Event of
Default described in Section 12.1(c), or (B) if Potlatch, willfully and
without reasonable justification, repudiates this Agreement or fails
continuously for a period in excess of ninety (90) days to substantially
perform its material obligations under this Agreement.
12.5 Right of Other Party To Perform. If either party (a "defaulting
party") fails to perform any covenant or obligation hereunder on its part to
be performed, and such failure shall continue for ten (10) days (or such
shorter period as may be reasonable under emergency circumstances) after
written notice thereof by the other party (a "non-defaulting party"), the non-
defaulting party may, without waiving or releasing the defaulting party from any
obligation hereunder, perform any such covenant or obligation required to be
performed by the defaulting party, but the non-defaulting party shall not be
obligated to do so. All amounts incurred by the non-defaulting party and all
necessary costs of such performance incurred by the non-defaulting party,
together with interest thereon at the Default Rate from the date of such
payment or performance by the non-defaulting party, shall be paid (and the
defaulting party covenants to make such payment) to the non-defaulting party
on demand.
ARTICLE 13
Resolution of Disputes
13.1 Determinations by Consulting Forester.
(a) Any dispute or controversy which this Agreement provides is to be
determined by the Consulting Forester shall be
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resolved, and any other dispute or controversy arising under this Agreement
may by agreement of the parties be resolved, by the Consulting Forester in
accordance with this Section 13.1. Unless the parties otherwise agree, each
Consulting Forester serving pursuant to this Agreement shall have not less
than ten (10) years' experience in the forest resource management or wood
products business. The parties may, if they so agree, select more than one
Consulting Forester to serve concurrently, provided that the parties shall agree
as to the respective separate types of disputes that each such Consulting
Forester shall determine (e.g., one Consulting Forester for each Resource
Region, or one to determine price issues and another to determine other
issues).
(b) Prior to or promptly after the Commencement Date the parties
shall select by mutual agreement a person or persons to serve as Consulting
Forester. Each time a Consulting Forester is to be selected pursuant to this
Section 13.1, the parties shall use diligent efforts, in good faith, to agree
upon a Consulting Forester. The Consulting Forester shall serve for an
indefinite period, commencing upon the parties' agreement to appoint the
Consulting Forester and the Consulting Forester's agreement to serve, and ending
upon the Forester Termination Date (as defined below). Either party may elect,
at any time for any reason or none, to discontinue the appointment of a
Consulting Forester by delivering notice to the other party ("Forester
Termination Notice") specifying the date as of which such party wishes the
appointment to be terminated, provided that such date shall not be less than
sixty (60) days after such Forester Termination Notice is delivered. Promptly
after delivery of such Forester Termination Notice, the parties shall jointly
notify the Consulting Forester in writing of the termination of his or her
appointment. The parties shall use diligent efforts to reduce the likelihood
that any such termination shall influence or prejudice any decisions the
Consulting Forester may make after such notice of termination is delivered.
The Consulting Forester may, at his or her election, withdraw from service as
Consulting Forester, but shall be required to give reasonable advance notice
of any such withdrawal. The term "Forester Termination Date" shall mean the
date specified by a withdrawing Consulting Forester or the party delivering a
Forester Termination Notice as the effective date of the termination of the
Consulting Forester's services. Promptly after receiving notice of the
impending termination or withdrawal of the Consulting Forester, the parties
shall select a replacement by mutual agreement.
(c) If the parties have not selected a Consulting Forester (who has agreed
to serve) on or before the date thirty (30) days after the Commencement Date
or on or before any Forester Termination Date, then at the election of either
party, the selection of the Consulting Forester may be submitted to
arbitration pursuant to Section 13.2.
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(d) Potlatch and Partnership shall, unless they otherwise agree, enter into
a written agreement with each Consulting Forester setting forth the terms upon
which the Consulting Forester shall serve, including the scope of disputes to
be determined, the compensation to be paid for services, the terms and
conditions respecting withdrawal or termination, and such other matters as the
parties may agree. Such agreement shall require that the Consulting Forester
act in a neutral and unbiased manner and avoid any ex parte contact with
either party.
(e) Potlatch and Partnership shall be prohibited from engaging in ex parte
contact with the Consulting Forester. All determinations of the Consulting
Forester shall be rendered in writing delivered to the parties, and shall be
final, binding and non-appealable except on the grounds that: (i) the
determination is inconsistent with the express provisions of this Agreement,
or (ii) the determination was obtained by fraud or other malfeasance on the
part of a party. By entering into this Agreement, the parties undertake and
agree to act in accordance with, and fulfill the requirements of, any final
determination made by a Consulting Forester and, upon receipt of any final
determination of the Consulting Forester which is not subject to appeal pursuant
to the preceding sentence, either party (the "enforcing party") shall have the
right to require the other party to execute, through the other party's
counsel, and deliver to the enforcing party a stipulation for entry of
judgment, in such form as the enforcing party may reasonably require, for the
purpose of evidencing and giving effect to the Consulting Forester's
determination. The enforcing party shall be entitled to obtain, and obtain
entry of, a judgment based on such stipulation and to take any action as may
be required to cause the determination of the Consulting Forester to have the
effect of a duly entered order of a court of competent jurisdiction.
(f) Potlatch and Partnership may from time to time adopt by mutual
agreement rules and procedures, consistent with this Agreement, to govern the
proceedings of the Consulting Forester, including rules respecting time
schedules, presentation of evidence and relevance of specified types of
evidence. The parties and the Consulting Forester shall observe and comply
with any such rules and procedures as may be in effect at the time of the
proceedings.
(g) Potlatch and Partnership shall each bear one-half of the cost of the
Consulting Forester's services.
13.2 Arbitration. (a) ANY CLAIM, CONTROVERSY OR DISPUTE, WHETHER SOUNDING
IN CONTRACT, STATUTE, TORT, FRAUD, MISREPRESENTATION OR OTHER LEGAL THEORY,
RELATED DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, WHENEVER BROUGHT AND WHETHER
BETWEEN ANY OF THE PARTIES TO THIS AGREEMENT OR BETWEEN ANY OF THE PARTIES TO
THIS AGREEMENT AND THE EMPLOYEES, AGENTS OR
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AFFILIATED BUSINESSES OF ANY OTHER PARTY, UNLESS RESOLVED BY A CONSULTING
FORESTER IN ACCORDANCE WITH THIS AGREEMENT, SHALL BE RESOLVED BY ARBITRATION
AS PRESCRIBED IN THIS SECTION, WHETHER OR NOT SUCH CLAIM, CONTROVERSY OR
DISPUTE RELATES TO A PROVISION OF THIS AGREEMENT SPECIFICALLY REFERRING TO THIS
SECTION 13.2.
(b) UNLESS THE PARTIES OTHERWISE AGREE, A SINGLE ARBITRATOR WHO IS A
RETIRED FEDERAL OR ARKANSAS STATE COURT JUDGE SHALL CONDUCT THE ARBITRATION
UNDER THE THEN CURRENT COMMERCIAL ARBITRATION RULES OF THE AMERICAN
ARBITRATION ASSOCIATION (THE "AAA"). THE ARBITRATOR SHALL BE SELECTED BY MUTUAL
AGREEMENT OF THE PARTIES, OR IF THEY ARE UNABLE TO REACH AGREEMENT ON THE
ARBITRATOR WITHIN THIRTY (30) DAYS AFTER WRITTEN NOTICE BY ONE PARTY TO THE
OTHER(S) INVOKING THIS ARBITRATION PROVISION, IN ACCORDANCE WITH AAA
PROCEDURES FROM A LIST OF RETIRED FEDERAL OR ARKANSAS STATE COURT JUDGES
PROVIDED BY THE AAA, WHICH SHALL NOT BE LIMITED TO INDIVIDUALS WHO HAVE
EXCLUSIVE ARRANGEMENTS WITH THE AAA. THE ARBITRATION SHALL BE CONDUCTED IN THE
STATE OF ARKANSAS AND ALL EXPEDITED PROCEDURES OF THE AAA, WHETHER IN ITS
COMMERCIAL ARBITRATION RULES, RULES FOR LARGE CASES, OR OTHERWISE, SHALL BE
PERMITTED.
(c) THE ARBITRATOR SHALL HAVE AUTHORITY TO TAKE INTO ACCOUNT INDUSTRY
CUSTOM AND PRACTICE, SHALL NOT BE EMPOWERED TO DECIDE DISPUTES SOLELY ON THE
BASIS OF NOTIONS OF FAIRNESS AND EQUITY IN DISREGARD OF THE PROVISIONS OF THIS
AGREEMENT, AND SHALL NOT HAVE THE AUTHORITY TO AWARD ANY FORM OF EXTRAORDINARY
DAMAGES (INCLUDING PUNITIVE DAMAGES). THE ARBITRATOR SHALL AWARD TO THE
PREVAILING PARTY ITS REASONABLE ATTORNEYS' FEES AND OTHER COSTS INCURRED IN
THE ARBITRATION, EXCEPT THE PARTIES SHALL SHARE EQUALLY THE FEES AND EXPENSES
OF THE ARBITRATOR. THE ARBITRATOR'S DECISION AND AWARD SHALL BE FINAL AND
BINDING AND JUDGMENT ON THE AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED IN
ANY COURT HAVING JURISDICTION THEREOF.
(d) IF ANY PARTY FILES A JUDICIAL OR ADMINISTRATIVE ACTION ASSERTING CLAIMS
SUBJECT TO ARBITRATION AS PRESCRIBED HEREIN, AND ANOTHER PARTY SUCCESSFULLY
OPPOSES SUCH ACTION OR COMPELS ARBITRATION OF SAID CLAIMS, THE PARTY FILING
SAID ACTION SHALL PAY THE OTHER PARTY'S COSTS AND EXPENSES INCURRED IN
OPPOSING SUCH ACTION OR COMPELLING ARBITRATION, INCLUDING REASONABLE ATTORNEYS'
FEES AND EXPENSES.
(e) WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES
ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION
TO NEUTRAL ARBITRATION.
Potlatch Initials: _________ Partnership Initials: ___________
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ARTICLE 14
Assignment
14.1 Assignment Prohibited. Except as otherwise expressly permitted under
Section 14.2 or Section 14.3, neither Potlatch nor Partnership shall, either
voluntarily or by operation of law, assign or transfer this Agreement or any
rights hereunder or interest herein, or agree to do so (each of the foregoing
defined herein as a "Transfer"), without the express prior written consent of
the other party, which consent such other party may grant or withhold in its
sole discretion. Any purported Transfer (whether voluntary or involuntary, by
operation of law or otherwise) without the consent of the other party shall,
at the option of such other party, be void or constitute an Event of Default
under this Agreement.
14.2 Exception for Assignment to Corporate Successor. Upon and subject to
the terms and conditions of this Section 14.2, either party (a "transferor")
may assign or transfer all, but not less than all, of its right, title and
interest in, to and under this Agreement and all of its obligations under this
Agreement, without the consent of the other party to this Agreement, to any of
the following (each a "Corporate Successor"): any corporation or entity
Controlled by the transferor, or to the surviving corporation or entity in the
event of a consolidation or merger of the transferor into such surviving
corporation or entity, or to a transferee as part of a transfer of all or
substantially all of the assets of the transferor; provided that, in any such
case, (i) in the event of a transfer by Partnership, the transferee shall,
simultaneously with such Transfer, acquire all of the Timberlands, (ii) the
transferee shall assume, in a writing reasonably satisfactory to the non-
transferring party, all of the obligations of the transferor under this
Agreement, (iii) the transferor shall pay all costs and expenses in connection
with the Transfer, including, without limitation, all fees and expenses
incurred by the non-transferring party, and (iv) the non-transferring party
shall be provided with copies of all assignment documentation promptly upon
consummation of the assignment.
14.3 Partial Assignment by Potlatch Permitted. (a) Potlatch shall have the
right, from time to time, to assign to any Person or Persons the right to
harvest and purchase during any one or more Harvest Years all or any portion
of the Timber specified to be harvested in the Harvest Plan for such Harvest
Years, provided that: (i) the assignee shall comply with all of the terms and
provisions of this Agreement applicable to the assigned rights; (ii) no such
assignment shall reduce or otherwise modify the obligations of Potlatch under
this Agreement; and (iii) Partnership shall be provided with notice prior to
such assignment and copies of all assignment documentation promptly upon
consummation of such assignment.
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(b) In the event Potlatch wishes to assign to a third party (a "Regional
Assignee") all of Potlatch's rights under this Agreement with respect to all
Timberlands in an entire Resource Region (an "Assigned Region") for the entire
Term, Potlatch shall have the right to require that this Agreement be divided
into two agreements. One such agreement shall relate to the Timberlands in the
Assigned Region and shall be entered into between Partnership and the Regional
Assignee (the "New Agreement"). The New Agreement shall (except as to the
scope of the Timberlands subject thereto) be on terms substantially identical
to this Agreement, with such modifications as Potlatch and Partnership may
agree. The second agreement shall be this Agreement amended to exclude the
Assigned Region and to terminate all further rights and obligations of Potlatch
and Partnership respecting the Timberlands in the Assigned Region. Potlatch
shall not be liable, directly or indirectly, for the obligations of the
Regional Assignee under the New Agreement if Potlatch establishes by
reasonable proof, within six (6) months after the date of the New Agreement,
that in light of the Regional Assignee's financial condition or prospects, it
is unlikely that the Regional Assignee will be unable to perform its
obligations under the New Agreement. Unless Potlatch so establishes such
Regional Assignee's capability of performing, Potlatch shall remain liable as
a surety for performance of all of the Regional Assignee's obligations under
the New Agreement. Notwithstanding the foregoing, if the New Agreement is
entered into during the initial 20-year term of this Agreement, Potlatch
shall, irrespective of the financial condition or prospects of the Regional
Assignee, guaranty the obligations of the Regional Assignee under the New
Agreement arising during such initial 20-year term (i.e., such guaranty shall
expire on __________________, 2018), pursuant to a form of guaranty reasonably
satisfactory to Potlatch and Partnership.
ARTICLE 15
Condemnation
15.1 Effect of Condemnation. In the event any portion of the Timberlands is
taken for public or quasi-public use in or by reason of any condemnation
proceeding or proceedings in eminent domain, this Agreement shall terminate as
to the portion so taken effective upon transfer of title pursuant to such
taking and such portion shall be released from this Agreement in accordance
with Section 9.7.
15.2 Condemnation Award. Any award in any such proceedings, and any payment
in consideration of a voluntary transfer under threat of eminent domain, with
respect to the Timberlands or standing Timber on the Timberlands shall belong
to Partnership insofar as such award is based upon the value of the property
taken, except for awards for Timber the title to which has passed to Potlatch.
Any award in any such proceedings with respect to logs the title to which has
passed to Potlatch, or
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with respect to the value of rights-of-way and right of access under this
Agreement, or with respect to expenses or losses incurred by Potlatch shall
belong to Potlatch.
15.3 Notice. Partnership shall promptly notify Potlatch in writing of the
commencement or threat deemed material by Partnership of any condemnation
proceeding or proceedings in eminent domain.
ARTICLE 16
Notices
16.1 Notices. Any notice or other communications required or permitted
under this Agreement to be given by one party to the other shall be effective
only if in writing. Notices shall be delivered to the party's address set
forth below, or to such other address as such party may specify by written
notice in accordance with this Section 16.1, by United States mail with postage
thereon fully prepaid, or by a recognized commercial delivery service, or by
facsimile transmission:
If to Potlatch: Potlatch Corporation
601 West Riverside Avenue, Suite 1100
Spokane, WA 99201
Attention: President
Facsimile No.: (509) 835-1555
with a copy to: Potlatch Corporation
601 West Riverside Avenue, Suite 1100
Spokane, WA 99201
Attention: General Counsel
Facsimile No.: (509) 835-1555
If to Partnership: Timberland Growth Limited Partnership
1242 N. Second Street
Memphis, TN 38101
Attention: Chief Executive Officer
Facsimile No.: (901) 521-8647
ARTICLE 17
Miscellaneous
17.1 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto, as well as their respective successors in
interest and assigns permitted hereunder, and wherever reference in this
Agreement is made to either of the parties hereto, such reference shall be
deemed to include, wherever applicable, also a reference to the successors and
permitted assigns of said party.
17.2 No Agency or Fiduciary Relationship. It is understood and agreed that
Potlatch and Partnership are independent
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entities; and that all operations of Potlatch hereunder shall be performed
entirely for Potlatch's account and not as an agent, representative, employee
or contractor of Partnership; and that all operations of Partnership hereunder
shall be performed entirely for Partnership's account and not as an agent,
representative, employee or contractor of Potlatch. Nothing in this Agreement
shall be construed as creating any partnership or other fiduciary relationship
between Potlatch and Partnership.
17.3 No Third-Party Beneficiaries. No Person other than Potlatch and
Partnership shall have any rights under this Agreement. Potlatch and
Partnership do not intend that any other Person shall be a third-party
beneficiary of this Agreement or any covenant, condition or provision herein.
17.4 Attorneys' Fees. If Partnership or Potlatch shall commence an
arbitration pursuant to Section 13.2, or take any other action against the
other party, to compel performance of or to recover for breach of any
covenant, agreement or condition of this Agreement, or for declaratory relief,
or to otherwise enforce its rights hereunder (but excluding any arbitration
of a matter which is, pursuant to the terms of this Agreement, to be submitted
in the first instance to the Consulting Forester), the losing party shall pay
to the prevailing party its reasonable attorneys' fees in addition to the
amount of any judgment and costs (including attorneys' fees and costs in any
appeal) as the arbitrator may determine, and the breaching party shall pay to
the nonbreaching party its reasonable attorney's fees and other costs incurred
in connection with any enforcement action which does not involve rendering a
judgment, including, without limitation, in connection with any bankruptcy or
insolvency proceeding involving the breaching party.
17.5 Entire Agreement. This Agreement, including all Appendices, Exhibits
and Schedules attached hereto, and the Long-Range Plans, Management Plans and
Harvest Plan in effect from time to time, together with any other agreements
or documents expressly incorporated herein or therein by reference, shall
constitute the entire and integrated agreement among the parties with respect
to the subject matter hereof; and all prior negotiations, understandings,
agreements and instruments with respect to such subject matter are hereby
superseded and shall be of no force and effect.
17.6 Amendments; Waiver; Time Periods. Neither this Agreement nor any of
the terms hereof may be terminated, amended, supplemented, waived or modified
orally, but only by an instrument in writing signed by the party against which
the enforcement of the termination, amendment, supplement, waiver or
modification shall be sought. The failure of either party for any period of
time to object to or to assert any remedy by reason of the other party's
failure to perform or observe any covenant or term hereof or the failure of
either party to assert any rights by reason of the happening or non-happening
of any
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condition hereof shall not be deemed a waiver of any right to assert and
enforce any remedy arising by reason of such failure or the happening or non-
happening of such condition or a waiver of any rights arising from any
subsequent failure of such other party to perform or observe the same or any
other term or covenant or by reason of the subsequent happening or non-
happening of the same or any other condition. Subject to Section 1.2, no
custom or practice which may develop between the parties hereto during the
Term shall be deemed a waiver of, or in any way affect, the right of the
parties hereto to insist upon performance in strict accordance with the terms
hereof. All references in this Agreement to time periods within which a party
is required to take specified action shall be deemed to permit the parties to
agree to a longer period.
17.7 Governing Law. This Agreement, and any decision by arbitrator(s)
pursuant to Section 13.2, shall be governed by, and construed in accordance
with, the laws of the State of Arkansas (but without regard to choice of law
rules), including all matters of construction, validity and performance, but
without regard to its choice of law rules. Notwithstanding the foregoing
sentence, questions concerning arbitrability under Section 13.2 shall be
governed exclusively by the United States Arbitration Act.
17.8 Counterparts. This Agreement and any amendments, supplements or
modifications hereof may be executed in more than one counterpart each of
which shall be deemed to be an original but all of which taken together shall
be deemed a single instrument.
17.9 Partial Invalidity. In the event that any provision of this Agreement
shall for any reason be determined to be invalid, illegal, or unenforceable in
any respect, the parties hereto shall attempt in good faith to agree to such
amendments, modifications, or supplements to this Agreement and take such
other appropriate actions as shall, to the maximum extent practicable in light
of such determination, implement and give effect to the intentions of the
parties as reflected herein. The provisions of this Agreement not so affected
shall remain in full force and effect.
17.10 Further Assurances. Potlatch and Partnership further covenant to
cooperate with one another in all reasonable respects necessary to consummate
and give effect to the transactions contemplated by this Agreement (including
executing and delivering such instruments or other writings as the other party
may reasonably request), and each will take all reasonable actions within its
authority to secure cooperation of any necessary third parties.
17.11 Headings. The headings of the sections of this Agreement are for
convenience of reference only and shall not
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affect the meanings or construction of any provision of this Agreement.
17.12 Jurisdiction and Venue. EACH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY:
(a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT, OR FOR RECOGNITION AND ENFORCEMENT
OF ANY JUDGMENT IN RESPECT THEREOF, INCLUDING, WITHOUT LIMITATION, ENTRY
OF JUDGMENT UPON ANY AWARD RENDERED BY ARBITRATORS IN ACCORDANCE WITH THIS
AGREEMENT, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE
STATE OF ARKANSAS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE
DISTRICT OF ARKANSAS, AND APPELLATE COURTS FROM ANY THEREOF;
(b) WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE THAT ANY
SUCH ACTION OR PROCEEDING WAS BROUGHT IN ANY INCONVENIENT COURT;
(c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING
MAY BE EFFECTED CERTIFIED MAIL (OR ANY SUCH PARTY AT ITS BY MAILING A
SUBSTANTIALLY ADDRESS FOR COPY THEREOF BY SIMILAR FORM OF NOTICES
REGISTERED OR MAIL), POSTAGE PURSUANT TO PREPAID, TO SECTION 16.1;
(d) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT THE
SERVICE OF PROCESS IN ANY OTHER LIMIT THE RIGHT TO SUE IN MANNER PERMITTED
BY LAW OR SHALL ANY OTHER JURISDICTION; AND
(e) WAIVES TRIAL BY JURY IN ANY SUCH ACTION OR PROCEEDING.
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The foregoing shall not be deemed to negate or undercut the parties' intent to
resolve disputes in accordance with the other provisions of this Agreement,
including Article 13.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
POTLATCH CORPORATION, a Delaware
corporation
By
----------------------------------------
Title
----------------------------------
TIMBERLAND GROWTH LIMITED
PARTNERSHIP, a Delaware limited
partnership
By Timberland Growth Corporation,
a Delaware corporation, general
partner
By
----------------------------------------
Title
----------------------------------
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APPENDIX A
Defined Terms
"AAA" shall have the meaning given in Section 13.2(b).
"Access Rights" shall have the meaning given in Section 8.5.
"Additional Timberlands" shall mean Timber-producing property acquired by
Partnership after the Commencement Date and made subject to the provisions of
this Agreement pursuant to Section 9.4.
"Adjustment Amount" shall have the meaning given in Section 6.4(b).
"Agreement" shall mean this Timberlands Management and Timber Purchase
Agreement, including all Exhibits and Appendices attached hereto and all Long-
Range Plans, Management Plans and Harvest Plans in effect from time to time,
as any of the same may be amended, modified or supplemented from time to time.
"Agreement Purposes" shall have the meaning given in Section 1.1.
"Alternative Stands" shall have the meaning given in Section 5.3(c).
"Applicable Laws" shall mean, as to any Person, all laws (statutory or
common), treaties, rules, regulations, determinations, orders, judgments,
ordinances, decrees, injunctions, writs, interpretations or Governmental
Approvals, in each case applicable to or binding on such Person or any of its
property or to which such Person or any of its property is subject.
"Assigned Region" shall have the meaning given in Section 14.3(b).
"ATCO" shall mean Anderson-Tully Company, a Mississippi corporation, and
(as the context permits) its affiliates.
"ATCO Exchange Parcel" shall have the meaning given in Section 9.2(b).
"ATCO Parcel Release Request" shall have the meaning given in Section
9.2(b).
"ATCO Release Parcel" shall have the meaning given in Section 9.2(b).
"Authorized Officer" shall mean (a) as to any party to this Agreement, the
Person or Persons from time to time designated by
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such party in writing to the other party as such party's authorized officer
for purposes of this Agreement, and (b) if no such designation is in effect,
(i) as to any corporation (or as to a partnership of which a corporation is
general partner or as to a limited liability company of which a corporation is
manager), the Chairman, the President and any Vice President of such
corporation, and (ii) as to any partnership of which a natural person is
general partner or as to any limited liability company of which a natural
person is manager, such natural person.
"Average Administrative Cost" means, as to any Harvest Year, the Total
Administrative Cost for such Harvest Year divided by the total number of green
tons of wood fiber handled by Potlatch (i.e., procured from Potlatch's fee
lands, from the Partnership or from other sources or sold by Potlatch from its
fee lands to third parties) in such Harvest Year.
"Average Cost of Log and Haul" means, as to any Harvest Year, the Total
Cost of Log and Haul during such Harvest Year, divided by the total number of
green tons of Merchantable Timber purchased by Potlatch pursuant to this
Agreement during such Harvest Year. In the event that Potlatch in any Harvest
Year separately calculates the Average Cost of Log and Haul for different
Products or categories of Products, then for purposes of determining the
Average Procurement Cost for such Product for such Harvest Year, the Average
Cost of Log and Haul applicable to such Product shall be added to the Average
Administrative Cost for such Harvest Year.
"Average Procurement Cost" means, as to any Harvest Year, the sum of
Average Administrative Cost for such Harvest Year plus Average Cost of Log and
Haul for such Harvest Year.
"Best's Rating" shall mean the rating assigned to an insurer from time to
time as published in A. M. Best Company, Inc.'s insurance reports, or in the
event such reports cease to be published, the rating in an alternative
generally recognized insurance company rating report which would be equivalent
to a Best's rating.
"Collateral" shall have the meaning given in Section 8.3(a).
"Commencement Date" shall have the meaning given in Section 3.3.
"Consulting Forester" shall mean a person selected by the parties and
serving as Consulting Forester pursuant to Section 13.1.
"Contribution Agreement" shall mean the Contribution Agreement dated as of
____________ __, 1998 between Potlatch
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and Partnership, whereunder the Former Potlatch Lands are to be transferred by
Potlatch to Partnership.
"Control," "Controlled" and "Controlling" shall mean (i) as to a corporation,
direct or indirect beneficial ownership of 50% or more of the aggregate voting
power of the voting securities of such corporation, (ii) as to a partnership,
direct or indirect beneficial ownership of a Controlling Interest of a general
partner of such partnership, and (iii) as to a partnership, limited liability
company or other entity, the direct or indirect beneficial ownership of 50% or
more of the voting power of the ownership interests in such entity.
"Controlling Interest" shall mean a direct or indirect beneficial ownership
interest in any Person which confers upon the holder thereof Control of such
Person.
"Corporate Successor" shall have the meaning given in Section 14.2.
"Costs of Log and Haul" shall mean the actual costs incurred by Potlatch
(without duplication of Total Administrative Costs) in harvesting Merchantable
Timber purchased pursuant to this Agreement and transporting Products to the
Destination Mill, including without limitation all costs of labor, equipment,
insurance, fuel, licenses and taxes (excluding yield taxes or sales taxes
which Potlatch is required to pay in accordance with Section 6.8(b)) incurred
in obtaining access to the logging site; transporting logging equipment to and
from the logging site; preparing the logging site for logging operations;
felling, delimbing and bucking Timber; skidding logs to a sorting and staging
area; sorting logs for transport; loading logs onto logging trucks; performing
road repairs and maintenance; completing post-harvest operations at the
logging site; and transporting logs to a Destination Mill (but excluding the
costs of secondary loading, unloading and transportation in excess of the costs
that would be incurred if the shipment in question were delivered to the
nearest Potlatch Conversion Facility capable of processing such shipment).
Notwithstanding the foregoing, Costs of Log and Haul shall not include (i)
costs incurred in correcting or repairing damage described in Sections 7.2,
7.3 or 7.8(b), (ii) indemnity payments pursuant to Section 7.7, or (iii) any
amount incurred for any work to the extent such amount is in excess of the
reasonable cost (under applicable market conditions) for the same work (but
Potlatch shall not be required to accept a low bid for work if Potlatch
reasonably believes a higher bid will provide a better value due to greater
reliability, trustworthiness, efficiency or skill of the higher bidder).
"CPI" shall mean the Consumer Price Index for All Urban Consumers for All
Cities, All Items, 1982-1984 equals 100, published by the United States
Department of Labor, Bureau of
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Labor Statistics. If the federal government revises or ceases to publish the
Consumer Price Index, the parties shall substitute a substantially equivalent
official index published by the Bureau of Labor Statistics or its successors
and shall use any appropriate conversion factors to accomplish such
substitution. The substitute index shall thereafter constitute the "CPI"
hereunder.
"Default Period" means the period commencing with the exercise of the Major
Lender's right to accelerate the indebtedness of Partnership arising upon a
default by Partnership under the Loan Documents, and ending upon the earlier
of (1) payment in full of all such indebtedness, or (2) the Major Lender's
withdrawal or rescission of such acceleration.
"Default Rate" shall have the meaning given in Section 6.5(b).
"Default Sale Timberlands" shall have the meaning given in Section 9.6(a).
"Delivered Log Price" means, as to any Product, the price (net scale) for
the Product delivered to a Potlatch Conversion Facility or other conversion
facility (i.e., "purchased at mill") in the applicable Resource Region paid
during the Harvest Year in an arms'-length transaction (including transactions
in which Potlatch is the buyer (from a source other than Partnership) or the
seller).
"Destination Mill" shall have the meaning given in Section 6.6(a).
"Environmental Laws" shall mean any and all federal, state and local laws,
regulations, ordinances, codes and policies, and any and all judicial or
administrative interpretations thereof by governmental authorities relating to
pollution or protection of the environment, of natural resources, of wildlife
or of public health and safety, including, without limitation, those relating
to emissions, discharges, releases or threatened releases of Hazardous
Materials into the environment, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, release, transport
or handling of Hazardous Materials, and any and all orders and decrees
pursuant thereto.
"Estimated Market Stumpage Price" shall mean, as to any Product during any
calendar quarter, the estimate of the Market Stumpage Price of such Product
for such calendar quarter determined in accordance with Section 6.2(e).
"Event of Default" shall mean a Partnership Event of Default or a Potlatch
Event of Default.
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"Exchange" shall have the meaning given in Section 9.1(b).
"Exchange Parcel" shall have the meaning given in Section 9.1(b).
"Excused Party" shall have the meaning given in Section 11.1.
"Expiration Date" shall have the meaning given in Section 3.3.
"Extension Deadline" shall have the meaning given in Section 3.3.
"Fiber Categories" shall mean, collectively, Hardwood Merchantable
Sawtimber, Hardwood Merchantable Pulpwood, Softwood Merchantable Sawtimber and
Softwood Merchantable Pulpwood.
"Force Majeure" shall have the meaning given in Section 11.1.
"Forester Termination Date" shall have the meaning given in Section
13.1(b).
"Forester Termination Notice" shall have the meaning given in Section
13.1(b).
"Former ATCO Lands" shall mean the Initial Timberlands contributed to
Partnership by Partnership's general partner and formerly owned by ATCO,
consisting of approximately 324,000 acres concentrated in the States of
Arkansas and Mississippi.
"Former Potlatch Lands" shall mean the Initial Timberlands contributed by
Potlatch to Partnership pursuant to the Contribution Agreement (including the
Leasehold Lands), consisting of approximately 514,000 acres in the State of
Arkansas.
"Governmental Approvals" shall mean all consents, rights, exemptions,
concessions, permits, easements, rights of way, licenses, authorizations,
certificates, orders, franchises, determinations or other approvals of or
notices to or filings with any Governmental Authority.
"Governmental Authority" shall mean any governmental department, commission,
board, regulatory authority, bureau, legislative body, agency, or any
instrumentality of any federal, state, local or municipal government or
domestic court.
"Hardwood" shall mean Timber of those species, commonly referred to as
"hardwood," which are deciduous and have broad leaves (such as oak,
cottonwood, hackberry, sweet gum, ash, sycamore, willow, poplar and hickory).
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"Harvest Deficit" shall have the meaning given in Section 6.1(b).
"Harvest Excess" shall have the meaning given in Section 6.1(b).
"Harvest Plan" shall mean a Proposed Harvest Plan which has been approved
by the parties in accordance with Section 5.3, as the same may be modified
from time to time in accordance with this Agreement.
"Harvest Plan Data Sheet" shall have the meaning given in Section 5.1(b).
"Harvest Plan Summary" shall have the meaning given in Section 5.1(c).
"Harvest Year" shall mean a calendar year to which a Harvest Plan pertains.
"Hazardous Materials" shall mean substances which are explosive, corrosive,
radioactive or toxic and any substances defined as hazardous substances,
hazardous materials, toxic substances, toxic air contaminants or hazardous
wastes under federal, state or local laws or regulations, including without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (42 U.S.C. ss. 9601 et seq.), the Superfund Amendments
and Reauthorization Act of 1986 (Pub. L. 99-499, 100 Stat. 1617 (October
17,1986)), and all amendments to these laws and regulations adopted or
publications promulgated pursuant to these laws. Hazardous Materials shall also
include, without limitation, those asbestos-containing materials defined and
described in Environmental Protection Agency Report No. 560/5-85-024 (June
1985), or any related or successor report, or other applicable government
regulations defining or describing such materials.
"Including" and "includes" shall be deemed to mean "including without
limitation" or "includes without limitation."
"Industry Practice" shall have the meaning given in Section 1.2.
"Initial Timberlands" shall mean the Timberlands which are subject to this
Agreement as of the Commencement Date and are described in Exhibit A.
"Inventory Data" shall have the meaning given in Section 4.1(a).
"Leasehold Lands" shall mean the approximately 13,600 acres of the Former
Potlatch Lands that were leased, and not owned in fee, by Potlatch prior to
the Commencement Date, as identified in Exhibit A.
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"Lender Protection Agreement" shall have the meaning given in Section
9.6(a).
"Loan Documents" shall have the meaning given in Section 9.6(a).
"Long-Range Plan" shall have the meaning given in Section 4.2(a).
"Major Lender" means the holder or holders of any indebtedness for borrowed
money incurred or to be incurred by Partnership in an aggregate amount in
excess of fifty million dollars ($50,000,000).
"Management Plan" shall have the meaning given in Section 4.2(b).
"Market Stumpage Price" shall have the meaning given in Sections 6.2(b).
"MBF" shall mean one thousand (1000) board feet, and a board foot is a
standard unit of measure for Timber and logs in accordance with Industry
Practice.
"Memorandum of Agreement" shall have the meaning given in Section 8.2.
"Merchantable Pulpwood" shall mean wood fiber other than Merchantable
Sawlogs which, under Industry Practice in the respective Resource Regions, is
saleable for use as raw materials in the manufacturing of fiberboard, oriented
strandboard, paper products or other processed wood products.
"Merchantable Sawlog" shall mean, generally, a log of suitable size and
quality for the production of solid wood products as determined in accordance
with Industry Practice in the respective Resource Regions.
"Merchantable Sawtimber" shall mean Timber that will produce at least one
(1) Merchantable Sawlog.
"Merchantable Timber" shall mean Timber that will produce at least one (1)
Merchantable Sawlog or such volume of Merchantable Pulpwood as the parties may
reasonably agree, from time to time.
"Monthly Logging Report" shall have the meaning given in Section 6.7.
"Monthly Payment" shall have the meaning given in Section 6.3(a).
"Negative Value Product" shall have the meaning given in Section 6.1(e).
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"Net Cost" shall have the meaning given in Section 6.1(e).
"Net Log Price" means, for any Product sold in any Harvest Year in a
"purchased at mill" transaction, (a) the Delivered Log Price per green ton
paid for such Product in such transaction, minus (b) the Average Procurement
Cost for such Harvest Year.
"Net Volume Increase" shall mean, as to any Resource Region as of any time,
a volume of Merchantable Sawtimber on the Timberlands in such Resource Region
equal to (i) the aggregate volume of all Merchantable Sawtimber on all
Additional Timberlands in such Resource Region added to such Timberlands,
during the period from the Commencement Date through the date in question, in
accordance with Section 9.4 (which volume shall be measured as of the date of
such addition), minus (ii) the aggregate volume of Merchantable Sawtimber on
all Released Timberlands in such Resource Region which have been released from
this Agreement, during the period from the Commencement Date through the date
in question, in accordance with Section 9.5 (which volume shall be measured as
of the date of such release).
"New Agreement" shall have the meaning given in Section 14.3(b).
"Objection Notice" shall have the meaning given in Section 5.3(a).
"Objection Response Notice" shall have the meaning given in Section 5.3(a).
"Opportunities Agreement" shall mean the Opportunities Agreement dated
__________, 1998 between Potlatch and the Partnership, as the same may be
amended, modified or supplemented from time to time.
"Other Assurances" shall have the meaning given in Section 8.3(b).
"Partnership" shall mean Timberland Growth Limited Partnership, a Delaware
limited partnership, and any Person who may succeed to its rights and
obligations under this Agreement.
"Partnership Event of Default" shall have the meaning given in Section
12.2.
"Partnership Indemnified Parties" shall have the meaning given in Section
7.7.
"Person" shall mean an individual, a partnership, a limited liability
company, a corporation, a joint stock company, a trust, a joint venture, an
unincorporated organization or a governmental entity (or any department,
agency or political subdivision thereof).
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"PHP Requirements" shall have the meaning given in Section 5.2.
"Potential Addition" shall have the meaning given in Section 9.3(a).
"Potential Addition Notice" shall have the meaning given in Section 9.3(a).
"Potlatch" shall mean Potlatch Corporation, a Delaware corporation, and any
Person who may succeed to its rights and obligations under this Agreement.
"Potlatch Conversion Facilities" shall mean the sawmills, plywood mills,
pulpmills and other wood products processing facilities owned or operated by
Potlatch now or in the future and which process Products harvested from the
Timberlands.
"Potlatch Event of Default" shall have the meaning given in Section 12.1.
"Potlatch Indemnified Parties" shall have the meaning given in Section 4.5.
"Price Reset Notice" shall have the meaning given in Section 6.2(h).
"Pricing Period" shall mean, as to any calendar quarter, the three (3)
calendar month period consisting of the last month of the previous calendar
quarter and the first two (2) months of the subject calendar quarter. For
example, the Pricing Period with respect to the second calendar quarter
(April, May and June) of 1999 shall consist of the period from March 1, 1999
through May 31, 1999.
"Prime Rate" shall mean the publicly announced prime rate or reference rate
charged on the relevant date by the San Francisco Main Office of Bank of
America NT & SA (or any successor bank thereto), or if there is no such
publicly announced rate, the rate quoted by such bank in pricing ninety (90) day
commercial loans to substantial commercial borrowers.
"Product" shall mean a subcategory of a Fiber Category which, as of the
relevant time in the relevant Resource Region, has a distinct Market Stumpage
Price based on its species, size, quality or other characteristics. For
example, two Merchantable Sawlogs of the same species may have different prices
per board foot based on their different diameters; each would constitute a
distinct Product. Conversely, two Merchantable Pulpwood logs of different
diameters and different species would constitute a single Product if they would
realize the same price per ton. A single log may consist of multiple Products
(e.g., the small end may be of insufficient diameter to constitute a
Merchantable Sawlog, but may constitute Merchantable Pulpwood).
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"Proposed Harvest Plan" shall have the meaning given in Section 5.1.
"Prudent Logging Practices" shall mean those practices, procedures,
methods, specifications and standards, as the same may change from time to
time, as are commonly utilized by experienced and competent loggers of
timberlands of significant size in the applicable Resource Region as good, safe
and environmentally sound logging practices.
"Prudent Management Practices" shall mean those practices, procedures,
methods, specifications and standards, as the same may change from time to
time, as are commonly utilized as good, safe and environmentally sound
practices by owners and managers of timberlands of significant size in the
applicable Resource Region in managing their own timberlands with a management
goal of maximizing growth and quality and maintaining a reasonably stable
inventory. Prudent Management Practices include planning and implementation of
silvicultural treatment programs; reforestation as required to maintain stable
inventory; animal, insect and disease monitoring and control programs;
management of all environmentally-sensitive areas within the owned timberlands
as may be required by Applicable Law, existing agreements or best management
practices for the protection of soil, water and wildlife; and implementation
of fire prevention programs providing every reasonable precaution against
fire, provision of a fire patrol during the fire season and prompt exertion of
all reasonable efforts to suppress all fires, however caused.
"Quarterly Logging Audit" shall have the meaning given in Section 6.9(b).
"Regional Assignee" shall have the meaning given in Section 14.3(b).
"Release Notice" shall have the meaning given in Section 9.6(a).
"Released Timberlands" shall have the meaning given in Section 9.5.
"Resource Unit" shall mean a geographic operating area within a Resource
Region, consisting of not less than 25,000 acres and not more than 50,000
acres, as designated by Partnership from time to time. The Resource Units in
existence as of the Commencement Date are shown in Appendix D.
"Resource Unit Harvest Map" shall have the meaning given in Section 5.1(a).
"Resource Region" shall mean a geographic area in which Partnership owns
Timberlands from time to time, which area constitutes a distinct forest
products market area (i.e., prices
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for a Product would be fairly uniform throughout a Resource Region) and has
relatively uniform Industry Practices. The Resource Regions, as of the
Commencement Date, are Southern Arkansas (as shown on the Resource Unit
Harvest Map) and the Mississippi River Valley (as shown on the Resource Unit
Harvest Map).
"Sale Parcel" shall have the meaning given in Section 9.1(b).
"Salvage Timber" shall have the meaning given in Section 5.5(a).
"Sawlog Categories" shall mean, collectively, Hardwood Merchantable Sawlogs
and Softwood Merchantable Sawlogs.
"Site Marking" shall have the meaning given in Section 5.8.
"Softwood" shall mean Timber of those species, commonly referred to as
"softwood," which are conifers and generally non-deciduous, such as firs,
pines, spruce and cedar.
"Stand" shall mean a Timber-growing site on which the growing conditions
(such as soil composition, drainage, aspect, elevation, Timber type, etc.) are
of general uniformity and are distinct in one or more ways from adjacent
areas, such that the site is deemed by the Partnership to be an appropriate
forest management unit.
"Stand Code Number" shall mean the identification number assigned to a
particular Stand or other management unit in Partnership's inventory system.
"Stumpage Bid Worksheet" shall mean a worksheet, in the form of Exhibit H
attached to the Agreement, setting forth Potlatch's assessment of the Timber
included in a Stumpage Sale Transaction, based upon Potlatch's cruise of such
Timber or other available information.
"Stumpage Outsale" shall have the meaning given in Section 6.2(d).
"Stumpage Sale Price" means, for any Product, the price paid for such
Product in a Stumpage Sale Transaction. As to each Stumpage Sale Transaction
in which only a single Product is sold, for purposes of determining the unit
price (per mbf, per ton, etc.) paid for such Product in the Stumpage Sale
Transaction, such unit price shall be based upon Potlatch's reasonable estimate
(as set forth in the Stumpage Bid Worksheet for such Stumpage Sale
Transaction), or other reasonable evidence, of the volume of the Product
included in the Stumpage Sale Transaction. As to each Stumpage Sale
Transaction in which more than one Product is sold for a single lump sum, for
purposes of determining the unit price paid in the Stumpage Sale
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Transaction for each particular Product included in that Stumpage Sale
Transaction, such unit price shall be based upon Potlatch's reasonable
estimates (as set forth in the Stumpage Bid Worksheet for such Stumpage Sale
Transaction), or other reasonable evidence, of (1) the volumes of each Product
included in the Stumpage Sale Transaction, and (2) the relative values (per mbf,
per ton, etc.) of the respective Products.
"Stumpage Sale Transaction" means an arms'-length sale transaction
(excluding any transaction between Potlatch and Partnership) in the relevant
Resource Region in which (a) a buyer purchases (at auction, in a sealed bid
procedure or in a privately negotiated transaction) the right to cut and
remove all or a portion of the Merchantable Timber from specified land during
a period ending not more than twenty-four (24) months after the sale price is
determined, (b) either (i) Potlatch submits a bid or offers to purchase at such
Stumpage Sale Transaction, or (ii) reasonable evidence of the species and
volumes of Timber included in such Stumpage Sale Transaction is obtained, and
(c) the winning bid is published or otherwise verifiable.
"Substitute Parcel" shall have the meaning given in Section 9.1(b).
"Sustainable Forestry Principles" shall mean timberland management and
harvest planning principles and policies (exemplified by the American Forest &
Paper Association's "Principles for Sustainable Forestry", as in effect on the
date of this Agreement) which, among other things, seek to: (a) ensure long-
term forest productivity and conservation of forest resources by, for
instance, limiting annual harvest levels in a given forest area to amounts which
could be sustained on an annual basis indefinitely without material depletion of
the Timber growing in the area; (b) protect water quality through riparian
protection measures and best management practices in all forest management
operations; (c) protect the quality of wildlife habitat and encourage
maintenance of aesthetic quality of forests by, for instance, limiting
clearcut size and adjacency.
"Temporary Logging Road" shall mean a temporary access road 12 to 15 feet
wide suitable for log trucks, which is typically not ditched, crowned or
gravelled, but which may include culverts or other drainage structures (which
culverts or structures are normally removed after harvest operations are
complete).
"Term" shall have the meaning given in Section 3.3.
"Termination Notice" shall have the meaning given in Section 3.3.
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"Timber" shall mean a tree or trees standing uncut in the woods.
"Timber Addition Deadline" shall have the meaning given in Section 9.3(a).
"Timber Addition Notice" shall have the meaning given in Section 9.3(a).
"Timber Damage Event" shall have the meaning given in Section 5.5(a).
"Timberlands" shall mean, as of any time, the Initial Timberlands plus any
Additional Timberlands to which this Agreement is then applicable by virtue of
Section 9.4, but excluding any Released Timberlands to which this Agreement
has theretofore ceased to be applicable by virtue of Section 9.5
"Total Administrative Cost" means, as to any Harvest Year, all reasonable
costs (without duplication of Costs of Log and Haul) incurred by Potlatch for
the operation and administration of its wood procurement function in its
Southern Region (i.e., the total expenses of operating Potlatch's Southern
Region Procurement Department) during such Harvest Year. "Total Cost of
Log and Haul" shall mean, as to any Harvest Year, the total amount of all
Costs of Log and Haul during such Harvest Year.
"Total Purchase Price" shall mean, as to any calendar quarter or Harvest
Year, the total amount payable by Potlatch under this Agreement for all Timber
cut and scaled during such calendar quarter or Harvest Year, based upon the
respective Market Stumpage Prices and volumes of the Products cut and scaled,
all as determined in accordance with Article 6.
"Transfer" shall have the meaning given in Section 14.1.
"Volume Reset Notice" shall have the meaning given in Section 6.3(b).
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EXHIBITS 10.4
OPPORTUNITIES AGREEMENT
-----------------------
THIS OPPORTUNITIES AGREEMENT (this "Agreement"), made and entered into this
___ day of _________, 1998, by and among POTLATCH CORPORATION, a Delaware
--------------------
corporation ("Potlatch"), TIMBERLAND GROWTH LIMITED PARTNERSHIP, a Delaware
-------------------------------------
limited partnership (the "Partnership"), and TIMBERLAND GROWTH CORPORATION, a
-----------------------------
Delaware corporation (the "Company"),
W I T N E S S E T H:
WHEREAS, Potlatch has contributed its interests in certain Timberlands (as
hereinafter defined) to the Partnership pursuant to that certain Contribution
Agreement, dated as of __________, 1998; and
WHEREAS, the Company is the sole general partner of the Partnership; and
WHEREAS, with certain exceptions set forth below, it is Potlatch's
intention to acquire additional interests in Timberlands exclusively through its
limited partnership interest in the Partnership, except to the extent that the
Partnership elects not to avail itself of opportunities which may arise in the
future to acquire interests in Timberlands; and
WHEREAS, it is the Partnership's intention to afford to Potlatch the
opportunity to harvest and purchase, in accordance with the Timber Agreement (as
hereinafter defined), all timber located on Timberlands that may be acquired by
the Partnership within certain regions specified herein; and
WHEREAS, the parties hereto desire to enter into this Agreement to define
their respective rights and obligations with respect to future opportunities to
acquire interests in Timberlands:
NOW, THEREFORE, in consideration of the agreement of Potlatch to enter into
the transactions contemplated above, and of the mutual provisions, agreements
and covenants herein contained, Potlatch, the Company and the Partnership agree
as follows:
1. DEFINITIONS.
-----------
1.1 Certain Definitions. The terms defined in this Section 1.1 shall, for
-------------------
all purposes of this Agreement, have the meanings herein specified:
(a) "Affiliate" shall mean, with respect to a party hereto, any Person as
to which more than 50% of the securities or other ownership interests having
power to elect the Board of Directors or persons performing similar fractions
are owned directly or indirectly
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by such party; provided, however, that neither the Partnership nor the Company
shall be deemed an Affiliate of Potlatch.
(b) "Appraiser" shall have the meaning specified in Section 2.4(b)(i)
hereof.
(c) "Appraiser's Certificate" shall have the meaning specified in Section
2.4(b)(ii) hereof.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday or a
day on which commercial banks in New York City are generally required or
authorized to be closed.
(e) "Certificate Date" shall have the meaning specified in Section
2.4(b)(ii) hereof.
(f) "Company's Common Stock" shall mean the Common Stock, par value $.01
per share, of the Company.
(g) "Fair Market Value" of a specified asset shall mean, as of the date of
determination, the cash price at which a willing seller would sell, and a
willing buyer would buy, each being apprised of all relevant facts and neither
acting under compulsion, such asset in an arms'-length negotiated transaction
with an unaffiliated third party without time constraints.
(h) "Higher Value" shall have the meaning specified in Section 2.4(b)(iii)
hereof.
(i) "Interest" shall have the meaning specified in Section 2.1 hereof.
(j) "Lower Value" shall have the meaning specified in Section 2.4(b)(iii)
hereof.
(k) "Mixed Assets Interest" shall have the meaning specified in Section
2.2(a) hereof.
(l) "Offered Timberlands" shall have the meaning specified in Section
2.4(a) hereof.
(m) "Partnership Agreement" shall mean the agreement of limited partnership
governing the Partnership, as amended.
(n) "Partnership Appraiser" shall have the meaning specified in Section
2.4(b)(i) hereof.
(o) "Partnership Units" shall mean limited partnership interests in the
Partnership.
(p) "Person" shall mean any individual, partnership, limited liability
company, corporation, joint venture, trust or other entity.
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<PAGE>
(q) "Potential Addition" shall have the meaning specified in Section 3
hereof.
(r) "Potlatch" shall mean Potlatch Corporation, a Delaware corporation, and
all successors to Potlatch Corporation by way of merger, consolidation or sale
of substantially all of its assets.
(s) "Potlatch Appraiser" shall have the meaning specified in Section
2.4(b)(i) hereof.
(t) "Potlatch Northern Territory" shall mean the geographic areas within a
150-mile radius of any converting facility currently operated by Potlatch or any
Affiliate of Potlatch in Idaho and Minnesota as of the date hereof. A list of
such facilities and their respective addresses is attached hereto as Exhibit A.
(u) "Potlatch Northern Territory Interest" shall have the meaning specified
in Section 2.2(b) hereof.
(v) "Potlatch Southern Territory" shall mean the geographic areas with a
150-mile radius of (i) the converting facilities operated by Potlatch in
Arkansas as of the date hereof and (ii) the converting facilities that Potlatch
will acquire in Mississippi pursuant to that certain Sawmill Subsidiary Asset
Purchase Agreement, dated as of February 9, 1998, between Potlatch and Anderson-
Tully Lumber Company. A list of the converting facilities referred to in
clauses (i) and (ii) of the preceding sentence and their respective addresses is
attached hereto as Exhibit B.
(w) "Third Appraiser" shall have the meaning specified in Section
2.4(b)(iv) hereof.
(x) "Third Value" shall have the meaning specified in Section 2.4(b)(iv)
hereof.
(y) "Timber" shall mean a tree as it stands uncut in the woods.
(z) "Timber Agreement" shall mean that certain Timberlands Management and
Timber Purchase Agreement, dated as of ____________, 1998, between Potlatch and
the Partnership, as the same may be amended, modified or supplemented from time
to time.
(aa) "Timberlands" shall mean real property that contains Timber which is
(or upon the completion of the growth cycle then in process is expected to
become) of a commercial quantity and of merchantable quality.
1.2 Other Definitions. In addition to the terms defined in this Section
-----------------
1.1, certain other terms are defined elsewhere in this Agreement, and, wherever
such terms are used in this Agreement, they shall have their respective defined
meanings, unless the context expressly or by necessary implication requires.
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2. OPPORTUNITIES.
-------------
2.1 The Company's and the Partnership's Right of First Opportunity.
--------------------------------------------------------------
Except as otherwise provided in Sections 2.2 and 2.3, the Company or the
Partnership shall have the right to pursue, to the exclusion of Potlatch, all
opportunities to acquire any direct or indirect interest in Timberlands (an
"Interest"). If Potlatch desires to acquire any Interest, Potlatch shall
promptly provide written notice of its desire to acquire such Interest to the
Company. As soon as reasonably practicable and in any event within 10 Business
Days after the date such notice is received by the Company, the Company shall
notify Potlatch in writing whether the Company or the Partnership elects to
pursue the acquisition of such Interest. If the Company (for itself or on
behalf of the Partnership) elects to pursue such acquisition, then such party or
its Affiliate shall have the exclusive right (as between the parties hereto) to
pursue and complete the acquisition of such Interest. Should Company (for
itself and on behalf of the Partnership) decide to reject the opportunity to
pursue the acquisition or should the Company or the Partnership, as applicable,
(and its Affiliates) decide to terminate its pursuit of the acquisition of such
Interest at any time, then the Company shall promptly notify Potlatch in writing
concerning such decision. Potlatch and its Affiliates shall have the exclusive
right (as between the parties hereto) to pursue and complete such acquisition at
any time within one year following, as applicable, the date of rejection, the
end of such 10 Business Day period if no written response has been received by
Potlatch during such period as provided above, or the date of receipt by
Potlatch of written notice from the Company or the Partnership that it has
terminated its pursuit of the acquisition. If Potlatch (and its Affiliates)
obtains such exclusive right, then the Company and the Partnership (and their
respective Affiliates) shall, at Potlatch's written request, provide to Potlatch
any information they may have which is relevant to the acquisition of such
Interest (except to the extent prohibited by any confidentiality agreement then
in effect).
2.2 Exceptions. Section 2.1 shall not apply to Potlatch's pursuit of any
----------
opportunity to acquire, or acquisition of, Interests in any of the following
circumstances: (a) where the Fair Market Value of the Interest being offered
represents a minority of the Fair Market Value of the total consideration being
offered by the seller or Affiliated sellers (a "Mixed Assets Interest"); (b)
where the Interest being offered relates exclusively to Timberlands located
within a Potlatch Northern Territory (a "Potlatch Northern Territory Interest");
(c) where the Interest involves an investment in not more than 10% of the
outstanding equity securities of a Person whose securities are publicly held and
actively traded; (d) where the Interest involves any right to cut Timber at the
stump pursuant to a timber deed or timber cutting contract with a term of less
than 10 years, or a lease of Timberlands with a term of less than 10 years; (e)
where the Interest involves the outstanding securities of Potlatch or any
subsidiary of Potlatch or the outstanding securities of the Company, the
Partnership or any of their subsidiaries; (f) where the purchase and sale of the
Interest is between Potlatch and its Affiliate or between Affiliates of
Potlatch; or (g) any Interest which Potlatch has the right to acquire under the
Timber Agreement.
2.3 Potlatch's Right of First Opportunity. Potlatch (and its Affiliates)
-------------------------------------
shall have the right to pursue, to the exclusion of the Company or the
Partnership, any Mixed Assets
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Interest or Potlatch Northern Territory Interest. If the Company or the
Partnership desires to acquire any Mixed Assets Interest or Potlatch Northern
Territory Interest, the Company or the Partnership shall promptly provide
written notice of its desire to acquire such Interest to Potlatch. As soon as
practicable and in any event within 10 Business Days after the date such notice
is received by Potlatch, Potlatch shall notify the Company or the Partnership,
as applicable, in writing whether Potlatch elects to pursue the acquisition of
such Interest. If Potlatch elects to pursue such acquisition, then Potlatch or
its Affiliate shall have the exclusive right (as between the parties hereto) to
pursue and complete the acquisition of such Interest. Should Potlatch decide to
reject the opportunity to pursue the acquisition or should Potlatch (and its
Affiliates) decide to terminate its pursuit of the acquisition of such Interest
at any time, then Potlatch shall promptly notify the Company in writing
concerning such decision. The Company or the Partnership (and their respective
Affiliates), as applicable, shall have the exclusive right (as between the
parties hereto) to pursue and complete such acquisition at any time within one
year following, as applicable, the date of rejection, the end of such 10
Business Day period if no written response has been received by the Company or
the Partnership, as applicable, during such period as provided above, or the
date of receipt by the Company and the Partnership of written notice from
Potlatch that it has otherwise terminated its pursuit of the acquisition. If
the Company or the Partnership (and their respective Affiliates) shall, at the
Company's written request, provide to the Company or the Partnership, as
applicable, any information they may have which is relevant to the acquisition
of such Interest (except to the extent prohibited by any confidentiality
agreement then in effect).
2.4 Potlatch's Obligation to Sell Certain Timberlands.
-------------------------------------------------
(a) In the event that Potlatch completes an acquisition of a Mixed Assets
Interest, Potlatch shall promptly make a written offer to the Partnership to
sell to the Partnership the Timberlands acquired in connected with such
acquisition (the "Offered Timberlands"), unless (i) a sale of the Offered
Timberlands to the Partnership would be legally impermissible, (ii) Potlatch's
interest in the Offered Timberlands is such that Potlatch would not be capable
of causing the Offered Timberlands to be sold or (iii) such a sale would cause
Potlatch or any of its Affiliates to violate any fiduciary or contractual duty
owed to any other Person. In the event that Potlatch does not promptly make
such written offer in reliance on any of clauses (i), (ii) or (iii) above,
Potlatch's obligation to make such offer (subject to such clauses) shall
continue for the six-month period following Potlatch's acquisition of the
Offered Timberlands. Potlatch's written offer to the Partnership shall state
whether the price is to be paid in cash, Partnership Units (valued based on the
number of shares of the Company's Common Stock into which such Partnership Units
could be exchanged under the Partnership Agreement without regard to any
requirements for the passage of time or any other conditions or limitations set
forth therein, and the average closing sale price of the Company's Common Stock
during the 20 trading days immediately preceding the date of Potlatch's
acquisition of the Offered Timberlands) or any specified combination of cash and
Partnership Units. Potlatch's written offer must be accepted (if at all) by
written notice to Potlatch delivered within 30 days after the Partnership's
receipt of Potlatch's written offer, and upon such acceptance Potlatch and the
Partnership shall be legally bound. In order to facilitate the Partnership's
evaluation of each offer, during such
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30-day period, Potlatch shall provide to the Partnership any information
available to Potlatch and reasonably requested by the Partnership (subject to
the Partnership's execution of a confidentiality agreement in customary form).
(b) If the Partnership accepts Potlatch's written offer pursuant to Section
2.4(a) above, Potlatch and the Partnership shall promptly memorialize their
agreement with respect to the sale of Offered Timberlands, which written
agreement shall provide for: (i) an assignment of the representations and
warranties received by Potlatch from the seller in connection with Potlatch's
acquisition of the Mixed Assets Interest to the extent that such representations
and warranties pertain to the Offered Timberlands; (ii) the transfer of the
Offered Timberlands by the same form of deed by which Potlatch acquired the
Offered Timberlands (or, if the form of the acquisition transaction did not
require delivery of a deed, a limited warranty deed); (iii) full indemnification
of Potlatch by the Partnership for any liabilities (including environmental
liabilities) associated with the Offered Timberlands (other than those
liabilities arising during the period when Potlatch was the owner of the Offered
Timberlands); (iv) the payment by the Partnership of all applicable transfer
taxes; and (v) other customary covenants and closing conditions. The purchase
price to be paid by the Partnership for the Offered Timberlands shall be equal
to the Fair Market Value of such Offered Timberlands as of the date of their
acquisition by Potlatch. The Fair Market Value of the Offered Timberlands shall
be determined (x) by mutual agreement of Potlatch and the Partnership or (y) if
no such agreement is reached within 30 days after the date of the Partnership's
acceptance of Potlatch's written offer, such Fair Market Value shall be
determined as follows:
(i) Each of the Partnership and Potlatch shall designate by written
notice to the other a firm of recognized national standing experienced in
appraisal techniques applicable to Timberland assets to serve as an
Appraiser pursuant to this Section 2.4 (the firms designed by the
Partnership and Potlatch being referred to herein as the "Partnership
Appraiser" and the "Potlatch Appraiser," respectively) within 30 days after
the failure to reach agreement in accordance with the terms of clause (y)
above.
(ii) Each Appraiser shall be directed to determine the Fair Market
Value of the Offered Timberlands. Each Appraiser will also be directed to
deliver a certificate stating such Fair Market Value (an "Appraiser's
Certificate") to both the Partnership and Potlatch on or before the forty-
fifth (45th) day after their respective designation (the "Certificate
Date"), upon the conclusion of its evaluation, and each Appraiser's
Certificate once delivered may not be retracted or modified in any respect.
Each Appraiser will keep confidential all information disclosed by Potlatch
in the course of conducting its evaluation, and to that end, will execute
such customary documentation as Potlatch may reasonably request with
respect to such confidentiality obligation. Potlatch shall provide each
Appraiser with such information within Potlatch's possession as may be
reasonably requested in writing by the Appraiser for purposes of its
evaluation hereunder. The Appraisers may, but shall be under no obligation
to, consult with each other in the course of
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conducting their respective evaluations. Each Appraiser will be directed
to comply with the provisions of this Section 2.4, and to that end, each of
Potlatch and the Partnership will provide to its respective Appraiser a
complete and correct copy of this Section 2.4 (and the definitions of
capitalized terms used in this Section 2.4 that are defined elsewhere in
this Agreement).
(iii) The Fair Market Value of the Offered Timberlands shall be
determined on the basis of the Appraisers' Certificates in accordance with
the provisions of this subparagraph (iii). The higher of the Fair Market
Values set forth on the Appraisers' Certificates is hereinafter referred to
as the "Higher Value" and the lower of such Fair Market Values is
hereinafter referred to as the "Lower Value." If the Higher Value is not
more than 110% of the Lower Value, the Fair Market Value will be the
arithmetic average of such two Values. If the Higher Value is more than
110% of the Lower Value, a third appraiser shall be selected in accordance
with the provisions of subparagraph (iv) below, and the Fair Market Value
will be determined in accordance with the provisions of subparagraph (v)
below.
(iv) If the Higher Value is more than 110% of the Lower Value, within
fourteen (14) days thereafter the Partnership Appraiser and the Potlatch
Appraiser shall agree upon and jointly designate, by written notice to each
of the Partnership and Potlatch, a third firm of recognized national
standing experienced in appraisal techniques applicable to Timberland
assets, and who shall have no current, proposed or prior business or
financial relationship with Potlatch, the Partnership or their respective
Affiliates, to serve as an appraiser pursuant to this Section 2.4 (the
"Third Appraiser"). The Third Appraiser shall determine the Fair Market
Value of the Offered Timberlands (the "Third Value") in accordance with the
provisions of subparagraph (ii) above, and shall deliver to each of the
Partnership and Potlatch an Appraiser's Certificate on or before the
thirtieth (30th) day after the designation of such Appraiser hereunder.
The Third Appraiser will be directed to comply with the provisions of this
Section 2.4, and to that end the parties will provide to the Third
Appraiser a complete and correct copy of this Section 2.4.
(v) Upon the delivery of the Appraiser's Certificate of the Third
Appraiser, the Fair Market Value of the Offered Timberlands will be
determined as provided in this subparagraph (v). The Fair Market Value
will be (w) the Lower Value, if the Third Value is less than the Lower
Value, (x) the Higher Value, if the Third Value is greater than the Higher
Value, (y) the arithmetic average of the Third Value and the other Value
(Lower or Higher) that is closer to the Third Value if the Third Value
falls within the range between (and including) the Lower Value and the
Higher Value and (z) the Third Value, if the Lower Value and the Higher
Value are equally close to the Third Value.
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<PAGE>
(vi) Each of the Partnership and Potlatch will bear the cost of the
Appraiser designated by it or on its behalf. If the Higher Value is not
more than 115% of the Lower Value, or if the Higher Value and the Lower
Value are equally close to the Third Value, each of the Partnership and
Potlatch shall bear 50% of the cost of the Third Appraiser, if any;
otherwise, the party whose Appraiser's determination of Fair Market Value
is further away from the Third Value shall bear the entire cost of the
Third Appraiser. The Partnership and Potlatch agree to pay when due the
fees and expenses of the Appraisers in accordance with the foregoing
provisions.
(vii) The determination of the Fair Market Value made pursuant to
this Section 2.4 shall be final and binding on the Partnership and
Potlatch, and such determination shall not be appealable to any court.
3. POTLATCH'S RIGHT TO TIMBER.
--------------------------
In the event that the Partnership acquires or proposes to acquire any
Timberlands within the Potlatch Northern Territory or the Potlatch Southern
Territory or in the event that the Partnership acquires any Offered Timberlands
pursuant to Section 2.4 hereof (all such Timberlands being referred to herein as
"Potential Additions"), Potlatch shall have the right to cause such Potential
Addition to be added to the "Timberlands" (as such term is defined in the Timber
Agreement) and made subject to the provisions of the Timber Agreement, in
accordance with the terms of section 9.3 of the Timber Agreement.
4. RESTRICTIONS; SPECIFIC PERFORMANCE.
----------------------------------
4.1 Necessary and Reasonable Restrictions. Each of Potlatch, the
-------------------------------------
Partnership and the Company acknowledges that the restrictions, prohibitions and
other provisions hereof are reasonable, fair and equitable in scope, terms and
duration, and are necessary to protect the legitimate business interests of the
parties. Each of Potlatch, the Partnership and the Company covenants that it
will not challenge the enforceability of this Agreement nor will it raise any
equitable defense to this Agreement's enforcement.
4.2 Specific Performance. Each of Potlatch, the Partnership and the
--------------------
Company acknowledges that the obligations undertaken by it pursuant to this
Agreement are unique and that the each of the parties hereto likely will have no
adequate remedy at law if either party hereto shall fail to perform any of its
obligations hereunder, and each of the parties hereto therefore confirms that
the other party's right to specific performance of the terms of this Agreement
is essential to protect such party's rights and interests. Accordingly, in
addition to any other remedies that either of the parties may have at law or in
equity, each of the parties hereto shall have the right to have all obligations,
covenants, agreements and other provisions of this Agreement specifically
performed by the other party, and each of the parties hereto shall have the
right to obtain preliminary and permanent injunctive relief to secure specific
performance and to prevent a breach or contemplated breach of this Agreement by
the other party.
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<PAGE>
5. OPERATIONS OF AFFILIATES.
------------------------
Each of Potlatch, the Partnership and the Company agrees that it will
refrain from authorizing any of its respective Affiliates to perform any
activity that would be prohibited by the terms of this Agreement if such
activity were performed by such party itself.
6. MISCELLANEOUS PROVISIONS.
------------------------
6.1 Term of Agreement. This Agreement shall terminate and the parties
-----------------
hereto shall not have any further obligations hereunder on the date on which the
outstanding voting securities of the Company beneficially owned by Potlatch
(determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended) represent less than 20% of the total number of votes entitled
to be cast generally in the election of the Company's directors. The
termination of this Agreement pursuant to this Section 6.1 shall not relieve any
party hereto of liability for any breach hereof occurring prior to such
termination.
6.2 Notices. Any notice, request, instruction or other document to be
-------
given hereunder by any party to the other shall be in writing and delivered
personally or sent by certified mail, telecopy or courier service, as follows:
(a) If to Potlatch, to:
Potlatch Corporation
601 West Riverside Avenue
Suite 1100
Spokane, WA 99201
Attention: Chief Executive Officer
Fax: (508) 835-1561
(b) If to the Partnership or the Company, to:
Timberland Growth Corporation
__________________________
Attention: Chief Executive Officer
Fax: (_____) _____-_________
6.3 Binding Effect; No Third Party Rights.
-------------------------------------
(a) This Agreement shall be binding upon and inure to the benefit of
Potlatch, the Partnership and the Company and their respective successors,
assigns, heirs and legal representatives.
(b) Nothing in this Agreement, whether express or implied, is intended to
confer any rights or remedies under or by reason of this Agreement on any
persons other than the parties hereto and their respective successors and
assigns, nor is anything in this Agreement
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<PAGE>
intended to relieve or discharge the obligation or liability of any third
persons to any party to this Agreement, nor shall any provision hereof give any
third persons any right of subrogation or action over or against any party to
this Agreement.
6.4 Waivers. The observance of any term of this Agreement may be waived
-------
(either generally or in a particular instance and either retroactively or
prospectively) only with the written consent of the party against whom such
waiver is sought to be enforced. No waiver by any party of any default with
respect to any provision, condition or requirement hereof shall be deemed to be
a continuing waiver in the future thereof or a waiver of any other provision,
condition or requirement hereof; nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
6.5 Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable, invalid or void by a court of competent jurisdiction, such
provision shall be excluded from this Agreement and the balance of this
Agreement shall be interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms.
6.6 Entire Agreement; Amendments.
----------------------------
(a) This Agreement contains the entire understanding of the parties with
respect to the matters covered herein and supersedes all prior agreements and
understandings, written or oral, between the parties relating to the subject
matter hereof.
(b) Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively) only with the written
consent of the parties.
6.7 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Arkansas (irrespective of its choice of law
principles).
6.8 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.9 Titles and Subtitles. The titles and subtitles used in this Agreement
--------------------
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
POTLATCH CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
TIMBERLAND GROWTH LIMITED
PARTNERSHIP
By: TIMBERLAND GROWTH
CORPORATION, its General Partner
By: _________________________________
Name: _______________________________
Title: ______________________________
TIMBERLAND GROWTH CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
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<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Timberland Growth Corporation
We consent to the use of our report included in the Registration Statement
on Form S-11 filed by Timberland Growth Corporation and to the reference to our
firm under the heading "Experts" and "Selected Financial and Operating
Information of the Potlatch Southern Timberlands" in the related Prospectus.
/s/ KPMG Peat Marwick LLP
April 28, 1998
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-48041 of Timberland Growth Corporation of our report on the
consolidated financial statements of Anderson-Tully Company dated February 10,
1998, appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the headings "Selected Consolidated
Financial Information of ATCO" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Memphis, Tennessee
April 28, 1998
