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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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. [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF SECURITIES MAXIMUM AGGREGATE AMOUNT OF
BEING REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $.01 par value................. $345,000,000 $101,775
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(1) Estimated pursuant to Rule 457(a) solely for the purpose of computing the
registration fee. Includes securities that the Underwriters have the
option to purchase to cover over-allotments, if any.
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
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 $ per share, commencing with a
pro rated distribution for the quarter ending June 30, 1998.
All of the shares of Common Stock offered hereby are being sold by the
Company. These shares represent approximately % of all shares of Common Stock
(or partnership interests exchangeable for shares of Common Stock) outstanding
after this offering ( % 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 %
of the shares of Common Stock 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 $ and
$ . 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.
----------
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INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total(3)................................ $ $ $
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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 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
BANCAMERICA ROBERTSON STEPHENS
----------
The date of this Prospectus is , 1998.
<PAGE>
[MAP OF THE INITIAL TIMBERLANDS, INDICATING LANDS HELD IN MISSOURI,
ARKANSAS, LOUISIANA, ILLINOIS, TENNESSEE, KENTUCKY AND MISSISSIPPI.]
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," "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................................................ 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ATCO....................................................... 58
BUSINESS.................................................................. 63
Overview................................................................ 63
Business Strategy....................................................... 64
Competitive Strengths................................................... 65
Industry Background..................................................... 66
The Initial Timberlands................................................. 68
Resource Management..................................................... 72
Operations.............................................................. 74
Sales and Markets....................................................... 75
Federal and State Regulation............................................ 78
Competition............................................................. 81
</TABLE>
3
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Insurance Coverage...................................................... 82
Legal Proceedings....................................................... 82
Employees............................................................... 82
MANAGEMENT................................................................ 83
Directors and Executive Officers........................................ 83
Executive Compensation.................................................. 84
Employment Agreements................................................... 85
Compensation of Directors............................................... 85
Stock Incentive Plan.................................................... 86
Incentive Bonus Program................................................. 87
Pension Plans........................................................... 88
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........................................... 95
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
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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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................................................. 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
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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 prior to or concurrently with the consummation of the public
offering made hereby (the "Offering") and (iii) an initial public offering
price of $ 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 a % 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 a % interest as the sole general partner
and Potlatch will initially hold a % 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 $ 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
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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
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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 % 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 owns at
least 20% of the Company's Common Stock (assuming the exchange of Potlatch's
Partnership Units for Common Stock). 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 at least 20% of the
Company's Common Stock (assuming the exchange of Potlatch's Partnership Units
for Common Stock), 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 $ 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
Prior to or concurrently 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 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 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 %
interest in the Partnership as the sole general partner of the Partnership,
(ii) Potlatch will own a % interest in the Partnership as the initial limited
partner, (iii) Potlatch will own the sole share of Special Voting Stock,
initially entitling Potlatch to % 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:
[DIAGRAM SHOWING THE OWNERSHIP STRUCTURE OF
THE COMPANY AND THE PARTNERSHIP AFTER THE COMPLETION OF THE FORMATION
TRANSACTIONS AND THE OFFERING]
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 current objective is to distribute approximately % of its Funds
from Operations (as defined herein) to its stockholders.
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 $ per share of Common Stock, which, on an annualized basis,
will represent a distribution rate of $ per share of Common Stock, or % of
the initial public offering price (assuming an initial public offering price of
$ 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, 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's current objective is to distribute
approximately % of its Funds from Operations 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 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 $ 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.................. 22,504
Operating expenses........................................ 7,038
General and administrative expenses....................... 2,915
Earnings from operations.................................. 37,500
Minority interest in Partnership income...................
Net earnings..............................................
<CAPTION>
PRO FORMA
DECEMBER 31, 1997(1)
--------------------
<S> <C>
BALANCE SHEET DATA:
Total assets.............................................. $ 464,309
Long-term debt............................................ 132,106
Minority interest......................................... 52,991
Stockholders' equity...................................... 276,002
<CAPTION>
PRO FORMA
YEAR ENDED
DEC. 31, 1997(1)
--------------------
<S> <C>
OTHER FINANCIAL DATA:
Net earnings.............................................. $
Add:
Depletion and real estate-related depreciation and
amortization........................................... 22,149
Minority interest in Partnership income.................
Income taxes on retained capital gains(2)...............
---------
Funds from Operations(3).................................. 54,869
Add:
Non-real estate-related depreciation and amortization... 355
Subtract:
Capital expenditures.................................... (2,219)
Principal payments on indebtedness...................... (481)
---------
Cash Available for Distribution before income taxes on
retained capital gains(4)................................ $ 52,524
=========
Company's share of Cash Available for Distribution before
income taxes on retained capital gains................... $
Subtract:
Income taxes on retained capital gains (2)..............
---------
Company's share of Cash Available for Distribution after
income taxes on retained capital gains................... $
=========
Funds from Operations per share(5)........................ $
=========
</TABLE>
- --------
(1) Gives effect to the Formation Transactions and the sale by the Company of
shares of Common Stock offered hereby at an assumed initial public
offering price of $ 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 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
14
<PAGE>
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.
(3) 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 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
(2) above 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.
(4) 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.
(5) Funds from Operations divided by the 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...................... shares
Common Stock to be outstanding
after the Offering........... 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 shares of Common Stock issuable under certain circumstances in
exchange for Partnership Units held by Potlatch. Excludes 1,500,000 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
The Company has two classes of common stock: 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 % 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 % 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
(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, 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
owns at least 20% of the Company, 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 $ 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's current objective is to
distribute % of Funds from Operations, 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, Special
Voting 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, or 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 $ per share in the net tangible book
value of the shares of Common Stock from the assumed initial public offering
price of $ 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 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 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). 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 such funds are not available or, 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 such funds to pay such taxes, then the
amount of cash actually distributed to the Company's stockholders may be
reduced. 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 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
28
<PAGE>
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 shares of Common
Stock being offered by the Company are estimated to be $ million ($ , if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $ 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
Company's current objective is to distribute approximately % of its Funds
from Operations to its stockholders. 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 $ per share of Common Stock,
which, on an annualized basis, is $ per share of Common Stock, or % 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.................................. $
Add:
Pro forma depletion and real estate-related
depreciation and amortization........................ 22,149
Pro forma minority interest in Partnership income (1).
Pro forma income taxes on retained capital gains (2)..
Adjustment for increased 1998 harvest volumes (3).....
-------
Estimated Funds from Operations(4)......................
Add:
Non-real estate-related depreciation and amortization. 355
Subtract:
Estimated capital expenditures........................ (5,216)
-------
Estimated Cash Available for Distribution before income
taxes on retained capital gains(5)..................... $
=======
Company's share of estimated Cash Available for Distri-
bution before income taxes on retained capital gains... $
Subtract:
Estimated income taxes on retained capital gains (2)..
-------
Company's share of estimated Cash Available for Distri-
bution after income taxes on retained capital gains.... $
=======
Expected initial distribution to stockholders(6)........ $
=======
Expected initial distribution per share................. $
=======
Expected initial payout ratio based on Company's share
of estimated Funds from Operations(7).................. %
</TABLE>
30
<PAGE>
- --------
(1) Reflects Potlatch's % share of the Partnership.
(2) 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 of capital gains, if any, to
retain after calculating Funds from Operations before income taxes paid on
retained capital gains.
(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.......................................................... $4,028
Depletion, depreciation and amortization..........................
Operating expenses................................................
------
Net increase in earnings from operations.......................
Subtract:
Additional Arkansas state income taxes..........................
Additional income taxes on retained capital gains...............
------
Increase in net earnings (excluding minority interest in
Partnership income)...........................................
Add:
Depletion, depreciation and amortization........................
Additional income taxes on retained capital gains...............
------
Net adjustment to estimated Funds from Operations to reflect
increased 1998 harvest levels................................. $
======
</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
31
<PAGE>
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 (2) above, 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.
(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) Reflects the Company's objective to distribute % of the Company's
proportionate share of Funds from Operations.
(7) Represents the expected initial distribution to stockholders divided by
the Company's % share of estimated Funds from Operations.
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
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's current objective is to distribute
approximately % of its Funds from Operations 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
32
<PAGE>
anticipates that it would generally make an election pursuant to which (i) any
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). 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 such funds are not available or, 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 such funds to pay such
taxes, then the amount of cash actually distributed to the Company's
stockholders may be reduced.
Based on the Company's pro forma results of operations for the year ended
December 31, 1997, not including adjustments to reflect increased 1998 harvest
volumes, the Company would have distributed approximately $ million, or
$ . per share of Common Stock, to meet its distribution objective as
described above. Under certain circumstances, the Company may make
distributions in excess of Cash Available for Distribution in order to meet
such distribution objective. In such a case, the Company may borrow funds,
issue additional equity securities or sell assets to obtain the cash necessary
to make such distributions.
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 $ per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................... $
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).......................................... $
Increase attributable to new investors.......................... $
-----
Pro forma net tangible book value per share as of December 31,
1997 after the Offering(2)..................................... $
-----
Dilution to new investors....................................... $
=====
</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 $52,991,000 divided by 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 $ 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................. % $ 300,000(1) 85.0% $ (1)
Partnership Units issued
to Potlatch............ % 52,991(2) 15.0% (2)
----------- ---------- ----------- ------- ---
Total................. 100% $ 352,991 100%
=========== ========== =========== ======= ===
</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 shares
of Common Stock being offered by the Company at an assumed initial public
offering price of $ 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........... -- 52,991
------ --------
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; shares
issued and outstanding
pro forma as adjusted(2)... --
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.................. --
Retained earnings......... -- --
------ --------
Total stockholders'
equity................. -- 276,002
------ --------
Total capitalization........ $ -- $461,099
====== ========
</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 $ 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) shares of Common Stock
that may be issued upon exchange of Partnership Units held by Potlatch,
and (ii) 1,500,000 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
administrative 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 11,574 (d) 22,504
Operating expenses...... -- 4,788 86,495 (84,245)(c) 7,038
General and
administrative
expenses............... -- -- -- 2,915 (e) 2,915
----- ------- ------- --------- -------
Total costs and
expenses............. -- 6,471 95,742 (69,756) 32,457
----- ------- ------- --------- -------
Earnings from operations. -- 33,978 12,130 (8,608) 37,500
Other income, net........ -- 1,362 1,046 2,997 (c) 5,405
Interest expense......... -- -- (4,438) 2,378 (c) (9,214)
(7,154)(f)
----- ------- ------- --------- -------
Earnings before minority
interest and income
taxes................... -- 35,340 8,738 (10,387) 33,691
Minority interest in
Partnership income...... -- -- (2,710) 2,710 (c)
(g)
----- ------- ------- --------- -------
Earnings before income
taxes................... -- 35,340 6,028
Income taxes............. -- -- (2,656) 2,656 (c)
(h)
----- ------- ------- --------- -------
Net earnings........... $ -- $35,340 $ 3,372 $ $
===== ======= ======= ========= =======
Weighted average number
of shares...............
=======
Net earnings per share
(i)..................... $
=======
Other Data:
Funds from Operations
(j)................... $54,869
=======
Cash Available for
Distribution before
taxes on retained
capital gains (k)..... $52,524
=======
</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)(l) $ 2
2 (m)
Other current assets..... -- -- 23,921 (22,725)(l) 1,196
Timber and timberlands,
net..................... -- 52,328 9,281 355,523 (n) 417,132
(o)
Property, plant and
equipment, net.......... -- 479 64,300 (63,300)(l) 2,979
-- -- -- 1,500 (p)
Commercial real estate
and farmland............ -- -- 29,801 13,199 (n) 43,000
Other assets............. -- -- 3,085 (3,085)(l) --
------ ------- -------- -------- --------
Total assets........... -- $52,807 $132,099 $279,403 $464,309
====== ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT):
Accounts payable and
accrued expenses........ $ -- $ 1,316 $ 15,493 $(13,599)(l) $ 3,210
Long-term debt........... -- -- 104,143 (85,198)(l) 132,106
113,161 (q)
Deferred taxes........... -- -- 13,971 (13,971)(l)
(o)
Other long-term
liabilities ............ -- -- 1,507 (1,507)(l) --
Minority interest........ -- -- 2,862 (2,862)(l) 52,991
52,991 (p)
Stockholders' equity
(deficit)............... -- 51,491 (5,877) (45,614)(l) 276,002
2 (m)
276,000 (r)
------ ------- -------- -------- --------
Total liabilities and
stockholders' equity.. $ -- $52,807 $132,099 $279,403 $464,309
====== ======= ======== ======== ========
</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.
(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.
(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.................... 19,525
New depreciation expense related to application of purchase
method of accounting to ATCO commercial real estate,
equipment and office building............................... 1,296
--------
Net adjustment............................................. $ 11,574
========
</TABLE>
(e) Reflects management's estimate of the following recurring incremental
general and administrative costs of the Company:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Salaries, including pay-
roll taxes and benefits.. $1,550
Legal, accounting, SEC re-
porting and other stock-
holder costs............. 455
Other administrative...... 910
------
Total adjustment........ $2,915
======
</TABLE>
(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 $ . In addition, Potlatch will be allocated
its proportionate share (initially %) 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>
Retained capital gains.................................. $ $ $
Arkansas nonconformity.................................. -- 971 971
--- --- ---
$ $ $
=== === ===
</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) 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 necessarily
indicative of funds available to fund the Company's cash needs, including its
ability to make distributions.
43
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Calculation of Funds from Operations:
Pro forma net earnings..................................... $
Plus pro forma depletion, and real estate-related
depreciation and amortization............................. 22,149
Plus pro forma minority interest in Partnership income.....
Plus pro forma income taxes on retained capital gains......
-------
Funds from Operations.................................... $54,869
=======
</TABLE>
(k) 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.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Calculation of Cash Available for Distribution:
Pro forma Funds from Operations............................. $54,869
Plus non-real estate-related depreciation and amortization.. 355
Subtract capital expenditures............................... (2,219)
Subtract principal payments on indebtedness................. (481)
-------
Cash Available for Distribution before income taxes on
retained capital gains................................... $52,524
=======
</TABLE>
(l) Reflects the elimination of the assets and liabilities of ATCO that will
not be acquired by the Company.
(m) Reflects the issuance by the Company of one share of Special Voting
Stock, as described elsewhere in this Prospectus, for $1,500.
(n) 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
========
The total purchase price of $410 million is comprised of (in thousands):
Proceeds from debt financing arrangements......................... $113,161
Net proceeds from the sale of shares of Common Stock......... 276,000
Liabilities of ATCO assumed by the Company........................ 20,839
--------
Total purchase price............................................ $410,000
========
</TABLE>
44
<PAGE>
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>
(o) To record deferred income taxes. The amount is calculated by applying
the expected effective tax rate to the portion of the difference between the
purchase price of the ATCO assets and the respective tax bases of the affected
assets.
(p) 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 and an office building in Memphis, Tennessee
acquired from ATCO. For financial accounting purposes, Potlatch's interest is
credited at Potlatch's carrying cost of the assets to be contributed to the
Partnership.
(q) To record borrowings of $113.2 million under the Company's Credit
Facility.
(r) Reflects the issuance by the Company of shares of Common Stock, as
described elsewhere in this Prospectus, at an assumed initial public offering
price of $ per share for net proceeds of approximately $276 million (after
deducting estimated underwriting discounts and commissions and estimated
offering expenses).
45
<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 %
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
46
<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.
47
<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. 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 softwoods, the
Company's harvest plans will be significantly affected by its plan to improve
long-term
48
<PAGE>
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
49
<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 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
50
<PAGE>
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 $2.9 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 $ 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.
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
51
<PAGE>
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 $22.5 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 $10.0
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
$ 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 $ million.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
The net proceeds to the Company from the sale of the 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 $ 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
$113.2 million in debt financing ($ 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 approximately $ million in cash 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 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
52
<PAGE>
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 $5.2
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.
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 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
53
<PAGE>
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 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
"--Overview" 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
54
<PAGE>
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 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). 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 such
funds are not available or, 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 such funds to pay such taxes, then the amount of cash actually
distributed to the Company's stockholders may be reduced. 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.
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.
55
<PAGE>
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 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>
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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.
57
<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.
61
<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.
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<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
$55.2 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
63
<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 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 % interest as the sole general partner and
Potlatch will hold a % 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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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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<PAGE>
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. The Company will also
acquire ATCO's headquarters building in Memphis in connection with the
Formation Transactions.
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
74
<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.
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 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
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<PAGE>
substitution which may not materially reduce the volume of timber harvested. 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 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.
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<PAGE>
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
Independent Directors' 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 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
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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.
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,
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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.
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
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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.
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
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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. Before joining Bank of
America in 1991, she was the Vice President and Manager of Leasing and
Acquisition for First Interstate Bank. 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 Asset
Management, 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.
Mr. Storey is a member of the American Institute of Certified Public
Accountants. 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.
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 Independent Directors' Committee will be established prior to or shortly
after the consummation of the Offering and will consist solely of Independent
Directors. This 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
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.
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.
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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 $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.
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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
1,500,000 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 key 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 key 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 a
key 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 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 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. The exercise price may be
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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 a key 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 a key 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.
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
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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.
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)
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 $132.1 million of indebtedness ($ if
the Underwriters' over-allotment option is exercised in full), which will
constitute approximately % of its total market capitalization after giving
effect to the Offering ( % if the Underwriters' over-allotment option is
exercised in full), in each case assuming an initial public offering price of
$ 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 and the Partnership were formed in February 1998. Prior to or
concurrently 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 and the Company's
future headquarters building to the Partnership in exchange for
Partnership Units.
. Potlatch will acquire the sole share of the Company's Special Voting
Stock.
. The Company will sell 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 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 expects to 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 $ 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 Partnership Units, which
will represent an approximately % economic interest in the Partnership, (ii)
Potlatch will own Partnership Units, which will represent an approximately
% economic interest in the Partnership, (iii) Potlatch will own the sole
share of Special Voting Stock, initially entitling Potlatch to approximately
% 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 the opportunity or fails to enter into a definitive acquisition
agreement within 120 days after receiving the notice from Potlatch, or unless
such definitive agreement is terminated. If the Partnership makes reasonable
efforts to pursue an acquisition opportunity, then the Opportunities Agreement
provides that Potlatch may not complete the acquisition on terms which, taken
as a whole, are more favorable than those offered to the Partnership.
The Partnership's right of first opportunity does not apply in certain
limited circumstances, including where the transaction involves lands 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 transaction) 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 holds less than 20%
of the outstanding shares of Common Stock (assuming for such purpose the
exchange of all Partnership Units held by Potlatch for shares of Common Stock
in accordance with the Partnership Agreement).
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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 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 March
1998. The Company is the sole general partner of, and upon consummation of the
Offering will hold approximately % 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, except for the preemptive right of
Potlatch to maintain its percentage ownership interest in the Company in the
event of certain equity offerings by the Company and the Partnership, as
described under "Certain Relationships and Transactions."
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 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 the
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 be 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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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
1, 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 Partnership Units, representing a % interest in
the Partnership (or Partnership Units, if the Underwriters' over-allotment
option is exercised in full), in each case assuming an initial public offering
price of $ 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 %
Scott R. Jones.......... 0 0 0 0
Allan F. Trinkwald...... 0 0 0 0
Robert M. Jolley, Jr.... 0 0 0 0
John M. Richards........ 0 0 0 0
Christine Garvey........ 0 0 0 0
Parnell S. Lewis, Jr.... 0 0 0 0
James F. Rippey......... 0 0 0 0
Will M. Storey.......... 0 0 0 0
Frederick T.
Weyerhaeuser........... 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 1, 1998 and 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 1, 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, % and
%, respectively, and all directors and executive officers as a group,
% and %, respectively.
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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, one share of Special Voting Stock,
par value $.01 per share, 150,000,000 shares of Excess Stock, par value $.01
per share, and 50,000,000 shares of Preferred Stock, par value $.01 per share.
None of the Common Stock and Preferred Stock is outstanding as of the date
hereof. Upon the consummation of the Offering, shares of Common Stock
will be issued and outstanding ( 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 shares of Common Stock, will control
approximately % 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 of Common Stock 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 affiliates. 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 based solely on 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, Special Voting
Stock or any series of Preferred Stock ("Equity Stock"). Under the Charter, a
person generally "beneficially owns" shares for such purpose if
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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 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, (iii) within the meaning of
Section 856(a)(5) of the Code, 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 Company 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 capital 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
The Company's Charter provides that the number of directors may be increased
or decreased from time to time by the vote of a majority of the Board but may
not be less than three. 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 annual meeting of stockholders to be held in 1999, another
class will hold office initially for a term expiring at the annual meeting of
stockholders to be held in 2000 and another class will hold office initially
for a term expiring at the 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 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 75% 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 except upon the existence of cause for removal
and a substantial affirmative vote and filling the vacancies created by such
removal with their own nominees.
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 so long as Potlatch and its subsidiaries
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. Thereafter, 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
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.
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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
shares of Common Stock. The 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
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 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 1,500,000 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 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............................
BancAmerica Robertson Stephens..................................
----
Total.........................................................
====
</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
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 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 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.
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 report 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
1,500,000 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
between 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................................................ 46
Management's Discussion and Analysis of Financial Condition and Results of
Operations of ATCO....................................................... 58
Business.................................................................. 63
Management................................................................ 83
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.5* Form of 1998 Stock Incentive Plan of the Registrant.
10.6* Form of Stock Option Agreement.
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.
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.
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 REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF SPOKANE, STATE OF WASHINGTON, ON THE 16TH DAY OF
MARCH, 1998.
Timberland Growth Corporation
/s/ John M. Richards
By: _________________________________
JOHN M. RICHARDS PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John M. Richards, Ralph M. Davisson and Betty
R. Fleshman, and each of them, his true and lawful attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this Registration
Statement, and any registration statement relating to the offering covered by
this Registration Statement and filed pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact and agents or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
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 March 16, 1998
- ------------------------------------- Financial Officer
JOHN M. RICHARDS (Principal
Executive,
Financial and
Accounting Officer)
and Director
II-4
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of February
9, 1998, by and among ANDERSON-TULLY COMPANY, a Mississippi corporation (the
----------------------
"Company"), POTLATCH CORPORATION, a Delaware corporation ("Parent"), TIMBERLAND
-------------------- ----------
GROWTH CORPORATION, a Delaware corporation ("Newco"), and BEAVER ACQUISITION
- ------------------ ------------------
CORPORATION, a Mississippi corporation and wholly-owned subsidiary of Newco
- -----------
("Newsub"),
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Parent, Newco, Newsub and
the Company have approved the merger of Newsub with and into the Company on the
terms and subject to the conditions set forth herein; and
WHEREAS, the transactions contemplated by this Agreement will not be
consummated unless and until, among other things, the Mississippi River
Timberlands Control Act, Miss. Code Ann. (S) 49-20-1 et seq. (1972), is
inapplicable to the transactions contemplated hereby or all required approvals
thereunder have been obtained; and
WHEREAS, in furtherance and not in limitation of the immediately preceding
recital, the Company intends to cause the Timberlands Act to be inapplicable to
the transactions contemplated hereby by registering its Common Stock under
Section 12(g) of the Securities Exchange Act of 1934, as amended, or otherwise,
prior to the effective time of the merger contemplated by this Agreement; and
WHEREAS, concurrently with the execution and delivery of this Agreement,
Parent, Anderson-Tully Veneers, L.P. and Anderson-Tully Management Services LLC
are entering into that certain Asset Purchase Agreement, dated as of the date
hereof (the "Asset Purchase Agreement"), Parent and Anderson-Tully Timber
Company are entering into that certain Logging Subsidiary Asset Purchase
Agreement, dated as of the date hereof (the "Logging Subsidiary Asset Purchase
Agreement"), and Parent and Anderson-Tully Lumber Company are entering into that
certain Sawmills Subsidiary Asset Purchase Agreement (the "Sawmills Subsidiary
Asset Purchase Agreement" and together with the Logging Asset Purchase
Agreement, the "Subsidiaries Asset Purchase Agreements") each of which
contemplates, among other things, the sale of certain assets to Parent by such
other parties immediately prior to (in the case of the assets to be transferred
pursuant to the Asset Purchase Agreement) or immediately after (in the case of
the assets to be transferred pursuant to the Subsidiaries Asset Purchase
Agreements), the closing hereunder; and
WHEREAS, the parties hereto desire to make certain representations,
warranties and covenants in connection with this Agreement:
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
-1-
<PAGE>
ARTICLE I
---------
CERTAIN DEFINITIONS
-------------------
Section 1.1 Certain Definitions. As used in this Agreement, the following
-------------------
terms have the respective meanings set forth below:
"Acquiring Party" has the meaning set forth in Section 7.5(b).
---------------
"Affiliate" means, with respect to any Person, any other Person who
---------
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with, such Person. The term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person whether through the
ownership of voting securities, by contract or otherwise and the terms
"controlled" and "controlling" have meanings correlative thereto.
"Agreement" means this Agreement and Plan of Merger.
---------
"Alternative Proposal" has the meaning set forth in Section 5.11(a).
--------------------
"Alternative Timber Transaction" means any transaction or series of related
------------------------------
transactions by Parent or any of its Subsidiaries involving any one or more of
the following: (i) the sale, lease, exchange, transfer or conveyance of
timberlands representing thirty percent (30%) or more of the total timberland
acreage held by Parent in the State of Arkansas on the date hereof (such total
acreage, the "Arkansas Timberlands"), provided that this clause (i) is not
--------
intended to cover a merger or other business combination transaction involving
Parent (including a sale of the Arkansas Timberlands as part of a sale of all or
substantially all of Parent's assets); (ii) the issuance of any investment
security the income from or value of which would depend primarily on the
Arkansas Timberlands, or (iii) the contribution of the Arkansas Timberlands to a
joint venture, trust, limited partnership, real estate investment trust or
similar entity; provided, however, that any transaction described in clauses
-------- -------
(i), (ii) or (iii) above shall not constitute an Alternative Timber Transaction
unless at least one of the parties to such transaction is a Person other than
Parent and its Subsidiaries.
"Antitrust Division" has the meaning set forth in Section 5.6.
------------------
"Articles of Merger" has the meaning set forth in Section 2.3.
------------------
"Asset Purchase Agreement" has the meaning set forth in the recitals to
------------------------
this Agreement.
"Base Per Share Amount" has the meaning set forth in Section 2.8.
---------------------
"Base Merger Price" means $410 million adjusted (without duplication) as
-----------------
follows: (i) minus the aggregate amount of Debt of the Company and its
-----
Subsidiaries as of the Closing Date, (ii) minus the aggregate amount of expenses
-----
incurred or to be incurred by the Company
-2-
<PAGE>
and its Subsidiaries in connection with the transactions contemplated by this
Agreement, including, without limitation, the fees referred to in Section 3.21,
but excluding any such expenses actually paid by the Company prior to the
Closing Date and any reasonable legal fees incurred in connection with the
delivery of the opinions referred to in Section 6.2(e) hereof, (iii) minus the
-----
aggregate amount required to be paid by the Company and its Subsidiaries to
officers, directors or employees of the Company or any of its Subsidiaries which
are triggered by the Company's execution and delivery of this Agreement or by
the consummation of the transactions contemplated hereby, but excluding any such
amounts actually paid by the Company prior to the Closing Date, (iv) plus the
----
amount of the Company's and each Subsidiary's cash and cash equivalents on hand
as of the Closing Date, (v) plus 95% of the Sawmills Amount, (vi) plus 82.2% of
---- ----
the Logging Amount, (vii) plus the amount(s), if any, referred to in clause (a)
----
of the definitions of Company Working Capital Adjustment, Logging Working
Capital Adjustment and Sawmills Working Capital Adjustment or minus the
-----
amount(s), if any, referred to in clause (b) of such definitions. As a means of
clarifying the intentions of the parties hereto with respect to the calculation
of the Base Merger Price, Schedule 2.10(b) is an example of how the Base Merger
----------------
Price would be calculated based on the assumptions set forth therein.
"Biomass" means Biomass Partners, L.P., a Tennessee limited partnership.
-------
"Built-in-Gain Election" has the meaning set forth in Section 3.10.
----------------------
"Business Day" means a day, other than a Saturday or Sunday, on which
------------
commercial banks in Memphis, Tennessee and in San Francisco, California are open
for the general transaction of business.
"Certificates" has the meaning set forth in Section 2.8.
------------
"Claim" has the meaning set forth in Section 5.9(a).
-----
"Closing" has the meaning set forth in Section 2.2.
-------
"Closing Date" has the meaning set forth in Section 2.2.
------------
"Code" means the Internal Revenue Code of 1986, as amended, and the rules
----
and regulations promulgated thereunder.
"Common Stock" means the Common Stock, $2,000 par value per share, of the
------------
Company.
"Company Financial Statements" has the meaning set forth in Section 3.6.
----------------------------
"Company Reorganization" means the transactions contemplated by the
----------------------
Information Statement of the Partnership dated December 16, 1997.
"Company Required Consents" has the meaning set forth in Section 3.4.
-------------------------
"Company Shareholder Approval" has the meaning set forth in Section 3.2.
----------------------------
-3-
<PAGE>
"Company Working Capital Adjustment" means (a) the amount, if any, by which
----------------------------------
the consolidated Working Capital of the Company and its Subsidiaries exceeds
$(321,000), or (b) the amount, if any, by which $(321,000) exceeds the
consolidated Working Capital of the Company and its Subsidiaries.
"Constituent Corporations" means the Company and Newsub.
------------------------
"Contracts" has the meaning set forth in Section 3.15.
---------
"Contribution" means the transaction contemplated to occur immediately
------------
after the Effective Time in which the Company will contribute all of its assets
and liabilities to the REIT Partnership, which shall acquire and assume such
assets and liabilities, all as contemplated by the Registration Statement.
"Debt" means any obligation for borrowed money or representing the purchase
----
price of property deferred and unpaid beyond normal trade terms, or any lease
obligation which under GAAP is to be capitalized, or any guarantee of any such
obligation; provided that the term "Debt" shall not include any guarantee of any
Debt which is assumed by Parent pursuant to the Asset Purchase Agreement, any
guarantee of any Debt referred to in clause (a) of the definitions of Sawmills
Amount or Logging Amount or any guarantee which by its terms terminates at the
Effective Time without liability (contingent or otherwise) to the Company.
"Dissenters' Shares" has the meaning set forth in Section 2.9.
------------------
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"Effective Time" has the meaning set forth in Section 2.3.
--------------
"Environmental Laws" means all federal, state and local laws, ordinances,
------------------
rules and regulations now or hereafter in force, as amended from time to time
through the Closing Date, and all federal and state court decisions, consent
decrees and orders interpreting or enforcing any of the foregoing, in any way
relating to or regulating human health or safety, or industrial hygiene or
environmental conditions, or protection of the environment, or pollution or
contamination of the air, soil, surface water or groundwater, and includes the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. (S) 9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
(S) 6901 et seq., the Clean Water Act, 33 U.S.C. (S) 1251 et seq. and the
Endangered Species Act, 16 U.S.C. et seq.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Facilities" shall mean any real property, leaseholds, or other interests
----------
currently or formerly owned or operated by the Company and its Subsidiaries and
any buildings, plants, structures, or equipment (including motor vehicles, tank
cars, and rolling stock) currently or formerly owned or operated by the Company
and its Subsidiaries.
"FTC" has the meaning set forth in Section 5.6.
---
"GAAP" means generally accepted accounting principles as in effect in the
----
United States
-4-
<PAGE>
on the date of this Agreement, applied on a consistent basis.
"Governmental Authority" means any national, federal, state, provincial,
----------------------
county, municipal or local government, foreign or domestic, or the government of
any political subdivision of any of the foregoing, or any entity, authority,
agency, ministry or other similar body exercising executive, legislative,
judicial, regulatory or administrative authority or functions of or pertaining
to government, including any authority or other quasi-governmental entity
established to perform any of such functions.
"Hazardous Substances" means any substance or material that is described as
--------------------
a toxic or hazardous substance, waste or material or a pollutant or contaminant,
or words of similar import, in any of the Environmental Laws, and includes
asbestos, petroleum (including crude oil or any fraction thereof, natural gas,
natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel, or
any mixture thereof), petroleum products, polychlorinated biphenyls, urea
formaldehyde, radon gas, radioactive matter, medical waste, and chemicals which
may cause cancer or reproductive toxicity.
"Dissenters' Shares" has the meaning set forth in Section 2.9.
------------------
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
-------
as amended.
"Intellectual Property" has the meaning set forth in Section 3.14.
---------------------
"Indemnified Officer/Director" has the meaning set forth in Section 5.9(a).
----------------------------
"IPO" has the meaning set forth in Section 5.8(a).
---
"IPO Criteria" has the meaning set forth in Section 5.8(a).
------------
"Leased Real Property" has the meaning set forth in Section 3.16.
--------------------
"Letter of Transmittal" has the meaning set forth in Section 2.10.
---------------------
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
----
charge of any kind.
"LLC Management Company" means Anderson-Tully Management Services LLC, a
----------------------
Mississippi limited liability company.
"Logging" means Anderson-Tully Timber Company, a Mississippi corporation.
-------
"Logging Amount" means $3,500,000, (a) minus the aggregate amount of Debt
-------------- -----
of Logging as of the Closing Date, (b) plus the amount of Logging's cash on hand
----
as of the Closing Date, and (c) minus the aggregate amount required to be paid
-----
by Logging to its officers, directors or employees which are triggered by this
Agreement, Logging's entering into the Logging Subsidiary Asset Purchase
Agreement or the consummation of the transactions contemplated hereby or
thereby, but excluding any such amounts actually paid by Logging prior to the
Closing
-5-
<PAGE>
Date.
"Logging Subsidiary Asset Purchase Agreement" has the meaning set forth in
-------------------------------------------
the recitals to this Agreement.
"Logging Working Capital Adjustment" means (a) 82.2% of the amount, if any,
----------------------------------
by which the Working Capital of Logging exceeds $5,000 or (b) 82.2% of the
amount, if any, by which $5,000 exceeds the Working Capital of Logging.
"Material Adverse Change" means any change that is materially adverse to
-----------------------
the business, financial condition or results of operations of a specified
Person, including, without limitation, any change which is reasonably likely to
be materially adverse to such business in the future or its future financial
condition or results of operations.
"Material Adverse Effect" means any effect that is materially adverse to
-----------------------
the business, financial condition or results of operations of a specified
Person, including, without limitation, any effect on such Person's future
business or its future financial condition or results of operations which is
reasonably likely to occur.
"Merger" has the meaning set forth in Section 2.1.
------
"Merger Documents" means, collectively, this Agreement, the Articles of
----------------
Merger and all other agreements and documents entered into in connection with
the Merger and the other transactions contemplated hereby.
"Mississippi BCA" has the meaning set forth in Section 2.1.
---------------
"Most Recent Balance Sheet" has the meaning set forth in Section 3.6.
-------------------------
"Multiemployer Plan" has the meaning set forth in section 3(37) of ERISA.
------------------
"Non-Parent Party" has the meaning set forth in Section 7.5(f).
----------------
"Note Purchase Agreement" means the Note Purchase Agreement for 6% Note due
-----------------------
October 1, 2002, dated as of October 1, 1997, between the Company and Parent.
"Offer Price" means (a) the price per share of capital stock to be paid ,
-----------
directly or indirectly, pursuant to any agreement to acquire voting power
referred to in Section 7.5(b)(ii)(A) (if such transaction were consummated on
the date of such agreement) multiplied by the total number of outstanding shares
of capital stock on the date of such agreement, (b) in the case of an agreement
to acquire assets referred to in Section 7.5(b)(ii)(A), the sum of the price to
be paid in such transaction for such assets (if such transaction were
consummated on the date of such agreement) and the fair market value of the
remaining assets of the Company as determined by a nationally recognized
investment banking firm selected by mutual agreement of Parent and the Company,
and (c) in the case of an acquisition of beneficial ownership of capital stock
of the Company referred to in Section 7.5(b)(ii)(B), the highest price per share
of capital stock paid by the acquiring Person or group multiplied by the total
number of outstanding shares of capital stock of the Company on the date of such
acquisition. In determining the Offer Price, the value
-6-
<PAGE>
of any consideration other than cash shall be determined by a nationally
recognized investment banking firm selected by mutual agreement of Parent and
the Company.
"Organizational Documents" has the meaning set forth in Section 3.1.
------------------------
"Owned Real Property" has the meaning set forth in Section 3.16.
-------------------
"Partnership" means Anderson-Tully Veneers, L.P., a Mississippi limited
-----------
partnership.
"Paying Agent" has the meaning set forth in Section 2.10.
------------
"Person" means an individual, partnership, corporation, limited liability
------
company, joint stock company, unincorporated organization or association, trust,
joint venture, association or other organization, whether or not a legal entity,
or a Governmental Authority.
"Plans" has the meaning set forth in Section 3.13.
-----
"Pro Rata Portion" means a fraction, the numerator of which is one (1), and
----------------
the denominator of which is the total number of shares of Common Stock
outstanding immediately prior to the Effective Time (assuming the exercise of
all securities of the Company which are convertible into, or exchangeable for,
shares of Common Stock); but for this purpose any share of Common Stock which is
held in the Company's treasury or by any of its Subsidiaries shall not be deemed
to be outstanding.
"Real Property" has the meaning set forth in Section 3.16.
-------------
"Registration Statement" has the meaning set forth in Section 4.6.
----------------------
"REIT Election" has the meaning set forth in Section 3.10.
-------------
"REIT Partnership" means the Delaware limited partnership in which Newco
----------------
will become the sole general partner at the closing of the IPO, as contemplated
by the Registration Statement.
"Release" means any spilling, leaking, pumping, pouring, emitting,
-------
emptying, discharging, injecting, escaping, leaching, dumping or disposing into
the environment, including continuing migration, of Hazardous Substances into or
through soil, surface water or groundwater.
"Report" has the meaning set forth in Section 5.6.
------
"Sawmills" means Anderson-Tully Lumber Company, a Mississippi corporation.
--------
"Sawmills Amount" means $20,000,000, (a) minus the amount of Debt of
--------------- -----
Sawmills as of the Closing Date, (b) plus the amount of Sawmills' cash on hand
----
as of the Closing Date, and (c) minus the aggregate amount required to be paid
-----
by Sawmills to its officers, directors or employees which are triggered by this
Agreement, Sawmills' entering into the Sawmills Subsidiary Asset Purchase
Agreement, or the consummation of the transactions contemplated hereby or
thereby, but excluding any such amounts actually paid by Sawmills prior to the
-7-
<PAGE>
Closing Date.
"Sawmills Subsidiary Asset Purchase Agreement" has the meaning set forth in
--------------------------------------------
the recitals to this Agreement.
"Sawmills Working Capital Adjustment" means (a) 95% of the amount by which
-----------------------------------
the Working Capital of Sawmills exceeds $3,800,000, or (b) 95% of the amount by
which $3,800,000 exceeds the Working Capital of Sawmills.
"SEC" has the meaning set forth in Section 4.6.
---
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Shareholder" means each holder of shares of Common Stock outstanding
-----------
immediately prior to the Effective Time.
"Shareholders' Meeting" has the meaning set forth in Section 5.3
---------------------
"Short Period" has the meaning set forth in Section 3.10.
------------
"Subsidiaries Asset Purchase Agreements" has the meaning set forth in the
--------------------------------------
recitals to this Agreement.
"Subsidiary" means, with respect to any Person, any corporation,
----------
partnership, association or other business entity of which (i) if a corporation
or other business entity (except a partnership), a majority of the total voting
power of shares of stock or other interests entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of such Person or a
combination thereof, or (ii) if a partnership, a majority of the partnership
interests thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more Subsidiaries of such Person or a combination thereof
or such Person shall be allocated a majority of partnership gains or losses or
shall be or control the managing director, managing member, general partner or
other managing Person of such partnership. Notwithstanding the foregoing,
neither Biomass nor the Partnership (nor LLC Management Company, Logging and
Sawmills, which are Subsidiaries of the Partnership) nor any Person listed on
Schedule 3.5(b) shall be deemed to be a Subsidiary of the Company. Unless the
- ---------------
context requires otherwise, each reference to a Subsidiary shall be deemed to be
a reference to a Subsidiary of the Company.
"Surviving Corporation" has the meaning set forth in Section 2.1.
---------------------
"Taxes" has the meaning set forth in Section 3.10.
-----
"Tax Return" has the meaning set forth in Section 3.10.
----------
"Termination Date" has the meaning set forth in Section 7.1(b).
----------------
"Timberlands Act" means the Mississippi River Timberlands Control Act,
---------------
Mississippi
-8-
<PAGE>
Code Ann. (S) 49-20-1 et seq. (1972).
"Topping Amount" means an amount equal to 9.9% of the excess, if any, of
--------------
(a) the Offer Price over (b) the Base Merger Price calculated as of the date
this Agreement is terminated pursuant to Section 7.1(c), Section 7.1(h) or
Section 7.1(i), as the case may be, less the aggregate amount of dividends paid
or with respect to which a record date has been established between such date of
termination and the date of the event giving rise to the payment of a
termination fee under Section 7.5(b).
"Working Capital" means the total current assets (excluding cash and cash
---------------
equivalents) of a specified Person or Persons at the Closing Date minus the
total current liabilities (excluding short-term Debt and the current portion of
long-term Debt) of such Person or Persons at the Closing Date (which difference
may be a negative number), calculated in accordance with GAAP applied in a
manner consistent with the Company Financial Statements.
Section 1.2 Interpretation. Unless otherwise indicated to the contrary
--------------
herein by the context or use thereof: (i) the words, "herein," "hereto,"
"hereof" and words of similar import refer to this Agreement as a whole and not
to any particular Section or paragraph hereof; (ii) the word "including" means
"including, but not limited to"; (iii) masculine gender shall also include the
feminine and neuter genders, and vice versa; and (iv) words importing the
singular shall also include the plural, and vice versa.
ARTICLE II
----------
THE MERGER
----------
Section 2.1 The Merger. Upon the terms and subject to the conditions set
----------
forth in this Agreement, at the Effective Time, Newsub shall, pursuant to the
provisions of the Mississippi Business Corporation Act (as amended from time to
time, the "Mississippi BCA"), be merged with and into the Company (the "Merger")
and the separate corporate existence of Newsub shall thereupon cease in
accordance with the provisions of the Mississippi BCA. From and after the
Effective Time, the Company shall be the surviving corporation in the Merger
(the Company, as the surviving corporation in the Merger, being sometimes
hereinafter referred to as the "Surviving Corporation"). The Merger shall have
the effects specified in the Mississippi BCA.
Section 2.2 Closing. The closing of the Merger (the "Closing") shall take
-------
place at the offices of Pillsbury Madison & Sutro LLP, 235 Montgomery Street,
San Francisco, California (a) concurrently with the closing of the IPO and
immediately after the closing under the Asset Purchase Agreement, but in any
event following the satisfaction or waiver of the conditions set forth in
Article VI (other than the conditions that by their nature are to be satisfied
at the Closing, but subject to the satisfaction or waiver of those conditions)
or (b) at such other place and time or on such other date as Parent and the
Company may agree in writing (the "Closing Date").
Section 2.3 Effective Time. As soon as practicable after the Closing, the
--------------
parties hereto shall cause Articles of Merger meeting the requirements of
Section 79-4-11.05 of the Mississippi BCA, to be properly executed and filed in
accordance with the Mississippi BCA. The Merger shall be effective at the time
and on the date when the Articles of Merger are duly filed with the
-9-
<PAGE>
Secretary of State of the State of Mississippi or at such other time as shall be
agreed upon by the parties and set forth in the Articles of Merger (the
"Effective Time").
Section 2.4 Articles of Incorporation. The articles of incorporation of
-------------------------
Newsub in effect immediately prior to the Effective Time shall be the articles
of incorporation of the Company at the Effective Time. The Articles of Merger
shall set forth the amendments to the articles of incorporation of the Surviving
Corporation in order to give effect to the provisions of this Section 2.4.
Section 2.5 Bylaws. The bylaws of Newsub as in effect immediately prior
------
to the Effective Time shall be the bylaws of the Company at and as of the
Effective Time.
Section 2.6 Officers. The officers of Newsub immediately prior to the
--------
Effective Time shall, from and after the Effective Time, be the officers of the
Surviving Corporation and will hold office until their successors are duly
elected or appointed and qualify in the manner provided in the articles of
incorporation or bylaws of the Surviving Corporation or as otherwise provided by
law, or until their earlier death, resignation or removal.
Section 2.7 Directors. The directors of Newsub immediately prior to the
---------
Effective Time, from and after the Effective Time, shall be the directors of the
Surviving Corporation and will serve until their successors are duly elected or
appointed and qualify in the manner provided in the articles of incorporation or
bylaws of the Surviving Corporation or as otherwise provided by law, or until
their earlier death, resignation or removal.
Section 2.8 Conversion of Shares.
--------------------
(a) As of the Effective Time, by virtue of the Merger and without any
action on the part of any holder thereof or any party hereto, (i) each share of
Common Stock of the Company issued and outstanding immediately prior to the
Effective Time (other than shares held in the Company's treasury or by any of
its Subsidiaries and other than shares held by Shareholders who validly perfect
dissenters' rights under the Mississippi BCA) shall be canceled and converted
into the right to receive an amount (such amount, the "Base Per Share Amount")
equal to the Base Merger Price multiplied by the Pro Rata Portion, payable in
cash to the holder thereof, without interest thereon, upon surrender of the
certificates formerly representing such share ("Certificates"), all at the time
and otherwise in accordance with Section 2.10, and (ii) each share of Common
Stock held by Shareholders who validly perfect dissenter's rights under the
Mississippi BCA shall be canceled and converted into a right to receive an
amount in accordance with Section 2.9.
(b) Each share of Common Stock held in the treasury of the Company or by
any of its Subsidiaries shall, by virtue of the Merger and without any action on
the part of the holders thereof, be canceled and retired and shall cease to
exist as of the Effective Time and no payment shall be made with respect
thereto.
(c) Each share of capital stock of Newsub issued and outstanding
immediately prior to the Effective Time shall, at the time of the Merger and
without any action on the part of Newsub, be converted into one validly issued,
fully paid and nonassessable share of the common stock of the Surviving
Corporation and the Surviving Corporation shall be a wholly-owned
-10-
<PAGE>
Subsidiary of Newco.
(d) Subject to Section 2.9, from and after the Effective Time, the holders
of Certificates shall cease to have any rights with respect to such
Certificates, except the right to receive the Base Per Share Amount with respect
to each of the shares represented thereby.
Section 2.9 Dissenters' Rights. Shares of Common Stock of the Company
------------------
which have not been voted for approval of this Agreement and with respect to
which dissenters' rights shall have been properly demanded in accordance with
the Mississippi BCA ("Dissenters' Shares") shall not be converted into the right
to receive cash as set forth in Section 2.8(a)(i) on or after the Effective Time
unless and until the shareholder becomes ineligible for such dissenters' rights,
at which time such shares shall cease to be Dissenters' Shares and shall be
converted into and represent the right to receive cash as set forth in Section
2.8(a)(i). From and after the Effective Time, no shareholder who has demanded
dissenters' rights shall have any rights whatsoever other than the right to
payment of the fair value of his shares afforded by the Mississippi BCA, and,
without limiting the generality of the foregoing, no such shareholder shall be
entitled to vote shares of Common Stock for any purpose or to receive payment of
dividends or other distributions with respect to shares of Common Stock (except
dividends and other distributions payable to shareholders of record at a date
which is prior to the Effective Time). The Company shall give Parent (i) prompt
notice (and a copy) of any written notice of intent to demand payment delivered
to Company pursuant to Section 79-4-13.21 of the Mississippi BCA, and prompt
written notice of withdrawal of any such notice or any other instruments in
respect thereof received by the Company and (ii) the opportunity to direct all
negotiations and proceedings with any shareholder who delivers any such notice
of intent to demand payment. The Company will not voluntarily make any payment
with respect to any such demands for payment and will not, except with the prior
written consent of Parent, settle or offer to settle any such demands. Newco
shall be responsible for the handling of all proceedings from and after the
Effective Time, and for the payment of any award or compromise, with respect to
Dissenters' Shares.
Section 2.10 Payment for Common Shares.
-------------------------
(a) Prior to the Closing Date, Parent and the Company shall agree on the
Base Merger Price calculated in accordance with the terms hereof. In this
regard, Parent and the Company shall consult with each other with respect to the
anticipated Closing Date hereunder, which shall be coordinated with the
anticipated closing date of the IPO, assuming the other conditions to Closing
hereunder are satisfied or reasonably capable of being satisfied on such date.
Upon determination of the anticipated Closing Date, the Company shall promptly
prepare and deliver to Parent a schedule substantially in the form attached as
Schedule 2.10(a) showing the estimated Base Merger Price as of the anticipated
- ----------------
Closing Date (including, without limitation, any expected changes in the amount
of Debt or Working Capital that would affect the Base Merger Price). The
Company shall make available to Parent such information as Parent shall
reasonably request to verify the information set forth in such schedule and the
Company shall immediately inform Parent of any changes to the amounts set forth
therein. Prior to Closing, Parent and the Company shall agree on a schedule
setting forth the Base Merger Price, which schedule shall be executed by Parent
and the Company. The foregoing process shall be repeated in the event that the
Closing Date does not occur on the anticipated Closing Date. As a means of
clarifying the intentions of the parties hereto with respect to the calculation
of the Base Merger Price, Schedule
--------
-11-
<PAGE>
2.10(b) is an example of how the Base Merger Price would be calculated based on
- -------
the assumptions set forth therein.
(b) As of or as soon as reasonably practicable after the Effective Time,
Newco shall deposit with the Paying Agent an amount necessary to pay each
Shareholder (other than holders of Dissenters' Shares and except as provided in
section 2.8(b)) an amount equal to the Base Per Share Amount multiplied by the
number of shares of Common Stock held by such Shareholder immediately prior to
the Effective Time.
(c) After the Effective Time, a bank or trust company selected by Newco
and reasonably acceptable to the Company (the "Paying Agent") shall act as
paying agent in effecting the exchange of cash against surrender of Certificates
which, immediately prior to the Effective Time, represented Common Stock of the
Company (other than Dissenters' Shares and except as provided in Section
2.8(b)). As soon as practicable after the Effective Time, the Paying Agent shall
mail a transmittal form (a "Letter of Transmittal") to each holder of
Certificates theretofore representing any such shares advising such holder of
the procedure for surrendering to the Paying Agent any such Certificates for
exchange. Upon the surrender and exchange of such a Certificate, the holder
shall be paid, without interest thereon, the amount of cash to which he is
entitled pursuant to Section 2.8(a)(i), less only any amount required to be
withheld under applicable withholding tax laws and regulations, and such
Certificate shall forthwith be canceled.
(d) If a check for the cash amount to be paid pursuant to Section 2.8
hereof is to be sent to a Person other than a Person in whose name the
Certificates for such shares surrendered for exchange are registered, it shall
be a condition of the exchange that the Person requesting such exchange shall
pay to the Paying Agent any transfer or other taxes required by reason of the
delivery of such check to a Person other than the registered owner of the
Certificates surrendered, or shall establish to the satisfaction of the Paying
Agent that such tax has been paid or is not applicable. Notwithstanding the
foregoing, neither the Paying Agent nor any party hereto shall be liable to a
holder of Certificates theretofore representing such shares for any amount paid
to a public official pursuant to any applicable abandoned property, escheat or
similar law. Until so surrendered and exchanged, each such Certificate shall
represent solely the right to receive the cash into which the shares it
theretofore represented shall have been converted pursuant to Section 2.8,
without interest, and the Surviving Corporation shall not be required until such
surrender to pay the holder thereof the cash to which such holder otherwise
would be entitled.
(e) Any portion of the funds in the hands of the Paying Agent which has not
been so paid pursuant to this Section 2.10 within six months after the Effective
Time shall promptly be paid to Newco, and any Shareholders of the Company who
have not theretofore complied with this Section thereafter shall look only to
Newco for payment of the amount of cash to which they are entitled under this
Agreement.
Section 2.11 Closing of the Company's Transfer Books. At the Effective
---------------------------------------
Time, the stock transfer books of the Company shall be closed and no transfer of
Common Stock (other than common stock into which the capital stock of Newsub may
be converted pursuant to the Merger) shall thereafter be made.
-12-
<PAGE>
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company represents and warrants to Parent, Newco and Newsub as follows:
Section 3.1 Organization and Qualification; Subsidiaries. Each of the
--------------------------------------------
Company and its Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation
specified in Schedule 3.1 and has the corporate power and authority and all
------------
licenses, permits and authorizations necessary to own or lease its property and
assets and to carry on its business as presently conducted, and as presently
proposed to be conducted, and is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction wherein the nature of
its business or the ownership of its assets makes such qualification necessary,
except where the failure to be so qualified and in good standing would not
prevent, delay or impair the Company's ability to consummate the transactions
contemplated by this Agreement or have a Material Adverse Effect on the Company
and its Subsidiaries taken as a whole. The Company has previously provided or
made available to Parent, Newco and Newsub true and complete copies of (a) its
articles of incorporation, (b) its bylaws as currently in effect and (c) the
certificate or articles of incorporation and bylaws, as currently in effect, of
each of its Subsidiaries (the "Organizational Documents").
Section 3.2 Authorization. The Company has the corporate power and
-------------
authority to execute and deliver this Agreement and each other Merger Document
to be executed in connection herewith and, subject only to approval of this
Agreement by the holders of two-thirds of the Common Stock (the "Company
Shareholder Approval") and receipt of the Company Required Consents, to perform
its obligations hereunder and thereunder, all of which have been duly authorized
by all requisite corporate action. This Agreement and each other Merger
Document to be executed in connection herewith have been duly authorized,
executed and delivered by the Company, and constitute valid and binding
agreements of the Company enforceable against the Company in accordance with
their terms, except as such may be subject to or limited by bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
Section 3.3 Non-contravention. Neither the execution and delivery of this
-----------------
Agreement or any other Merger Document nor the consummation of the Merger and
the other transactions contemplated hereby nor the fulfillment of and the
performance by the Company of its obligations hereunder will (with or without
notice or lapse of time) (a) contravene any provision contained in the
Organizational Documents or any resolution adopted by the board of directors or
shareholders of the Company, (b) conflict with, violate or result in a material
breach of, or constitute a material default under (i) any Contract or (ii) any
judgment, order, decree, statute, law, rule or regulation or other restriction
of any Governmental Authority, in each case to which the Company or any of the
Subsidiaries is a party or by which any of them is bound or to which any of
their respective assets or properties are subject, if any, (c) except with
respect to Liens granted to Parent's financing sources or otherwise created by
Parent or Newco, result in the creation or imposition of any Lien on any of the
assets or properties of the Company or any of its Subsidiaries, which in the
case of any of clauses (a) through (c) above, would prevent, delay or impair the
Company's ability to consummate the transactions contemplated by this Agreement
or
-13-
<PAGE>
have a Material Adverse Effect on the Company and its Subsidiaries taken as a
whole.
Section 3.4 No Consents. Except for (a) filing of the Articles of Merger
-----------
in accordance with the Mississippi BCA, (b) filings required by the HSR Act, (c)
any filings which may be required pursuant to Section 5.6(b) and (d) filings and
approvals set forth in Schedule 3.4 (the "Company Required Consents"), no notice
------------
to, filing with, or authorization, registration, consent or approval of any
Governmental Authority or other Person is necessary for the execution, delivery
or performance of this Agreement, the consummation of the transactions
contemplated hereby or thereby by the Company, other than any notice, filing,
authorization, registration, consent or approval which, if not obtained, would
not prevent, delay or impair the Company's ability to consummate the
transactions contemplated by this Agreement or have a Material Adverse Effect on
the Company and its Subsidiaries, taken as a whole.
Section 3.5 Capitalization of the Company and the Subsidiaries.
--------------------------------------------------
(a) The Company's authorized capital stock consists of 1,200 authorized
shares of Common Stock, of which 579.5441 shares are issued and outstanding.
The Company does not have (i) any shares of Common Stock reserved for issuance,
or (ii) any outstanding or authorized option, warrant, right, call or commitment
obligating the Company to issue, deliver, transfer or sell shares of its capital
stock or any outstanding securities or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire
from it, any shares of its capital stock. There are no (i) outstanding
obligations of the Company or any of the Subsidiaries to repurchase, redeem or
otherwise acquire or make any payment in respect of any capital stock of the
Company or any Subsidiary, (ii) authorized or outstanding stock appreciation,
phantom stock, profit participation or similar rights with respect to the
Company or any of the Subsidiaries or (iii) voting trusts, proxies or other
agreements, to which the Company is a party, among the Company's shareholders
with respect to the voting or transfer of the Company's capital stock. There
are no preemptive or other subscription rights with respect to any shares of the
Company's capital stock, and all of the issued and outstanding shares of Common
Stock have been duly authorized and are validly issued, fully paid and
nonassessable.
(b) All Subsidiaries of the Company are listed on Schedule 3.1. All of the
------------
issued and outstanding shares of capital stock of each of the Company's
Subsidiaries have been duly authorized and are validly issued, fully paid and
nonassessable, were not issued in violation of preemptive rights or similar
rights and are owned (of record and beneficially) by the Company or by a
Subsidiary, free and clear of all rights of first refusal and other Liens.
Except with respect to the Subsidiaries and except as otherwise disclosed in
Schedule 3.5(b), neither the Company nor any Subsidiary owns any shares of stock
- ---------------
or any equity interest in any Person, and neither the Company nor any of the
Subsidiaries controls any other Person by means of ownership, management
contract or otherwise. Except as set forth in Schedule 3.5(b), no Subsidiary
---------------
has (i) any shares of its capital stock reserved for issuance, or (ii) any
outstanding or authorized option, warrant, right, call or commitment obligating
such Subsidiary to issue, deliver, transfer or sell shares of its capital stock
or any outstanding securities or obligations convertible into or exchangeable
for, or giving any Person any right to subscribe for or acquire from it, any
shares of its capital stock. Except as set forth in Schedule 3.5(b), there are
---------------
no (i) outstanding obligations of any of the Subsidiaries to repurchase, redeem
or otherwise acquire or make any payment in respect of any capital stock of the
Company or any of its Subsidiaries or (ii) voting trusts, proxies or other
agreements, to which any Subsidiary is a party, among the Company or any
Subsidiary's
-14-
<PAGE>
shareholders with respect to the voting or transfer of the Company or any
Subsidiary's capital stock except as otherwise set forth in this Agreement.
(c) The Company has previously provided to Parent a true and complete list
of the record holders of the Common Stock and the number of shares, including
fractional shares, held by each such holder, which list remains true and
complete as of the date of this Agreement.
Section 3.6 Financial Statements.
--------------------
(a) The Company has made available to Parent, Newco and Newsub (i) the
audited consolidated balance sheets, and the audited consolidated statements of
earnings, shareholders' equity and cash flows of the Company and its
consolidated subsidiaries for the years ended July 31, 1995, July 31, 1996 and
July 31, 1997, and (ii) an unaudited consolidated balance sheet of the Company
and its consolidated subsidiaries as of September 30, 1997 (the "Most Recent
Balance Sheet") and the related unaudited consolidated statements of income,
changes in shareholders' equity and cash flows for the two months then ended,
including the notes thereto, together with the relevant auditors' report with
respect thereto, prepared by the Company's independent certified public
accountants. All of the foregoing financial statements are hereinafter
collectively referred to as the "Company Financial Statements." The Company
Financial Statements have been (and any financial statements provided by the
Company pursuant to Section 5.1(b) hereof will be) prepared from, and are (and
will be) in accordance with, the books and records of the Company and its
consolidated subsidiaries, are (and will be) correct and complete in all
material respects, and fairly present (and will fairly present) the assets and
liabilities of the Company and its consolidated subsidiaries and the
consolidated financial position and consolidated results of operations of the
Company and its consolidated subsidiaries as of the dates and for the periods
indicated, in each case in accordance with GAAP.
(b) Except to the extent reflected or reserved against in the Company
Financial Statements as of and for the fiscal year ended July 31, 1997 (and the
notes thereto), or otherwise disclosed in the Most Recent Balance Sheet, the
Company and its Subsidiaries have no material liabilities or other obligations
(including contingent liabilities and obligations) except (i) liabilities and
obligations incurred in connection with the Company Reorganization or in the
ordinary course of business consistent with past practice since the date of the
Most Recent Balance Sheet, (ii) obligations required to obtain and preserve the
Company's status as a REIT, or (iii) such liabilities or obligations that would
not be required to be reflected or reserved against in the consolidated balance
sheet of the Company and its Subsidiaries prepared in accordance with GAAP.
(c) The Debt of the Company and its Subsidiaries as of the date hereof is
as set forth on Schedule 3.6(c).
---------------
Section 3.7 Books and Records. The books of account, minute books, stock
-----------------
record books and other records of the Company and its Subsidiaries, all of which
have been made available to Parent, are complete and correct and have been
maintained in accordance with sound business practices, including the
maintenance of an adequate system of internal controls. The minute books of the
Company and its Subsidiaries contain accurate and complete records of all
meetings held of, and corporate action taken by, the shareholders, the Boards of
Directors and the committees of Boards of Directors of the Company and its
Subsidiaries, and no meeting of any
-15-
<PAGE>
such shareholders, Board of Directors or committee has been held for which
minutes have not been prepared and are not contained in such minute books. At
the Closing, all of such books and records will be in the possession of the
Company and its Subsidiaries.
Section 3.8 Governmental Authorizations; Licenses. Except as set forth in
-------------------------------------
Schedule 3.8, the business of each of the Company and its Subsidiaries has been
- ------------
operated in compliance, in all material respects, with all applicable laws,
rules, regulations, codes, ordinances, orders, policies and guidelines of all
Governmental Authorities, except when the failure to comply would not have a
Material Adverse Effect on the Company and its Subsidiaries taken as a whole.
Except as set forth in Schedule 3.8, each of the Company and its Subsidiaries
------------
has, and after giving effect to the Merger and the other transactions
contemplated by the Merger Documents, will continue to have, all material
permits, licenses, approvals, certificates and other authorizations and has made
all notifications, registrations, certifications and filings with all
Governmental Authorities, necessary for the operation of its business as
currently conducted, in each case other than those the absence of which would
not have a Material Adverse Effect on the Company. Except as set forth in
Schedule 3.8, there is no action, case, proceeding or investigation pending or,
- ------------
to the Company's knowledge, threatened, and to the knowledge of the Company, no
event has occurred or circumstance exists that may give rise to or serve as a
basis for the commencement of any such action, case or proceeding or
investigation, by any Governmental Authority (a) with respect to any alleged
violation by the Company or any of its Subsidiaries of any statute, law, rule,
regulation, code, ordinance, order, policy or guideline of any Governmental
Authority, or (b) with respect to any alleged failure by the Company or any of
its Subsidiaries to have any permit, license, approval, certification or other
authorization required in connection with the operation of the business of each
of the Company and the Subsidiaries, or (c) which, if determined adversely to
the Company or any such Subsidiary, would reasonably be expected to prevent,
delay or impair the Company's ability to consummate the transactions
contemplated by this Agreement or have a Material Adverse Effect on the Company
and its Subsidiaries taken as a whole.
Section 3.9 Litigation. Except as set forth in Schedule 3.8 or Schedule
---------- ------------ --------
3.9, as of the date of this Agreement, there are no claims, actions,
- ---
proceedings, or investigations pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries or any of their
officers or directors (in their capacity as such), and to the knowledge of the
Company, no event has occurred or circumstance exists that may give rise to or
serve as a basis for the commencement of any such claim, action, proceeding or
investigation, before any court or Governmental Authority which, if determined
adversely to the Company or such Subsidiary, officer or director, would
reasonably be expected to prevent, delay or impair the Company's ability to
consummate the transactions contemplated by this Agreement or have a Material
Adverse Effect on the Company and its Subsidiaries taken as a whole.
Section 3.10 Taxes and Tax Payments. Except as set forth on Schedule
---------------------- --------
3.10:
- ----
(a) The Company and each of its Subsidiaries (i) have prepared in good
faith and timely filed (or there has been filed on their behalf) all Tax Returns
required to have been filed by each of them under applicable law (other than Tax
Returns the failure to file of which would not have a Material Adverse Effect on
the Company and its Subsidiaries), and all such Tax Returns were true, correct
and complete in all material respects and (ii) have paid all material Taxes that
are currently due and payable for all periods through and including the Closing
Date
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<PAGE>
except for those contested in good faith or for which adequate reserves have
been established in accordance with GAAP.
(b) There are no ongoing audits or examinations of any Tax Returns of the
Company or any of its Subsidiaries, and neither the Company nor any of its
Subsidiaries has been notified, formally or informally, by any taxing authority
that any such audit or examination, or any other investigation or proceeding
related to Taxes or Tax Matters, is contemplated or pending.
(c) All material Taxes for which the Company or any of its Subsidiaries are
liable for periods through the Closing Date (whether or not the period ends for
tax purposes on the Closing Date) have been or will be paid when due or are
adequately reserved against on the books of the Company. Neither the Company
nor any of its Subsidiaries are parties to any Tax sharing or Tax allocation
agreement. The Company and its Subsidiaries have not agreed to make and are not
required to make any adjustment under Section 481(a) of the Code, by reason of a
change in accounting method or otherwise. The Company intends to make the
election under Section 856(c)(1) of the Code (the "REIT Election") to be treated
as a real estate investment trust pursuant to Sections 856 through 860 of the
Code in connection with its Tax Return filed with respect to the taxable year
beginning January 1, 1998 and ending on the Closing Date (the "Short Period").
As of the Closing Date, and except for the REIT Election, the Company will have
satisfied all of the requirements for taxation as a real estate investment trust
pursuant to Section 856 through 860 of the Code during the Short Period. The
Company is aware of no facts or circumstances which would result in the Company
being unable to make a valid and effective REIT Election. The Company intends
to make the election provided for under Notice 88-19 in connection with its REIT
Election (the "Built-in-Gain Election"). The Company is aware of no facts or
circumstances which would result in the Company being unable to make a valid and
effective Built-in-Gain Election. Schedule 3.10(c) sets forth all material
----------------
elections and consents with respect to any Taxes (or the computation thereof)
affecting the Company or any of its Subsidiaries as of the date hereof.
(d) Neither the Company nor any predecessor corporation, nor any of their
respective Subsidiaries, has executed or filed with the IRS or any other taxing
authority any agreement or other document extending, or having the effect of
extending, the period of assessment or collection of any Taxes.
(e) As used in this Section 3.10, the term (i) "Taxes" includes all taxes
of any nature whatsoever and however denominated, including, without limitation,
income, franchise, sales, gross receipts, occupation, use, severance, real and
personal property, employment, excise, stamp, impost, environmental, transfer
taxes or duties and all other charges, as well as penalties and interest
thereon, imposed by any government or instrumentality, whether federal, state,
local, foreign or other; and (ii) "Tax Return" shall mean a report, return or
other information required to be supplied to any governmental entity with
respect to Taxes including, where permitted or required, combined or
consolidated returns.
Section 3.11 Environmental Matters. Except as permitted by applicable
---------------------
Environmental Laws or disclosed in the Schedule 3.11, to the knowledge of the
-------------
Company: (a) no Hazardous Substances are present in, on or under the Facilities
or any other properties and assets (whether real, personal or mixed) in which
the Company or its Subsidiaries has or had an interest or any nearby real
property which could migrate to the Facilities or other properties and assets,
and
-17-
<PAGE>
there is no present Release or threatened Release of any Hazardous Substances
in, on or under the Facilities or any other properties and assets (whether real,
personal or mixed) in which the Company or its Subsidiaries had or had an
interest, or any nearby real property which could migrate to the Facilities or
other properties and assets, whether by the Company or any of its Subsidiaries
or by any other entity or Person; (b) neither the Company nor any of its
Subsidiaries has ever used or permitted any Person to use the Facilities or any
part thereof or any other properties and assets (whether real, personal or
mixed) in which the Company or its Subsidiaries has or had an interest, for the
production, processing, manufacture, generation, treatment, handling, storage or
disposal of Hazardous Substances, except in compliance with applicable
Environmental Laws; (c) no underground or above-ground storage tanks, barrels,
wells, pits, sumps, lagoons or other containers of any kind are, or to the
knowledge of the Company, have been located in, on, under or about the
Facilities or any other properties and assets (whether real, personal or mixed)
in which the Company or its Subsidiaries has or had an interest; (d) the Company
and its Subsidiaries, the Facilities and every part thereof, and all operations
and activities therein and thereon and the use and occupancy thereof, comply and
have complied with all applicable Environmental Laws (except where any such
violation would not have a Material Adverse Effect on the Company or any of its
Subsidiaries), and neither the Company, nor any of its Subsidiaries, nor any
other Person using or occupying the Facilities or any part thereof is violating
or has violated any Environmental Laws or has any liability under any
Environmental Laws; (e) the Company and its Subsidiaries have all permits,
licenses and approvals required by all applicable Environmental Laws for the use
and occupancy of the Facilities, and all operations and activities of the
Company and its Subsidiaries (except where the failure to have any such permit,
license or approval would not have a Material Adverse Effect upon the Company or
any of its Subsidiaries), and the Company and its Subsidiaries are in full
compliance with all such permits, licenses and approvals; and all such permits,
licenses and approvals were duly issued and are in full force and effect (except
where non-compliance would not have a Material Adverse Effect upon the Company
or any of its Subsidiaries); and (f) no claim, demand, action or proceeding of
any kind relating to any past or present Release or threatened Release of any
Hazardous Substances in, on or under the Facilities or any other properties and
assets (whether real, personal or mixed) in which the Company or its
Subsidiaries has or had an interest or any past or present violation of or any
liability under any Environmental Laws by the Company and its Subsidiaries has
been made or commenced, or is pending, or is being threatened by any person.
Section 3.12 Employee Matters.
----------------
(a) Schedule 3.12 contains a true and complete list of (i) the officers and
-------------
employees currently employed by the Company and its Subsidiaries having an
annual base salary of $100,000 or more, indicating the title of and whether the
employee or officer is covered by an employment, consulting or severance
agreement, and (ii) the directors of each of the Company and the Subsidiaries.
(b) Except as set forth on Schedule 3.12, (i) neither the Company nor any
-------------
Subsidiary has entered into any collective bargaining agreements with respect to
the employees of the Company or its Subsidiaries ("Company Employees"), (ii)
there is no labor strike, labor dispute, work slowdown or work stoppage or
lockout pending or, to the Company's knowledge, threatened against or affecting
the Company or any Subsidiary, (iii) to the Company's knowledge, no union
organization campaign is in progress with respect to any of the Company
-18-
<PAGE>
Employees, and no material question concerning representation exists respecting
such employees, (iv) there is no unfair labor practice charge or complaint
pending or, to the Company's knowledge, threatened against the Company or any
Subsidiary, except for such agreements, activities, charges or complaints which
would not reasonably be expected to have a Material Adverse Effect on the
Company and its Subsidiaries taken as a whole.
Section 3.13 Employee Benefit Plans.
----------------------
(a) Schedule 3.13 sets forth all of the plans and programs (collectively,
-------------
the "Plans") which the Company or any of its Subsidiaries maintain, are party
to, contribute to or are obligated to contribute to, on behalf of the Company's
or any Subsidiary's employees or former employees and their dependents or
survivors (whether or not set forth in a written document), including without
limitation:
(i) Each employee benefit plan, as defined in Section 3(3) of ERISA;
(ii) Each bonus, deferred compensation, incentive, restricted stock,
employee stock purchase, stock option, stock appreciation right, phantom
stock, supplemental pension, executive compensation, fringe benefit,
severance, termination of pay or similar plan, program, policy, perquisite
or arrangement (other than any such item provided solely pursuant to the
terms of a written or oral contract with any individual employee that is
disclosed in Schedule 3.12); and
-------------
(iii) Each material plan, program, agreement, policy, commitment or
other arrangement relating to the provision of any benefit described in
section 3(1) of ERISA to former employees or directors or to their
survivors, other than procedures intended to comply with the Consolidated
Omnibus Budget Reconciliation Act of 1985.
(b) Neither the Company nor any ERISA Affiliate has, since January 1, 1993
terminated, suspended, discontinued contributions to or withdrawn from any
employee pension benefit plan, as defined in section 3(2) of ERISA, including
(without limitation) any multiemployer plan, as defined in section 3(37) of
ERISA. For this purpose, ERISA Affiliate" means each person (as defined in
section 3(9) of ERISA) that, together with the Company, would be treated as a
single employer under section 4001(b) of ERISA or that would be deemed to be a
member of the same "controlled group" within the meaning of section 414(b) or
(c) of the Code.
(c) The Company has provided to Parent complete and current copies of each
of the following:
(i) The text (including amendment) of each of the Plans, to the extent
reduced to writing;
(ii) A summary of each of the Plans, to the extent not previously
reduced to writing;
(iii) With respect to each Plan that is an employee benefit plan (as
defined in section 3(3) of ERISA), the following:
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<PAGE>
(1) The most recent summary plan description, as described in
section 102 of ERISA;
(2) Any summary of material modifications that has been
distributed to participants or filed with the U.S. Department of Labor
but that has not been incorporated in an updated summary plan
description furnished under subparagraph (1) above; and
(3) The annual report, as described in section 103 of ERISA,
and, where applicable, actuarial reports, for the three most recent
plan years for which an annual report or actuarial report has been
prepared; and
(iv) With respect to each Plan that is intended to qualify under
section 401(a) of the Code, the most recent determination letter concerning
the plan's qualification under section 301(a) of the Code, as issued by the
Internal Revenue Service, and any subsequent determination letter
applications.
(d) With respect to each Plan that is an employee benefit plan (as defined
in section 3(3) of ERISA), the requirements of ERISA applicable to such Plan
have been substantially satisfied.
(e) Each Plan that is intended to qualify under section 401(a) of the Code
substantially meets the requirements for qualification under section 401(a) of
the Code and the regulations thereunder, except to the extent that such
requirements may be satisfied by adopting retroactive amendments under section
401(b) of the Code and the regulations thereunder or any other provision of
applicable law. Each such Plan has been administered substantially in accordance
with its terms (or, if applicable, such terms as will be adopted pursuant to a
retroactive amendment under section 401(b) of the Code) and the applicable
provisions of ERISA and the Code and the regulations thereunder or any other
provision of applicable law.
(f) None of the Plans has any accumulated funding deficiency under section
412 of the Code. Neither the Company nor any ERISA Affiliate has any material
termination or withdrawal liability under Title IV of ERISA. For purposes of
determining any accumulated funding deficiency under section 412 of the Code,
the term "ERISA Affiliate" shall include any entity that is deemed to be a
member of the same "controlled group" within the meaning of section 414(m) or
(o) of the Code.
(g) All contributions, premiums or other payments due from the Company or
any Subsidiary to (or under) any Plan have been fully paid or adequately
provided for on the books and financial statements of the Company in accordance
with GAAP applied consistently with the Company Financial Statements.
Section 3.14 Proprietary Rights. Schedule 3.14 (a) identifies each
------------------ -------------
fictitious business name, patent, registered and unregistered trademark, service
mark or copyright registration (the "Intellectual Property") which has been
issued to any of the Company and its Subsidiaries, (b) identifies each pending
patent, trademark, service mark or copyright application or application for
registration made by Company or its Subsidiaries, and (c) identifies each
license
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<PAGE>
which any of the Company and its Subsidiaries has granted to any Person with
respect to its Intellectual Property. To the Company's knowledge, there is not
pending or threatened against the Company or any Subsidiary any claim by any
Person contesting the validity, enforceability, use or ownership of any of its
Intellectual Property. The Company and/or its Subsidiaries is the owner of all
right, title and interest in and to the Intellectual Property, free and clear of
all Liens and other adverse claims, and has the right to use without payment to
any other Person all of the Intellectual Property.
Section 3.15 Contracts.
---------
(a) Schedule 3.15(a) lists all written or oral contracts (except for usual
----------------
and ordinary contracts or purchase orders executed in the normal course of
business and which are not, individually or in the aggregate, material to the
Company), agreements or leases to which, as of the date hereof, the Company or
any Subsidiary is a party or is otherwise bound, of the type described below
(the "Contracts"):
(i) all agreements for the purchase by the Company of machinery,
equipment or other personal property other than those that are for amounts
not to exceed $100,000 and those as to which the Company's remaining
obligation as of the date hereof does not exceed $100,000;
(ii) all leases, pledges, conditional sale or title retention
agreements involving the payment of more than $100,000;
(iii) all agreements between the Company or a Subsidiary of the Company
and any Affiliate of the Company;
(iv) all agreements relating to the consignment or lease of personal
property (whether the Company or a Subsidiary is lessee, sublessee, lessor
or sublessor), other than such agreements that provide for payments of less
than $100,000;
(v) all agreements containing commitments of warranty, suretyship,
guarantee or indemnification (except for guarantees, warranties and
indemnities provided by the Company or any Subsidiary in the ordinary
course of business consistent with past practice and those having a
contract value in the aggregate of less than $100,000);
(vi) all mortgages, indentures, notes, bonds or loan agreements
relating to indebtedness incurred or provided by the Company or any of its
Subsidiaries;
(vii) all licensing agreements or other contracts with respect to
Intellectual Property, including without limitation agreements with current
or former employees, consultants or contractors regarding the appropriation
or the nondisclosure of any Intellectual Property;
(viii) all collective bargaining agreements and other contracts to or
with any labor union or other employee representative of a group of
employees;
(ix) all joint ventures, partnerships and other similar agreements
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<PAGE>
(however named) involving a share of profits, losses, costs or liabilities
by the Company or any of its Subsidiaries with any other Person where the
investment by the Company or any of its Subsidiaries exceeds $100,000;
(x) all agreements containing covenants that in any way purport to
restrict the business activity of the Company or any of its Subsidiaries or
limit the freedom of the Company or any of its Subsidiaries to engage in
any line of business or to compete with any Person;
(xi) all material powers of attorney that are currently effective and
outstanding;
(xii) all agreements entered into other than in the ordinary course of
business consistent with past practice that contain or provide for an
express undertaking by the Company or any of its Subsidiaries to be
responsible for consequential damages and that are not covered by the
Contracts listed in Schedule 3.15(a) with respect to Contracts of the type
----------------
described in clauses (i) through (xi) above or clause (xiii) below;
(xiii) any agreement other than those covered by clauses (i) through
(xii) above which would reasonably be expected to involve payment or
receipt by the Company or any Subsidiary of more than $100,000 in the
aggregate in any calendar year; and
(xiv) all material amendments, supplements and modifications (whether
oral or written) in respect of any of the foregoing.
(b) None of the other parties to any such Contracts has given written
notice to the Company or a Subsidiary that it intends to renegotiate, terminate
or materially alter the provisions of such Contracts either as a result of
transactions contemplated hereby or otherwise, and neither the Company nor any
of the Subsidiaries have given notice to any other party to any such Contract
that it intends to renegotiate, terminate or materially alter the provisions of
any such Contract.
(c) Neither the Company nor any Subsidiary is in material default, nor has
either the Company or any Subsidiary given or received notice of, any default or
claimed, purported or alleged default, under any of the Contracts. Each of the
Company and its Subsidiaries is, and at all times has been, in full compliance
in all material respects with all applicable terms and requirements of each
Contract under which the Company or its Subsidiaries has or had any obligation
or liability or by which the Company and its Subsidiaries or any of the assets
owned or used by the Company or its Subsidiaries is or was bound. To the
knowledge of the Company, each other Person that has or had any obligation or
liability under any Contract under which the Company or its Subsidiaries has or
had any rights is, and at all times since January 1, 1997 has been, in
compliance in all material respects with all applicable terms and requirements
of such Contract. No event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with or result in a
material violation or breach of, or give the Company or its Subsidiaries or
other Person the right to declare a default or exercise any remedy under, or to
accelerate the maturity or performance of, or to cancel, terminate or modify,
any Contract.
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<PAGE>
(d) Correct and complete copies of all Contracts, including any material
amendments thereto, have been delivered or made available to Parent, Newco and
Newsub.
Section 3.16 Real Property.
-------------
(a) The Company has furnished to Parent and Newco such information, in
writing, concerning the real properties owned by the Company as Parent and Newco
have requested. Such information is true and complete in all material respects.
As to all such real properties purporting to be owned by the Company or a
Subsidiary, consisting of approximately 324,000 acres of timberlands located in
the states of Mississippi, Arkansas, Tennessee, Louisiana, Kentucky, Missouri
and Illinois, approximately 7,500 acres of farmland located in Mississippi and
Arkansas and two commercial real estate properties (the "Commercial Real
Estate"), all as further described in that certain letter agreement dated the
date hereof between Parent and the Company (the "Owned Real Property"), the
Company or a Subsidiary, as the case may be, has good and insurable title to all
the Owned Real Property owned by it. All of the Owned Real Property is owned by
the Company or a Subsidiary, as the case may be, free and clear of all Liens,
except (i) Liens for taxes not yet due and payable, (ii) statutory Liens for
carriers, warehousemen, mechanics, workmen and materialmen for liabilities and
obligations incurred in the ordinary course of business that are not yet
delinquent or are being contested in good faith, (iii) Liens in a cumulative
amount less than $100,000, and (iv) as disclosed in Schedule 3.16(a). All of the
----------------
Owned Real Property is free of defects, irregularities, encumbrances and other
imperfections of title (other than Liens, which are addressed in the preceding
sentence) (collectively, "Other Encumbrances"), except such Other Encumbrances
that do not materially impair (i) the value of the Owned Real Property (taken as
a whole); (ii) the present use of any material portion of the Owned Real
Property, or (iii) the transferability or marketability of any material portion
of the Owned Real Property. No third parties have any rights of first refusal,
rights of first offer or other rights to purchase any of the Owned Real
Property.
(b) Except as set forth in Schedule 3.16(b) and to the Company's knowledge
----------------
with respect to the Commercial Real Estate, there are no (i) presently effective
material leases, lease amendments, lease guaranties, work letter agreements,
improvement agreements, subleases, assignments, licenses, concessions or other
agreements with respect to the leasing, use or occupancy of the Owned Real
Property or any part thereof or (ii) Persons leasing, using or occupying the
Owned Real Property or any part thereof except the Company or its Subsidiaries.
(c) To the knowledge of the Company, Schedule 3.16(c) is an accurate and
----------------
complete list of all tangible and intangible personal property owned by the
Company and its Subsidiaries relating to the ownership, construction,
management, operation, maintenance or repair of the Owned Real Property (other
than the Commercial Real Estate), and all such tangible personal property is
located at such Owned Real Property. The Company or its Subsidiaries has good
title to all such personal property, free and clear of all Liens.
(d) To the knowledge of the Company, Schedule 3.16(d) is an accurate and
----------------
complete list of all presently effective building permits, certificates of
occupancy, and other necessary certificates, permits, licenses and approvals
possessed by the Company relating to the design, construction, ownership,
occupancy, use, management, operation, maintenance or repair of the Owned Real
Property (other than the Commercial Real Estate).
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<PAGE>
(e) To the knowledge of the Company, (i) the Owned Real Property and every
part thereof and (as of the Closing Date) the use and occupancy of the Owned
Real Property are in full compliance with all applicable building, earthquake,
zoning, land use, environmental, antipollution, health, fire, safety, access and
accommodations for the physically handicapped, subdivision, energy and resource
conservation or similar laws, statutes, rules, regulations and ordinances and
all covenants, conditions and restrictions applicable to the Owned Real Property
(except where non-compliance would not have a Material Adverse Effect on the
Company or any of its Subsidiaries), and (ii) the Company has received no
notice, citation or other claim written or, to the knowledge of the Company,
threatened, alleging any violation of any such law, statute, rule, regulation,
ordinance, covenant, condition or restriction.
(f) Schedule 3.16(f) lists all leases of real property pursuant to which
----------------
the Company or any Subsidiary is obligated to make rental payments in excess of
$100,000 per annum under the applicable lease (the "Leased Real Property"),
setting forth the address, landlord and tenant for each parcel of Leased Real
Property. All of the Leased Real Property is held by the Company or a
Subsidiary thereof pursuant to valid and binding leases therefor that are in
full force and effect and enforceable by the Company or Subsidiary thereof that
is party thereto in accordance with their respective terms, except where any
lack of enforceability, individually or in the aggregate, would not have a
Material Adverse Effect on the Company and its Subsidiaries taken as a whole.
The Company has previously provided or made available to Parent and Newco
complete and correct copies of all written leases of Leased Real Property.
Except as set forth in Schedule 3.16(f), neither the Company nor any Subsidiary
----------------
has received any written notice of default or event of default under any lease
of Leased Real Property.
(g) The Owned Real Property and the Leased Real Property constitute all of
the real property owned, leased or otherwise utilized in connection with and
material to the business of the Company and its Subsidiaries (the "Real
Property").
Section 3.17 Equipment. Schedule 3.17 lists all machinery and equipment
--------- -------------
owned by the Company or any Subsidiary and material to the business or
operations thereof. Except as set forth in Schedule 3.17, the machinery and
-------------
equipment material to the business or operations of the Company or the
Subsidiaries are in normal operating condition, ordinary wear and tear and
obsolescence excepted, free from any known defects except such minor defects as
do not substantially interfere with the continued use thereof in the conduct of
normal operations. Except as set forth in Schedule 3.17, the Company and its
-------------
Subsidiaries, together, have good and marketable title to all such personal
property, free and clear of all Liens, except Liens for current taxes,
assessments and other governmental charges not yet due and payable or being
contested in good faith by the Company or a Subsidiary in appropriate
proceedings, Liens of carriers, warehousemen, mechanics, laborers and
materialmen incurred in the ordinary course of business for sums not yet due,
and such Liens, if any, as in the aggregate, are not substantial in character,
extent or amount and do not materially interfere with the use of such property
or otherwise materially impair business operations.
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<PAGE>
Section 3.18 Insurance.
---------
(a) The Company has delivered or made available to Parent:
(i) true and complete copies of all policies of insurance to which
the Company or any of its Subsidiaries is a party or under which the
Company or any of its Subsidiaries, or any director of the Company or any
of its Subsidiaries, is or has been covered at any time within the two
years preceding the date of this Agreement;
(ii) true and complete copies of all pending applications for policies
of insurance;
(iii) any statement by the auditor of the Company or of its
Subsidiaries' financial statements with regard to the adequacy of such
entity's coverage or of the reserves for claims;
(iv) true and complete copies of any self-insurance arrangement by or
affecting the Company or any of its Subsidiaries, including descriptions of
any reserves established thereunder;
(v) true and complete copies of any contract or arrangement, other
than a policy of insurance, for the transfer or sharing of any risk by the
Company or any of its Subsidiaries;
(vi) true and complete copies of all contracts of the Company and its
Subsidiaries with any Person with respect to insurance (including leases
and service agreements);
(vii) a summary of the loss experience under each insurance policy;
(viii) a statement describing each claim under an insurance policy for
an amount in excess of $100,000, which sets forth:
(A) the name of the claimant;
(B) description of the policy by insurer, type of insurance, and
period of coverage; and
(C) the amount and a brief description of the claim; and
(ix) a statement describing the loss experience for all claims that
were self-insured, including the number and aggregate cost of such claims.
(b) Except as set forth on Schedule 3.18(b):
----------------
(i) All policies to which the Company or any of its Subsidiaries is a
party or that provide coverage to either the Company or any of its
Subsidiaries, or any
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<PAGE>
director or officer of the Company or any of its Subsidiaries:
(A) are valid, outstanding and enforceable;
(B) are issued by an insurer that is financially sound and
reputable;
(C) taken together, provide adequate insurance coverage for the
assets and the operations of the Company and its Subsidiaries;
(D) will not terminate or be subject to termination as a result
of the Merger; and
(E) do not provide for any retrospective premium adjustment or
other experienced-based liability on the part of the Company or any of
its Subsidiaries.
(ii) The Company has not received (A) any refusal of coverage or any
notice that a defense will be afforded with reservation of rights, or (B)
any notice of cancellation or any other indication that any insurance
policy is no longer in full force or effect or will not be renewed or that
the issuer of any policy is not willing or able to perform its obligations
thereunder.
(iii) The Company and its Subsidiaries have paid all premiums due,
and have otherwise performed all of their respective obligations, under
each policy to which the Company or any of its Subsidiaries is a party or
that provides coverage to the Company or any of its Subsidiaries or a
director or officer thereof.
(iv) The Company and its Subsidiaries have given notice to the
insurer of all claims that may be insured thereby.
Section 3.19 Transactions With Affiliates. Except as set forth on
----------------------------
Schedule 3.19, none of the Company's shareholders, directors, officers or
- -------------
employees nor any Person in which any such shareholder, director, officer or
employee owns five percent or more of the equity interest nor any of their
respective Affiliates is or, since August 1, 1995, was, involved in any business
arrangement or relationship with the Company or the Subsidiaries (whether
written or oral), and none of the Company's shareholders, directors, officers or
employees nor any of their respective Affiliates owns any property or right,
tangible or intangible, which is necessary to the business of the Company or the
Subsidiaries.
Section 3.20 Absence of Certain Changes and Events. Except as set forth
-------------------------------------
in Schedule 3.20 and except for the Company Reorganization and any changes
-------------
required in order for the Company to obtain and preserve its status as a REIT,
since the date of the Most Recent Balance Sheet, the Company and its
Subsidiaries have conducted their businesses in the ordinary course of business
consistent with past practice, and there is not and has not been: (a) any
Material Adverse Change to the Company or its Subsidiaries taken as a whole, (b)
any distribution or dividend made by the Company or its Subsidiaries, except for
distributions or dividends required to be made by the Company to obtain and
preserve its status as a REIT, (c) any material
-26-
<PAGE>
repurchase of equity securities by the Company or any of its Subsidiaries, (d)
any payment or increase by the Company or its Subsidiaries of any salaries or
other compensation to any shareholder, director, officer or (except in the
ordinary course of business consistent with past practice) employee or entry
into any employment, severance, or similar contract with any director, officer
or employee other than in the ordinary course of business consistent with past
practices, (e) any adoption of, increase in the payments to or benefits under,
any profit sharing, deferred compensation, savings, insurance, pension,
retirement or other employee benefit plan for or with any employees of the
Company or its Subsidiaries other than in the ordinary course of business
consistent with past practices, (f) any condition, event or occurrence which
could reasonably be expected to prevent or materially delay the Company's
consummating the transactions contemplated by this Agreement or (g) any material
change in accounting methods, principles or practice of the Company or its
Subsidiaries.
Section 3.21 Brokers. With the exception of Goldman, Sachs & Co. and SSM
-------
Corporation (whose respective fees and expenses will be paid by Company pursuant
to agreements previously furnished to Parent), no Person is or will be entitled
to a broker's, finder's, investment banker's, financial adviser's or similar fee
from the Company or its Subsidiaries in connection with this Agreement or any of
the transactions contemplated hereby.
Section 3.22 Disclosure. No representation or warranty of the Company in
----------
this Agreement and no statement in the Schedules hereto omits to state a
material fact necessary to make the statements herein or therein, in light of
the circumstance in which they were made, not misleading.
Section 3.23 Opinion of Company's Financial Adviser. The Company has
--------------------------------------
received the opinion of Goldman, Sachs & Co., to the effect that the aggregate
consideration received pursuant to the Merger Agreement and the Asset Purchase
Agreeement, considered as a unitary transaction, is fair consideration from a
financial point of view for the Company, its Subsidiaries, the Partnership and
LLC.
Section 3.24 Company Board Recommendation. The board of directors of the
----------------------------
Company has, by unanimous vote of those directors present at a meeting duly
called and held at which a quorum was present, (a) determined that this
Agreement and the transactions contemplated hereby are in the best interests of
the shareholders of the Company, (b) adopted and approved this Agreement and the
transactions contemplated hereby and (c) recommended that the shareholders of
the Company approve this Agreement and the transactions contemplated hereby.
Section 3.25 Company Shareholder Approval. The Company Shareholder
----------------------------
Approval consists of an affirmative vote of holders of two-thirds of the issued
and outstanding Common Stock and is the only vote of holders of any class or
series of the Company's securities necessary to approve the Company's actions
taken or to be taken in connection with this Agreement, the Merger and the other
transactions contemplated hereby.
Section 3.26 Takeover Statutes. The Board of Directors of the Company has
-----------------
taken or will take all appropriate and necessary actions such that the
Mississippi Shareholder Protection Act, Miss. Code Ann. (S) 79-25-3 et seq., and
the Mississippi Control Share Act, Miss. Code Ann. (S) 79-27-3 et seq., will not
have any effect on the Merger or the other transactions contemplated
-27-
<PAGE>
by this Agreement. Except to the extent that the Timberlands Act may be
applicable, no other "fair price," "moratorium," "control share acquisition" or
other similar anti-takeover statute or regulation is, as of the date hereof,
applicable to the Merger or the other transactions contemplated by this
Agreement.
Section 3.27 Information Supplied. The information concerning the Company
--------------------
supplied by the Company to Newco and used in the Registration Statement in the
form attached hereto as Exhibit A does not contain (and any information
---------
hereafter provided by the Company to Newco for inclusion in the Registration
Statement or any amendment to the Registration Statement (or any preliminary
prospectus filed with the SEC pursuant to Rule 424(a) under the Securities Act
with respect to the proposed IPO as of the date of its filing with the SEC) will
not contain) any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading and the information concerning the Company supplied by the
Company to Newco and contained in the Registration Statement at the time that it
becomes effective under the Securities Act or in any amendment to such effective
Registration Statement as of its applicable effective date or deemed to be
contained in any such Registration Statement pursuant to Rule 430A or Rule 434
under the Securities Act, will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading.
Section 3.28 Timber Assets. The Company has furnished to Parent
-------------
information concerning quantities of merchantable wood fiber into which, to the
actual knowledge of the Company, standing timber owned by the Company is capable
of conversion.
Section 3.29 Commercial Real Estate. To the knowledge of the Company, the
----------------------
Company is not subject to or reasonably likely to incur any liability or
obligation by virtue of its partnership interest in BTE Partners, a Tennessee
general partnership, other than those liabilities or obligations which would not
have a Material Adverse Effect on the Company and its Subsidiaries, taken as a
whole.
Section 3.30 Definition of Company Knowledge. As used in this Agreement,
-------------------------------
the phrase "to the knowledge of the Company" (or words of similar import) means
the actual knowledge of the President, the Chief Financial Officer, the General
Counsel and the Vice President of Strategic Planning of the Company.
Section 3.31 Disclaimer of Other Representations and Warranties. Except
--------------------------------------------------
as expressly set forth in this Article III, the Company makes no representation
or warranty, express or implied, at law or in equity, in respect of the Company,
its Subsidiaries, or any of their respective assets, liabilities or operations,
including, without limitation, with respect to merchantability or fitness for
any particular purpose, and any such other representations or warranties are
hereby expressly disclaimed.
-28-
<PAGE>
ARTICLE IV
----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
PARENT, NEWCO AND NEWSUB
------------------------
Parent, Newco and Newsub represent and warrant to the Company as follows:
Section 4.1 Organization. Each of Parent and Newco is a corporation duly
------------
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power and authority to own or lease its property
and assets and to carry on its business as presently conducted. Newsub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Mississippi and has the corporate power and authority to own or
lease its property and assets and to carry on its business as presently
conducted. Other than Newsub, Newco has no Subsidiaries.
Section 4.2 Authorization. Each of Parent, Newco and Newsub has the
-------------
corporate power and authority to execute and deliver this Agreement and each
other agreement or instrument to be executed in connection herewith and to
perform its obligations hereunder and thereunder. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by the Board of Directors of each of Parent, Newco or
Newsub and by the sole stockholder or shareholder of each of Newco and Newsub,
and no other corporate proceedings on the part of Parent, Newco or Newsub are
necessary to authorize this Agreement and the transactions contemplated hereby.
This Agreement and each other agreement or instrument to be executed in
connection herewith have been duly authorized, executed and delivered by each of
Parent, Newco and Newsub and constitute a valid and binding agreement of each of
Parent, Newco and Newsub, enforceable against each of Parent, Newco and Newsub
in accordance with its terms, except as such may be subject to or limited by
bankruptcy, insolvency, reorganization or other laws relating to or affecting
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
Section 4.3 Noncontravention. The execution, delivery and performance by
----------------
each of Parent, Newco and Newsub of this Agreement and the Articles of Merger
and the consummation of the Merger and each of the other transactions
contemplated hereby will not (a) contravene any provision contained in the
certificate of incorporation or bylaws of Parent, Newco or Newsub, (b) conflict
with, violate or result in a material breach (with or without the lapse of time,
the giving of notice or both) under (i) any material contract, agreement,
commitment, indenture, mortgage, lease, pledge, note, bond, license, permit or
other instrument or obligation or (ii) any judgment, order, decree, statute,
law, rule or regulation or other restriction of any Governmental Authority, in
each case to which Parent, Newco or Newsub is a party or by which it is bound or
to which any of its assets or properties are subject, which in the case of
either clause (a) or (b) above, would have a Material Adverse Effect on Parent,
Newco and Newsub taken as a whole. Newco and Newsub have each previously
delivered to the Company true and complete copies of its certificate of
incorporation (and all amendments thereto) and bylaws (as currently in effect).
Section 4.4 No Consents. Except for (i) filing and recordation of
-----------
appropriate Merger
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<PAGE>
documents as required by the Mississippi BCA, (ii) filings under the HSR Act,
and (iii) filings and approvals that may be required to be made and obtained
under the Timberlands Act (subject to the provisions of Section 5.6(b)), no
notice to, filing with, or authorization, registration, consent or approval of
any Governmental Authority or other Person is necessary for the execution,
delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby by Parent, Newco or Newsub.
Section 4.5 Litigation. There are no actions, suits, proceedings, orders
----------
or investigations pending or threatened against or affecting Parent, Newco or
Newsub at law or in equity, or before or by any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which would reasonably be expected
materially adversely to affect Parent's, Newco's or Newsub's performance under
this Agreement or the consummation of the transactions contemplated hereby.
Section 4.6 Registration Statement. As promptly as practicable after the
----------------------
date hereof, Newco shall file with the United States Securities and Exchange
Commission ("SEC") a registration statement on Form S-11 substantially in the
form attached hereto as Exhibit A with such changes as may be deemed necessary
---------
or appropriate by Parent and Newco prior to the time of its initial filing (the
"Registration Statement"). The Registration Statement does not contain (and any
information hereafter included in any amendment to the Registration Statement
(or any preliminary prospectus filed with the SEC pursuant to Rule 424(a) under
the Securities Act with respect to the proposed IPO as of the date of its filing
with the SEC) will not contain) any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading and the Registration Statement at the time it becomes
effective under the Securities Act or any amendment to such effective
Registration Statement as of its applicable effective date or deemed to be
contained in any such Registration Statement pursuant to Rule 430A or Rule 434
under the Securities Act, will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. The Company acknowledges that
the foregoing representation and warranty assumes the accuracy of, and the
Company's compliance with, the representation and warranty set forth in Section
3.27.
ARTICLE V
---------
CERTAIN COVENANTS AND AGREEMENTS
--------------------------------
Section 5.1 Access and Information.
----------------------
(a) From and after the date hereof, the Company will, and the Company will
cause each of its Subsidiaries to, provide Parent, Newco and Newsub and their
respective agents and representatives with reasonable access during normal
business hours to such of its premises, properties, contracts, commitments,
books, records and other information of the Company and the Subsidiaries, upon
reasonable notice, as Parent, Newco and Newsub and their respective agents and
representatives shall reasonably request from time to time. No investigation
pursuant to this Section 5.1(a) shall be deemed to modify any representation or
warranty made by the Company hereunder. Each of Parent, Newco and Newsub agrees
to conduct and agrees to cause
-30-
<PAGE>
its agents and representatives to conduct, any such inquiries with reasonable
discretion and sensitivity to the Company's relationships with its employees,
customers and suppliers. The foregoing notwithstanding, none of the Parent,
Newco or Newsub or their representatives or agents shall contact any employee,
customer or supplier of the Company or any of the Subsidiaries regarding the
Company or the Subsidiaries without the prior written consent of the Company.
(b) In furtherance and not in limitation of the covenants set forth in
Section 5.1(a), the Company agrees to provide to Parent and Newco: (i) as soon
as practicable after each fiscal quarter (beginning with the fiscal quarter
ended December 31, 1997) and in any event within 45 days thereafter, a
consolidated balance sheet of the Company and its consolidated subsidiaries as
at the end of such quarter and a consolidated statement of income and cash flows
of the Company and its consolidated subsidiaries, prepared in accordance with
GAAP applied in a manner consistent with the Company Financial Statements and
certified by the principal financial or accounting officer of the Company,
together with a comparison of such statements to the Company's operating plan
then in effect and approved by the Company's Board of Directors and (ii) as soon
as practicable after the end of each month (beginning with January 1998) and in
any event within 45 days thereafter, a consolidated balance sheet of the Company
and its consolidated subsidiaries as at the end of such month and a consolidated
statement of income of the Company and its consolidated subsidiaries for such
month, prepared in accordance with GAAP (subject to the absence of notes)
applied in a manner consistent with the Company Financial Statements and
certified by the principal financial or accounting officer of the Company.
(c) The Company, Parent, Newco and Newsub each agrees not to disclose or
permit the disclosure for any purpose other than the transactions contemplated
hereby of any non-public, confidential or proprietary information furnished to
such party by another party hereto in connection with the transactions
contemplated by this Agreement, provided that such disclosure may be made (a) to
any Person who is an officer, director or employee of such party, or to counsel,
accountants and financial advisers to such party solely for their use in
evaluating the transactions contemplated by this Agreement, (b) with the prior
written consent of all parties to this Agreement, (c) pursuant to a subpoena or
order issued by a court, arbitrator or Governmental Authority or (d) if Newco
deems it necessary or appropriate in the Registration Statement or otherwise in
connection with the proposed IPO.
Section 5.2 Conduct of Business by the Company. From the date hereof to
----------------------------------
the Effective Time, the Company will and will cause each of its Subsidiaries to,
except as otherwise expressly provided herein, or consented to in writing by
Parent (which consent shall not be unreasonably withheld or delayed):
(a) conduct its business only in the ordinary and regular course and
consistent with past practice, except as may be required to obtain and preserve
the Company's status as a real estate investment trust ("REIT");
(b) use commercially reasonable efforts to keep in full force and effect
its corporate existence and all material rights, franchises and goodwill
relating to its business;
(c) use commercially reasonable efforts to preserve its present
relationships with
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<PAGE>
customers, suppliers, contractors, distributors, employees and business
associates; provided, however, that nothing in this paragraph (c) shall require
-------- -------
the Company to take any action which would cause the Company to be unable to
qualify as a REIT;
(d) perform in all material respects all of its obligations under all
notes, bonds, mortgages, indentures, licenses, contracts, agreements or other
instruments or obligations to which it is a party or by which it or any of its
properties or assets may be bound and not enter into, assume or amend any of the
foregoing other than in the ordinary course of business;
(e) promptly inform Parent, Newco and Newsub in writing of any material
breach of or change in the representations and warranties contained in Article
III hereof;
(f) not pay or authorize any dividend or other distribution with respect to
its capital stock, other than (i) cash dividends actually paid prior to the
Closing Date, (ii) distributions in respect of any Subsidiary's capital stock
payable entirely to the Company or a wholly-owned subsidiary of the Company and
(iii) the distribution by the Company of its entire interest in Anderson-Tully
GP Company (which distribution and the appointment of a successor general
partner of the Partnership (which successor will be a Person other than the
Company or any of its Subsidiaries) the Company agrees shall have occurred prior
to the Closing Date);
(g) not amend the Organizational Documents except as provided in Schedule
--------
5.2(g);
- ------
(h) not split, combine, subdivide or reclassify its outstanding shares of
capital stock;
(i) not repurchase, redeem or otherwise acquire any shares of its capital
stock;
(j) not terminate, establish, adopt, enter into or amend any Plans except
as required by law or pursuant to the terms of a collective bargaining
agreement;
(k) not increase the salary, wage or other compensation of any directors,
officers or employees, other than in the ordinary course of business in
accordance with past practices;
(l) not issue, sell, pledge or otherwise encumber any shares of its capital
stock or any rights, warrants or options to acquire any such shares;
(m) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the stock or assets of, or by any other
manner, any business or any Person or division thereof;
(n) except as permitted by paragraph (v) below, not sell, lease, license,
mortgage or otherwise encumber or subject to any material Lien or otherwise
dispose of any of its properties or assets except in the ordinary course of
business consistent with past practice or in transactions involving
consideration not exceeding $100,000 in any on case or $250,000 in the
aggregate;
(o) not (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another Person, issue or sell any of its debt securities or
warrants or other rights to acquire any such debt securities, guarantee any debt
securities of another Person or agree to maintain the financial condition of any
Person, except for borrowings of up to $50 million under
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<PAGE>
its revolving credit facilities incurred in the ordinary course of business
consistent with past practice or as may be required to make a distribution to
preserve the Company's status as a REIT or (ii) make any loans, advances or
capital contributions to, or investments in, any other Person;
(p) not adopt a plan of liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or reorganization;
(q) not change any material accounting method, principle or practice;
(r) not make any material tax election (other than electing to change its
tax year to a calendar year, making the election provided in Notice 88-19, and
making any other election required to obtain or preserve its status as a REIT)
or settle or compromise any material Federal, state, local or foreign income tax
liability, except in the ordinary course of business and consistent with past
practice;
(s) not enter into any contract that is not terminable by it without
penalty upon six months' notice, or that obligates it to make annual
expenditures in excess of $100,000 or terminate or modify in any material
respect any contract to which it is a party or waive, release or assign any
material rights or claims;
(t) except in the ordinary course of business consistent with past
practice, not sell, assign, transfer, license or permit to lapse any material
rights with respect to its Intellectual Property rights;
(u) not enter into, or otherwise engage in, any transaction referred to in
Section 3.19;
(v) not sell or cause to be harvested standing timber at a rate that would
cause its annualized sales for the period January 1, 1998 to the Closing Date to
exceed 110,000 MBF of sawtimber or 780,000 tons of pulpwood (such annualized
amount to be calculated assuming the average sales and harvest rate per day
through the Closing Date continues through December 31, 1998);
(w) continue its various silvicultural practices consistent with its past
practices;
(x) not enter into any contract, or take any action, that would reasonably
be expected to jeopardize the current or future status of the Company as a REIT
(without regard to the transactions contemplated hereby);
(y) maintain in good repair in accordance with its past practice and good
and prudent practice all of the material personal property assets used in its
business (other than those personal property assets associated with the
Commercial Real Estate), and replace, in accordance with past practice and
prudent practice, any of such assets that may be damaged or destroyed;
(z) as soon as reasonably practicable after the date hereof, but in all
events prior to the Closing Date, transfer and assign to Logging all right,
title and interest in U.S. Trademark Reg. No. 620,654; provided, however, that
-------- -------
nothing in this paragraph (z) shall require the Company to make such transfer if
the Board of Directors of the Company reasonably determines that such transfer
would result in the Company's inability to qualify or remain qualified as a
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<PAGE>
REIT;
(aa) not take or omit to be taken any action which would have a Material
Adverse Effect on the Company and its Subsidiaries, taken as a whole; and
(bb) not commit or agree to take any action inconsistent with the
foregoing;
provided, however, that nothing in this Agreement shall prohibit the Company or
- -------- -------
any of its Subsidiaries from taking any action required to obtain or preserve
the Company's status as a REIT or to consummate or make effective the
transactions contemplated by the Company Reorganization.
Section 5.3 Shareholders' Approval.
----------------------
(a) The Company shall take all action necessary in accordance with
applicable law and its articles of incorporation and bylaws to convene a meeting
of its shareholders within forty-five days after the date hereof or as soon
thereafter as is practicable for the purpose of voting upon this Agreement and
the transactions contemplated hereby (the "Shareholders' Meeting"). The Board
of Directors of the Company (i) has recommended approval of this Agreement and
the transactions contemplated hereby to the shareholders of the Company, (ii)
shall include, and shall not withdraw or modify, such recommendation in the
notice of meeting with respect to the Shareholders' Meeting and in any proxy
statement published in connection with the Shareholders' Meeting unless the
board of directors of the Company reasonably determines after consultation with
outside legal counsel that it is necessary to omit, withdraw or modify any such
recommendation to comply with its fiduciary duties under applicable law, (iii)
shall submit for approval of its shareholders the matters to be voted upon at
the Shareholders' Meeting, (iv) shall use its reasonable best efforts
(including, without limitation, soliciting proxies for such approvals), to the
extent permitted by applicable law, to obtain Company Shareholder Approval, (v)
shall not take any action to nullify its resolution adopting and approving this
Agreement and the transactions contemplated hereby and their submission to the
Company shareholders. In connection with the Shareholders' Meeting, Parent shall
furnish all information concerning Parent, Newco and Newsub as the Company may
reasonably request in connection with any materials to be prepared and
distributed to shareholders of the Company.
(b) The Company agrees that any proxy statement (and any amendment or
supplement thereto) used in connection with the solicitation of proxies for
approval of this Agreement at the Shareholders' Meeting, at the date of mailing
to the shareholders of the Company and at the time of the Shareholders' Meeting,
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
Section 5.4 Commercial Efforts; Further Assurances.
--------------------------------------
(a) Subject to the terms and conditions herein provided, each of the
parties hereto shall use its commercially reasonable efforts to take, or cause
to be taken, all actions, and to do, or cause to be done, all things reasonably
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this
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<PAGE>
Agreement, including using its commercially reasonable efforts to obtain
consents of all Governmental Authorities and third parties necessary to the
consummation of the transactions contemplated by this Agreement; provided,
--------
however, that neither this Section 5.4(a) nor any other provision of this
- -------
Agreement (including, without limitation, Sections 5.6(a) and (b)) shall
require, or be construed to require, Parent, Newco or the Company to proffer to,
or agree to, any concession to any Governmental Authority that Parent concludes
is reasonably likely materially to reduce the economic or business benefits
Parent expects, as of the date hereof, to realize from the Merger. Subject to
applicable laws relating to the exchange of information, Parent and the Company
shall have the right to review in advance, and to the extent practicable each
will consult the other on, all the information relating to Parent, Newco or the
Company, as the case may be, and any of their respective Subsidiaries, that
appear in any filing made with, or written materials submitted to, any third
party and/or any Governmental Authority in connection with the Merger and the
other transactions contemplated by this Agreement. In exercising the foregoing
right, each of the Company and Parent shall act reasonably and as promptly as
practicable.
(b) In the event any claim, action, suit, investigation or other proceeding
by any Governmental Authority or other Person is commenced which questions the
validity or legality of the Merger or any of the other transactions contemplated
hereby or seeks damages in connection therewith, the parties agree to cooperate
and use commercially reasonable efforts to defend against such claim, action,
suit, investigation or other proceeding and, if an injunction or other order is
issued in any such action, suit or other proceeding, to use commercially
reasonable efforts to have such injunction or other order lifted, and to
cooperate reasonably regarding any other impediment to the consummation of the
transactions contemplated hereby.
(c) (i) Each of the Company and Parent agrees that it shall, as soon as
reasonably practicable after it learns of the existence of any facts or
circumstances causing any of the representations and warranties herein made,
respectively, by the Company or by Parent, Newco or Newsub (including, without
limitation, those contained in Article III or Article IV), to have been
incorrect when made or to have thereafter become incorrect (whether through its
discovery of an inadvertent, good faith error at the time this Agreement was
signed or the happening thereafter of any event or occurrence or otherwise),
deliver to the other written notice of such incorrect representations and
warranties; and (ii) each party shall give prompt written notice to the others
of any failure of the Company, Parent, Newco or Newsub, as the case may be, to
comply with or satisfy any material covenant, condition or agreement to be
complied with or satisfied by it under the Merger Documents.
(d) The Company acknowledges that it is Newco's intention to cause the
Contribution to occur immediately after the Effective Time. The Company and
Newco each agree to use their respective commercially reasonable efforts to
satisfy the conditions set forth in Section 6.2(f).
Section 5.5 Public Announcements. The timing and content of all
--------------------
announcements regarding any aspect of this Agreement or the Merger (including,
without limitation, the disclosure of financial information with respect to the
Company) to the financial community, any Governmental Authority, employees or
the general public shall be mutually agreed upon in advance by the Company and
Parent; provided, that each party hereto may make any such announcement which it
in good faith believes, based on advice of counsel, is necessary or advisable in
connection with any requirement of law or regulation, it being understood and
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<PAGE>
agreed that each party shall promptly provide the other parties hereto with
copies of any such announcement prior thereto; and provided further, that each
party acknowledges the disclosures that are required to be made in the
Registration Statement.
Section 5.6 Hart-Scott-Rodino and Timberlands Act.
-------------------------------------
(a) Each of Parent, Newco, Newsub and Company will use their respective
commercially reasonable efforts to file with the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the Federal Trade
Commission (the "FTC") promptly following the date hereof the notification and
report form (the "Report") required under the HSR Act, with respect to the
transactions contemplated hereby. Each of Parent, Newco, Newsub and the Company
shall cooperate with each other to the extent necessary to assist each other in
the preparation of its Report, shall request early termination of the waiting
period required by the HSR Act and, if requested, will promptly amend or furnish
additional information thereunder requested by the Antitrust Division and/or the
FTC. The filing fee under the HSR Act shall be paid by Parent. The Company
also agrees to take the actions described in this Section 5.6(a) to the extent
required to permit the Non-Parent Parties to comply with their respective
obligations under Section 5.2(f) of the Asset Purchase Agreement.
(b) As promptly as practicable after the date hereof, the Company shall use
its reasonable best efforts to cause its Common Stock to be registered under
Section 12(g) of the Exchange Act and thereby cause the Timberlands Act to be
inapplicable to the transactions contemplated hereby by virtue of Section 49-20-
9 thereof. In the event that the Company is unable to register its Common Stock
under the Exchange Act or, despite its reasonable best efforts, is otherwise
unable to cause the Timberlands Act to be inapplicable to the transactions
contemplated hereby, then Parent, Newco, Newsub and the Company shall use their
commercially reasonable efforts to make all appropriate filings under the
Timberlands Act with respect to the transactions contemplated hereby, cooperate
with each other in such filings and in the prosecution of an order of approval
by the Mississippi Secretary of State, and furnish such additional information
and take such additional actions as shall be requested by the Mississippi
Secretary of State. The applicable fees under the Timberlands Act shall be paid
by Parent.
Section 5.7 Employee Benefits. As of the Effective Time, Newco shall
-----------------
cause the REIT Partnership to offer employment to those employees of the Company
identified on a schedule to be delivered by Newco to the Company at least thirty
days prior to Closing at the same salaries as those in effect immediately prior
to the Effective Time. At any time after the Effective Time, Newco, in its sole
discretion, may cause the REIT Partnership to extend to the former employees of
the Company and its Subsidiaries who become employees of the REIT Partnership
(each, a "Hired Employee," and collectively, the "Hired Employees"), the
employee benefit plans and programs, including tax-qualified defined benefit and
defined contribution plans, applicable to similarly situated employees of the
REIT Partnership. Until that time, Newco shall cause the REIT Partnership to
maintain employee benefit plans and programs for the former employees of the
Company and its Subsidiaries with terms no less favorable to such employees than
the Plans in place as of the Effective Time for such employees and shall
continue to make all contributions to such plans for such period on a basis
consistent with the Company's past practices. Newco shall cause the Hired
Employees to be given credit for all purposes under all of the REIT
Partnership's pension, welfare and fringe benefit plans, including for purposes
of determining vacation and severance pay, for the period during which such
employee was
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employed by the Company, its Subsidiaries or any ERISA Affiliate; provided,
--------
however, that in no event will the REIT Partnership be required to credit
- -------
service to a Hired Employee to the extent that such credit would result in a
duplication of benefits. Newco shall cause Hired Employees to be entitled to
participate in the welfare plans maintained by the REIT Partnership effective
upon the Effective Time without any waiting periods, any evidence of
insurability or the application of any preexisting condition restrictions, and
counting claims incurred prior to the Effective Time for purposes of applying
co-payments, deductibles, out-of-pocket maximums and other such matters.
Notwithstanding any other provisions of this Agreement to the contrary, in no
event may any defined benefit plan or other funded employee benefit plan that is
maintained by the Company, its Subsidiaries or any ERISA Affiliate thereof, be
terminated or otherwise amended in any manner that would result in a recognition
of income by Newco attributable to such plan. Effective as of the Effective
Time, Parent shall become the plan sponsor of all of the Plans and the Company
shall take all such actions, including without limitation the adoption of such
amendments to the Plans, as may be necessary to terminate the coverage and cease
benefit accruals effective as of the Effective Time of any individual who is not
a hired Employee or a Hired Employee under the Asset Purchase Agreement, the
Logging Subsidiary Asset Purchase Agreement, or the Sawmills Subsidiary Asset
Purchase Agreement and to provide any required notification to any affected
individual of the cessation of accrual of benefits under the Plan(s) effective
as of the Effective Time. The Company shall use its reasonable best efforts
before and after the Closing Date to cooperate with the REIT Partnership and
Parent to take all such actions and make such governmental filings as may be
necessary or desirable to give effect to the provisions of this Section 5.7 and
to assure an orderly transition to Parent of administrative responsibilities
with respect to the Plans.
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Section 5.8 Initial Public Offering.
-----------------------
(a) As promptly as practicable after the date hereof, Newco shall use its
reasonable efforts to (i) file the Registration Statement with the SEC, (ii)
cause such Registration Statement (as it may be amended or supplemented in
response to comments received from the SEC staff or as otherwise deemed
necessary or appropriate by Parent and Newco) to be declared effective under the
Securities Act and (iii) effect the proposed underwritten initial public
offering of shares of its Common Stock substantially as contemplated by the
Registration Statement at the time that it becomes effective under the
Securities Act (including for this purpose the information deemed to be
contained in such Registration Statement pursuant to Rule 430A or Rule 434 under
the Securities Act and by any post-effective amendment thereto) and otherwise on
terms and conditions which are materially less favorable to Newco than customary
terms and conditions ("IPO"); provided, however, that Newco's obligation to take
-------- -------
the actions described in clauses (ii) and (iii) above shall be suspended during
any period when (x) in Parent's good faith judgment it is highly likely that any
of the conditions to Closing set forth in Sections 6.1 and 6.2 (other than
Section 6.2(d)) would not be satisfied at the time when, if Newco were to so
proceed, the closing of the proposed IPO would otherwise be expected to occur or
(y) after consultation with the firms designated as the managing underwriters of
the proposed IPO, the Board of Directors of Parent, or a duly constituted
committee thereof, determines in good faith that, based upon then current
conditions in the United States securities markets, factors related to the
proposed business of Newco and the REIT Partnership or other relevant factors,
it is reasonably likely that the proposed IPO will not meet the "IPO Criteria"
(as such term is defined in that certain letter agreement dated the date hereof
between Parent and the Company). Newco shall promptly notify the Company if its
obligations under this Section 5.8(a) shall have been suspended pursuant to the
proviso set forth in the preceding sentence. The Company shall use its
reasonable efforts to assist Newco in complying with its covenants in the first
sentence of this Section 5.8(a), by promptly providing such information
(including, without limitation, financial information) with respect to the
Company reasonably requested by Newco in connection with the Registration
Statement (as it may be amended and supplemented) or the proposed IPO and by
causing its counsel to deliver such opinions, its auditors to deliver such
"comfort" letters and its officers to deliver such certificates, in each case as
are customary in connection with underwritten public offerings such as the
proposed IPO.
(b) Newco agrees to provide to the Company copies of the Registration
Statement (including any amendments thereto) a reasonable time before filing.
Each of the Company and Newco agrees promptly to notify the other if at any time
any event shall have occurred as a result of which the preliminary or final
prospectus contained in the Registration Statement as then amended or
supplemented would include an untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Section 5.9 Indemnification; Officers' and Directors' Insurance.
---------------------------------------------------
(a) From and after the Effective Time, Newco shall, or shall cause the
Surviving Corporation to, indemnify, defend and hold harmless the present and
former officers and directors of the Company (each an "Indemnified
Officer/Director") against all losses, expenses, claims, damages, liabilities or
amounts that are paid in settlement of, or otherwise in connection with, any
claim, action, suit, proceeding or investigation (a "Claim"), based in whole or
in part
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on the fact that such person is or was a director or officer of the Company and
arising out of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, in connection with the Merger and the other
transactions contemplated by this Agreement), in each case to the full extent
permitted under the Mississippi BCA and the Company's certificate of
incorporation and bylaws (to the extent permitted by applicable law) as in
effect on the date of this Agreement. Newco shall, or shall cause the Surviving
Corporation to, pay any expenses in advance of the final disposition of any such
Claim to each Indemnified Officer/Director to the fullest extent permitted under
the Mississippi BCA upon receipt from the Indemnified Officer/Director to whom
expenses are advanced of any undertaking to repay such advances required under
the Mississippi BCA. Newco shall, or shall cause the Surviving Corporation to,
cooperate in the defense of any such matter.
(b) Newco shall, or shall cause the Surviving Corporation to, keep in
effect provisions in its certificate of incorporation and bylaws providing for
exculpation of director liability and its indemnification of the Indemnified
Officers/Directors to the fullest extent permitted under the Mississippi BCA,
which provisions shall not be amended except as required by applicable law or
except to make changes permitted by law that would enlarge the right of
indemnification of the Indemnified Officers/Directors.
(c) Newco shall at its expense maintain or cause to be maintained in effect
for not less than five (5) years from the Effective Time the policies of
officers' and directors' liability insurance most recently maintained by the
Company (provided that Newco may substitute or cause to be substituted therefor
policies of at least the same coverage containing terms and conditions which are
no less advantageous so long as such substitution does not result in gaps or
lapses in coverage) with respect to matters occurring prior to the Effective
Time; provided, however, that Newco shall not be obligated to make or cause to
-------- -------
be made annual premium payments for such insurance to the extent premiums exceed
200% of the annual premiums paid by Newco for such insurance during the year
following the IPO. Newco shall pay or cause to be paid all expenses (including
attorney's fees and expenses) that may be incurred by any Indemnified
Officer/Director in enforcing the indemnity and other obligations provided for
in this Section 5.9, provided, however, that Newco shall not be liable for any
-------- -------
settlement effected without its prior consent.
(d) In the event that Newco or any of its successors or assigns
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation thereof, then proper provision shall be made
so that the successors and assigns of Newco or of its successors or assigns, as
the case may be, shall assume its obligations set forth in this Section 5.9.
(e) The provisions of this Section 5.9 shall survive the consummation of
the Merger and expressly are intended to benefit each Indemnified
Officer/Director.
Section 5.10 Approval by Parent and Newco. Each of Parent and Newco, in
----------------------------
its capacity as the sole stockholder of Newsub, shall vote the shares of Newco
and Newsub to approve and adopt the Merger, this Agreement and the transactions
contemplated hereby, and Parent agrees to cause Newco and Newsub to comply with
their respective obligations hereunder during the period prior to the Effective
Time.
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Section 5.11 No Solicitation.
---------------
(a) The Company agrees that neither it nor any of its Subsidiaries shall,
and the Company shall not permit any of its or any Subsidiary's officers,
directors, agents, representatives or advisers to:
(i) solicit, initiate or knowingly encourage the submission of any
proposal or offer from any Person relating to any (A) acquisition of a
substantial amount of assets of the Company or any of its Subsidiaries
(other than in the ordinary course of business) or any of the
outstanding capital stock of the Company or (B) an offer to purchase
outstanding shares of capital stock of the Company or any of its
Subsidiaries, or (C) merger, consolidation, business combination, sale
of substantially all assets, recapitalization, liquidation or similar
transaction involving the Company or any of its Subsidiaries, other
than the transactions contemplated by this Agreement (each an
"Alternative Proposal"), or
(ii) enter into or participate in any discussions or negotiations regarding
any Alternative Proposal, or furnish to any other Person any non-
public information with respect to its business, properties or assets,
or otherwise cooperate with, or assist or participate in, any attempt
by any other Person to make any Alternative Proposal; provided,
however, that prior to the date of the Shareholders' Meeting the
provisions of this clause (ii) shall not prohibit the Company from
taking any of the actions described in such clause in connection with
an unsolicited bona fide written Alternative Proposal to the Company
or its shareholders, if and only to the extent that (A) the board of
directors of the Company reasonably determines (1) after consultation
with outside legal counsel, that the taking of such action is
necessary for such board of directors to comply with its fiduciary
duties to shareholders under applicable law and (2) after consultation
with its financial adviser, that such Alternative Proposal is
reasonably capable of being completed taking into account all legal,
financial, regulatory and other aspects of the proposal and the Person
making the proposal, and would, if consummated, result in a
transaction which is more favorable, from a financial point of view,
to the Company's shareholders than the transactions contemplated by
this Agreement, and (B) prior to taking such actions, the board of
directors of the Company receives from such Person an executed
confidentiality agreement in customary form. Nothing in this Agreement
shall prevent the Company or its board of directors from making any
public disclosure that, in the opinion of the Company's outside
counsel, is required by applicable law; provided, however, that prior
to making any such public disclosure the Company shall inform Parent
that it intends to make such disclosure, consult the Parent regarding
the necessity for such disclosure and provide to Parent a copy of any
written opinion of outside counsel.
(b) The Company shall notify Parent promptly (and in any event no later
than 24 hours) (i) after any action is taken that would be proscribed by Section
5.11(a)(ii) but for the
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proviso thereof or (ii) after receipt by the Company of any Alternative
Proposal. Such notification shall include the terms of any Alternative Proposal
and the name of such Person making any such Alternative Proposal. Thereafter,
the Company shall keep Parent informed on a current basis with respect to the
status and terms of any such Alternative Proposal and the status of any
discussions or negotiations with respect thereto.
Section 5.12. Restructuring Agreements. The Company agrees to cooperate
------------------------
with Parent in the preparation and execution of any agreement reasonably
requested by Parent to which the Company or any of its Subsidiaries would be a
party with respect to the operations of the Company after the Effective Time
(including without limitation any agreement providing for the termination or
modification of any existing agreement at the Effective Time); provided however,
that no such agreement shall impose any obligation whatsoever on, or amend any
agreement of, the Company or any of its Subsidiaries prior to the Effective
Time. Any expenses incurred by the Company in connection with this Section 5.12
shall be paid by Parent prior to the Closing and shall not result in any
adjustment to the Base Merger Price.
ARTICLE VI
----------
CLOSING; CONDITIONS TO CLOSING
------------------------------
Section 6.1 Closing; Conditions to the Obligations of All Parties. The
-----------------------------------------------------
Closing of the Merger shall take place simultaneously with the closing of the
IPO and immediately after the closing under the Asset Purchase Agreement, after
satisfaction or waiver of the conditions to Closing set forth in this Agreement.
The respective obligations of each party to consummate the transactions
contemplated by this Agreement shall be subject to the satisfaction or waiver at
or prior to the Effective Time of each of the following conditions:
(a) Approval. This Agreement and the transactions contemplated hereby
--------
shall have been approved and adopted by the requisite vote of the shareholders
of the Company.
(b) Change in Law. No statute, rule or regulation shall have been enacted
-------------
or issued by any Governmental Authority that makes the consummation of the
Merger or the transactions contemplated by this Agreement or the Contribution
illegal.
(c) Injunction. At the Effective Time there shall be no effective
----------
injunction, writ or preliminary restraining order or any order of any nature
issued and outstanding by a court or Governmental Authority of competent
jurisdiction to the effect that the Merger or the transactions contemplated by
this Agreement or the Contribution may not be consummated and no proceeding or
lawsuit shall have been commenced by any Governmental Authority for the purpose
of obtaining such injunction, writ or preliminary restraining order.
(d) HSR Act. The waiting period (and each extension thereof, if any)
-------
applicable to the Merger under the HSR Act shall have terminated or expired.
(e) Timberlands Act. The Timberlands Act shall be inapplicable to the
---------------
transactions contemplated hereby (by virtue of the registration of the Common
Stock under Section 12(g) of the Exchange Act or otherwise), or a decision
approving Newco's acquisition of Common Stock
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hereunder by the Secretary of State of Mississippi (or, if applicable, the
reviewing court referred to in Section 49-20-33 of the Timberlands Act) shall
have become final and nonappealable.
Section 6.2 Conditions to the Obligations of Parent, Newco and Newsub.
---------------------------------------------------------
The obligations of Parent, Newco and Newsub to consummate the transactions
contemplated by this Agreement shall be subject to the satisfaction or waiver
prior to or at the Effective Time of each of the following conditions:
(a) Representations and Warranties. All representations and warranties
------------------------------
made by the Company in this Agreement and the Schedules hereto that are
qualified by materiality shall be true, correct and complete as of the Closing
Date as though such representations and warranties were made as of the Closing
Date (or on the date when made in the case of any representation or warranty
which specifically relates to an earlier date) and all representations and
warranties made by the Company in this Agreement and the Schedules hereto that
are not so qualified shall be true, correct and complete in all material
respects as of the Closing Date as though such representations and warranties
were made as of the Closing Date (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date).
Parent shall have received a certificate, dated the Closing Date, to such
effect, signed on behalf of the Company by its Chief Executive Officer.
(b) Performance by the Company. The Company shall have duly performed or
--------------------------
complied with, in all material respects, all of the covenants and obligations to
be performed or complied with by it under the terms of this Agreement on or
prior to or at the Closing Date. Parent shall have received a certificate,
dated the Closing Date, to such effect, signed on behalf of the Company by its
Chief Executive Officer.
(c) Consents. Newco shall have received evidence reasonably satisfactory
--------
to it that the Company has received the Company Required Consents.
(d) IPO. Newco shall have consummated the IPO (whether or not the IPO
---
satisfied the IPO Criteria).
(e) Legal Opinions. Newco shall have received the opinion of Skadden,
--------------
Arps, Slate, Meagher & Flom LLP, dated the Closing Date, in the form attached
hereto as Exhibit B-1 and from counsel reasonably satisfactory to Newco legal
opinions in form reasonably satisfactory to Newco covering the matters set forth
on Exhibit B-2.
(f) Contribution. Newco shall have obtained the consent or approval of
------------
each Person whose consent or approval shall be required in order to consummate
the Contribution, other than those consents or approvals which, if not obtained,
would not reasonably be expected to have a material adverse effect on the
business, financial condition, results of operations or prospects of Newco or
the REIT Partnership. Newco or the REIT Partnership, as appropriate, shall have
obtained all material permits, licenses, approvals certificates and other
authorizations from, and shall have made all notifications, registrations,
certifications and filings with, Governmental Authorities, necessary for the
REIT Partnership to operate the Company's business after completion of the
Contribution in substantially the same manner as it was conducted by the Company
prior to the Effective Time.
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Section 6.3 Conditions to the Obligations of the Company. The obligations
--------------------------------------------
of the Company to consummate the transactions contemplated by this Agreement
shall be subject to the satisfaction or waiver prior to or at the Effective Time
of each of the following conditions:
(a) Representations and Warranties. All representations and warranties
------------------------------
made by Parent, Newco and Newsub in this Agreement that are qualified by
materiality shall be true, correct and complete as of the Closing Date as though
such representations and warranties were made as of the Closing Date (or on the
date when made in the case of any representation or warranty which specifically
relates to an earlier date) and all representations and warranties made by the
Parent, Newco and Newsub in this Agreement that are not so qualified shall be
true, correct and complete in all material respects as of the Closing Date as
though such representations and warranties were made as of the Closing Date (or
on the date when made in the case of any representation or warranty which
specifically relates to an earlier date). The Company shall have received a
certificate, dated the Closing Date, to such effect, signed on behalf of Parent,
Newco and Newsub by their respective Chief Executive Officers.
(b) Performance by Parent, Newco and Newsub. Parent, Newco and Newsub
---------------------------------------
shall have duly performed or complied with, in all material respects, all of the
covenants and obligations to be performed or complied with by each of them under
the terms of this Agreement prior to the Closing Date. The Company shall have
received a certificate, dated the Closing Date, to such effect, signed on behalf
of Parent, Newco and Newsub by their respective Chief Executive Officers.
ARTICLE VII
-----------
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
Section 7.1 Termination. This Agreement may be terminated and the Merger
-----------
may be abandoned at any time prior to the Effective Time, whether before or
after the approval thereof by the shareholders of the Company and Newsub:
(a) by written consent of the Company and Parent;
(b) by either the Company or Parent, if the Merger shall not have been
consummated on or before December 31, 1998 (the "Termination Date"); provided,
--------
however, that this Agreement may not be terminated by (i) Parent if Parent fails
- -------
to perform its obligations under this Agreement or the Asset Purchase Agreement
or (ii) the Company if the Company fails to perform its obligations under this
Agreement or a Non-Parent Party fails to perform its obligations under the Asset
Purchase Agreement, and in either such case such failure to perform causes the
Merger not to have been consummated prior to the Termination Date;
(c) by Parent if the approval of the Company's shareholders as required by
Section 6.1(a) shall not have been obtained at the Shareholders' Meeting or if
the Board of Directors of the Company shall have (i) taken any action nullifying
its resolutions adopting and approving this Agreement and directing that it be
submitted for approval of shareholders at the Shareholders' Meeting or (ii)
withdrawn or adversely modified its recommendation of this Agreement and the
transactions contemplated hereby;
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(d) by the Company if there has been a material breach by Parent, Newco or
Newsub of any representation, warranty or covenant contained in this Agreement
that is not curable or, if curable, is not cured within 30 days after written
notice of such breach is given by the Company to the party committing such
breach;
(e) by Parent if there has been a material breach by the Company of any
representation, warranty or covenant contained in this Agreement that is not
curable or, if curable, is not cured within 30 days after written notice of such
breach is given by Parent to the Company;
(f) by Parent if at the time of the Shareholders' Meeting the holders of
more than 10% of the outstanding shares of Common Stock (i) have taken the
actions required in order to assert dissenters' rights under Section 79-4-13.21
of the Mississippi BCA and, (ii) prior to any termination of this Agreement by
Parent, have not become ineligible to assert dissenters' rights pursuant to
Section 79-4-13.23(c) of the Mississippi BCA;
(g) by either Parent or the Company, if any Governmental Authority shall
have issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the Merger or the transactions contemplated
by this Agreement and such order, decree, ruling or other action shall have
become final and nonappealable;
(h) by either the Company or Parent if the Asset Purchase Agreement shall
have been terminated prior to the closing thereunder; or
(i) by the Company if the approval of the Company's shareholders as
required by Section 6.1(a) shall not have been obtained at the Shareholders'
Meeting.
Section 7.2 Effect of Termination. If this Agreement is terminated
---------------------
pursuant to Section 7.1 hereof, all rights and obligations of the parties
hereunder shall terminate and no party shall have any liability to the other
party, except for obligations of the parties hereto in Sections 5.1(c), 5.5 and
7.5, which shall survive the termination of this Agreement.
Section 7.3 Amendments. This Agreement may be amended by the parties
----------
hereto, approved by action taken by the respective Boards of Directors of the
Company, Parent, Newco and Newsub at any time before approval hereby by the
shareholders of the Company, but, after such approval, no amendment shall be
made which adversely changes the method of computing the amount to be received
by the Shareholders of the Company or changes the medium of payment therefor or
which in any way materially adversely affects the rights of such Shareholders
without the further approval of the shareholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto, and may not be amended after the Effective Time.
Section 7.4 Waiver. At any time prior to the Effective Time, any term,
------
provision or condition of this Agreement may be waived in writing (or the time
for performance of any of the obligations or other acts of the other parties
hereto may be extended) by the party which is, or the party the shareholders of
which are, entitled to the benefits thereof.
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Section 7.5 Fees and Expenses.
-----------------
(a) Except as provided in this Section 7.5 and Sections 5.6(a) and (b), all
fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses (whether or not the Merger is consummated).
(b) The Company shall pay to Parent a termination fee of $15 million plus
the Topping Amount if (i) this Agreement is terminated pursuant to Section
7.1(c) or Section 7.1(i), or this Agreement is terminated pursuant to Section
7.1(h) following a termination of the Asset Purchase Agreement pursuant to
Section 7.1(f) thereof, and (ii) except as provided in the following sentence,
prior to June 30, 1999 (A) the Company or any of its Subsidiaries enters into
any agreement, (x) pursuant to which any Person (an "Acquiring Party") acquires,
or proposes to acquire, by purchase, merger, consolidation, assignment, lease,
transfer or otherwise, thirty percent or more of the voting power of the
outstanding securities of the Company or any of its Subsidiaries or thirty
percent or more of the fair market value of the total assets of the Company or
any of its Subsidiaries or (y) pursuant to which there is, or there is proposed
to be, consummated a merger, consolidation or similar transaction between the
Company or any of its Subsidiaries and an Acquiring Party in which shareholders
of the Company immediately prior to such merger, consolidation or similar
transaction would not (if such transaction were consummated on the date of such
agreement) own securities representing at least seventy percent of the
outstanding voting power of the surviving entity (or, if applicable, any entity
in control of such surviving entity) of such merger, consolidation of similar
transaction immediately following the consummation thereof or (B) any Person or
"group" acquires "beneficial ownership" of thirty percent or more of the
Company's outstanding capital stock, provided that no Person acting solely as an
underwriter in connection with a firmly committed underwritten public offering
by the Company shall be deemed to have acquired beneficial ownership of the
underwritten securities (the terms "group" and "beneficial ownership" having the
meaning ascribed to them under Rule 13d-5 and Rule 13d-3, respectively, under
the Exchange Act). Clause (ii) of the preceding sentence shall not be deemed to
cover any issuance (or any agreement providing for any issuance) by the Company
to any Person of shares of capital stock of the Company under the following
circumstances: (x) the number of shares to be issued is approximately the
minimum number of shares necessary (assuming such issuance occurred on the date
of any such agreement) to cause the five individuals who, prior to the date of
such issuance (or any such agreement), own (or who are deemed to own pursuant to
the provisions of Sections 542(a)(2) and 544 of the Code, as modified by Section
856(h) of the Code, but without duplication of ownership) the largest number of
shares of capital stock of the Company, to own (or be deemed to own pursuant to
the foregoing provisions of the Code) not more than 49% of the Company's total
number of outstanding shares of capital stock, and (y) prior to the date of the
later of the Shareholders' Meeting or the Limited Partners' Meeting (as such
term is defined in the Asset Purchase Agreement), neither the Person agreeing to
acquire or acquiring such shares from the Company nor any Affiliate of such
Person made an Alternative Proposal to the Company, its board of directors or
any member thereof or publicly announce an Alternative Proposal or an intention
to make an Alternative Proposal. At least ten days prior to entering into an
agreement covered by the preceding sentence, the principal executive officer of
the Company shall deliver a certificate to Parent certifying as to the matters
set forth in clauses (x) and (y) above and the factual basis for the conclusion
that the proposed issuance is covered by clause (x) above.
(c) Parent shall pay to the Company a termination fee of $15 million in the
event that
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this Agreement is terminated by the Company (i) pursuant to Section 7.1(d) as a
result of willful breach by Parent, Newco or Newsub of any representation,
warranty or covenant contained in this Agreement or (ii) pursuant to Section
7.1(b) and Parent's willful failure to perform its obligations under this
Agreement caused the Merger not to have been consummated prior to the
Termination Date.
(d) The Company shall pay to Parent a termination fee of $15 million in the
event that this Agreement is terminated by Parent (i) pursuant to Section 7.1(e)
as a result of a willful breach by the Company of any representation, warranty
or covenant contained in this Agreement or (ii) pursuant to Section 7.1(b) and
the Company's willful failure to perform its obligations under this Agreement
caused the Merger not to have been consummated prior to the Termination Date.
(e) Parent shall pay to the Company a termination fee of $15 million in the
event that (i) this Agreement is terminated pursuant to Section 7.1(h) and the
termination of the Asset Purchase Agreement resulted from a willful breach by
Parent of any of its representations, warranties or covenants therein or (ii)
this Agreement is terminated by the Company pursuant to Section 7.1(b) and
Parent's willful failure to perform its obligations under the Asset Purchase
Agreement caused the Merger not to have been consummated prior to the
Termination Date.
(f) The Company shall pay to Parent a termination fee of $15 million in the
event that (i) this Agreement is terminated pursuant to Section 7.1(h) and the
termination of the Asset Purchase Agreement resulted from a willful breach by
any party thereto other than Parent (each a "Non-Parent Party") of any of its
representations, warranties and covenants therein or (ii) this Agreement is
terminated by Parent pursuant to Section 7.1(b) and a Non-Parent Party's willful
failure to perform its obligations under the Asset Purchase Agreement caused the
Merger not to have been consummated prior to the Termination Date.
(g) Parent shall pay to the Company a termination fee of $15 million in the
event that this Agreement is terminated by the Company pursuant to Section
7.1(b), all of the conditions to Closing set forth in Sections 6.1 and 6.2
(other than the condition set forth in Section 6.2(d)) were satisfied or were
reasonably capable of being satisfied prior to the Termination Date and prior to
June 30, 1999 Parent enters into any agreement with respect to an Alternative
Timber Transaction.
(h) The termination fees provided for in this Section 7.5 shall be paid by
wire transfer of immediately available funds within two Business Days after the
event giving rise to the obligation to pay such fees. No party shall be
entitled to assert a right to payment under more than one of paragraphs (b)
through (g) of this Section 7.5.
(i) The fees provided for in paragraphs (b), (c), (d), (e), (f) and (g) of
this Section 7.5 are intended to be liquidated damages and, as such, the
exclusive remedies with respect to the matters discussed in such paragraphs, and
no party hereto shall seek any additional damages or remedies at law or in
equity as a result of any such matter.
(j) Any termination fee payable to the Company shall be paid in such
amounts and at such times as payment will not adversely affect the Company's
status as a REIT as determined by
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<PAGE>
the Board of Directors of the Company in good faith. Any amounts payable in
years subsequent to the Termination Date shall accrue interest at the short-term
applicable federal rate as of the Termination Date.
ARTICLE VIII
------------
MISCELLANEOUS
-------------
Section 8.1 Nonsurvival of Representations and Warranties. The
---------------------------------------------
representations, warranties and covenants in this Agreement or in any instrument
delivered pursuant to this Agreement shall terminate as of the Effective Time
and shall not survive the Merger, except that the following provisions of this
Agreement shall survive the Merger: Article II, Sections 5.1(c), 5.5 and 5.9,
Section 7.5 (but only until the party first entitled to receive a termination
fee thereunder shall have received such fee), and this Article VIII.
Section 8.2 Notices. All notices or other communications required or
-------
permitted hereunder shall be in writing and shall be delivered or sent
personally, by facsimile or by certified, registered or express mail, postage
prepaid, and shall be deemed given when so delivered or sent personally or by
facsimile or, if by mail, two days after the date of mailing, as follows:
If to Parent, Newco or the Newsub:
Potlatch Corporation
601 West Riverside Avenue
Spokane, Washington 99201
Facsimile: (509) 835-1560
Attention: Chief Executive Officer
with a copy to (which shall not constitute notice to Parent, Newco or
Newsub):
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, California 94104
Facsimile: (415) 983-1200
Attention: Blair W. White, Esq.
If to Company:
Anderson-Tully Company
1242 North Second Street
Memphis, Tennessee 38107
Facsimile: (901) 526-8842
Attention: President
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<PAGE>
with a copy to (which shall not constitute notice to the Company):
Arnold & Porter
555 12th Street, N.W.
Washington, D.C. 20004-1202
Facsimile: (202) 942-5999
Attention: Dennis G. Lyons, Esq.
or to such other address as any party hereto shall notify the other parties
hereto (as provided above) from time to time.
Section 8.3 Note Purchase Agreement.
-----------------------
(a) Parent and the Company agree that Section 8.2 of the Note Purchase
Agreement is hereby amended by deleting the date "April 1, 1998" as it appears
in the first sentence thereof and substituting instead the date "February 9,
1998."
(b) Parent and the Company agree that this Agreement constitutes a binding
agreement to combine the business of the Company with Parent and certain
affiliates of Parent for purposes of Section 8.7 of the Note Purchase Agreement.
(c) The amendments to the Note Purchase Agreement described in this Section
8.3 shall be effective as of the date of this Agreement. From and after the
date of this Agreement, references in the Note Purchase Agreement to "this
Agreement," "herein" or words of similar import shall mean and be a reference to
the Note Purchase Agreement as amended and supplemented hereby. The amendments
to the Note Purchase Agreement described in this Section 8.3 shall survive any
termination of this Agreement pursuant to Section 7.1.
Section 8.4 Exhibits and Schedules. All exhibits and schedules hereto, or
----------------------
documents expressly incorporated into this Agreement, are hereby incorporated
into this Agreement and are hereby made a part hereof as if set out in full in
this Agreement.
Section 8.5 Expenses. Regardless of whether the transactions provided for
--------
in this Agreement are consummated, except as otherwise provided in Section 7.5
and Sections 5.6(a) and (b), each party hereto shall pay its own expenses
incident to this Agreement and the transactions contemplated hereby. Newco
agrees to pay or cause to be paid any expenses referred to in clauses (ii) and
(iii) of the definition of Base Merger Price which have been incurred or will be
incurred by the Company to the extent that such expenses have not been paid
prior to the Effective Time.
Section 8.6 Time of the Essence. Time is of the essence for each and
-------------------
every provision of this Agreement.
Section 8.7 Governing Law; Consent to Jurisdiction. This Agreement shall
--------------------------------------
be governed by, and construed in accordance with, the internal laws of the State
of Delaware without reference to the choice of law or conflicts of law
principles thereof. Any legal action or proceeding with respect to this
Agreement or any document related hereto may be brought in the courts of the
State of Delaware or the United States of America located in Delaware, and, by
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<PAGE>
execution and delivery of this Agreement, each of Parent, Newco, Newsub and the
Company hereby accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts. The parties hereto
hereby irrevocably waive any objection, including, without limitation, any forum
-----
non conveniens, which any of them may now or hereafter have to the bringing of
- --------------
such action or proceeding in such respective jurisdictions.
Section 8.8 Assignment; Successors and Assigns; No Third Party Rights.
---------------------------------------------------------
Except as otherwise provided herein, this Agreement may not be assigned, and any
attempted assignment shall be null and void. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, successors, permitted assigns and legal
representatives. Except as provided in Section 5.9, this Agreement shall be for
the sole benefit of the parties to this Agreement and their respective heirs,
successors, permitted assigns and legal representatives and is not intended, nor
shall be construed, to give any person, other than the parties hereto and their
respective heirs, successors, assigns and legal representatives, any legal or
equitable right, remedy or claim hereunder.
Section 8.9 Counterparts. This Agreement may be executed in counterparts,
------------
any one of which may be by facsimile followed by the originally executed
document forwarded immediately thereafter to the other parties hereto, each of
which shall be deemed an original agreement, but all of which together shall
constitute one and the same instrument.
Section 8.10 Titles and Headings. The titles, captions and table of
-------------------
contents in this Agreement are for reference purposes only, and shall not in any
way define, limit, extend or describe the scope of this Agreement or otherwise
affect the meaning or interpretation of this Agreement.
Section 8.11 Entire Agreement. This Agreement, including the Schedules
----------------
attached hereto, and the Articles of Merger, constitutes the entire agreement
among the parties with respect to the matters covered hereby and supersedes all
previous written, oral or implied understandings among them with respect to such
matters, except to the extent that other written agreements are expressly
referred to herein.
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<PAGE>
Section 8.12 Severability. Any term or provision of this Agreement which
------------
is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
ANDERSON-TULLY COMPANY
By /s/ PARNELL S. LEWIS
-----------------------
Name: Parnell S. Lewis
Title: President
POTLATCH CORPORATION
By /s/ JOHN M. RICHARDS
-----------------------
Name: John M. Richards
Title: Chairman and C.E.O.
TIMBERLAND GROWTH CORPORATION
By /s/ JOHN M. RICHARDS
-----------------------
Name: John M. Richards
Title: President
BEAVER ACQUISITION CORPORATION
By /s/ JOHN M. RICHARDS
-----------------------
Name: John M. Richards
Title: President
-50-
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
----------------------------
OF
--
TIMBERLAND GROWTH CORPORATION,
------------------------------
A DELAWARE CORPORATION
----------------------
FIRST: The name of the corporation is the Timberland Growth Corporation.
-----
SECOND: The address of the corporation's registered office in the State of
------
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle,
Zip Code 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the corporation is to engage in any lawful act or
-----
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: The total number of shares of stock which the corporation shall
------
have authority to issue is one hundred (100) shares of Common Stock, $.01 par
value per share.
FIFTH: The Board of Directors is authorized to adopt, amend or repeal the
-----
by-laws of the corporation. The election of directors of the corporation need
not be by ballot.
SIXTH: The name and mailing address of the incorporator is:
-----
Linda P. Shih
c/o Pillsbury Madison & Sutro LLP
P.O. Box 7880
San Francisco, CA 94120-7880
SEVENTH: A director of the corporation shall not be liable to the
-------
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except for liability which, by express provision of the
General Corporation Law of Delaware as in effect from time to time (hereinafter
the "Delaware Law"), cannot be eliminated.
The corporation shall, to the fullest extent permitted by Delaware Law,
indemnify any director or officer of the corporation (the "Indemnitee") who is
or was involved in any manner (including, without limitation, as a party or a
witness) in any threatened, pending or completed investigation, claim, action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including without limitation, any action, suit or proceeding brought by or in
the right of the corporation to procure a judgment in its favor) (a
"Proceeding") by reason of the fact that such Indemnitee is or was serving as a
director, officer, employee, agent, fiduciary or co-founder of the corporation,
or is or was serving another entity as a director, officer, employee, fiduciary
or agent at the request of the corporation, against all expenses and liabilities
actually and reasonably incurred by such Indemnitee in connection with such
Proceeding.
The right to indemnification conferred by this Article Seventh shall be
presumed to
-1-
<PAGE>
have been relied upon by an Indemnitee and shall be enforceable as a contract
right. The corporation may enter into contracts to provide individual
Indemnitees with specific rights of indemnification to the fullest extent
permitted by Delaware 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 perform the obligations provided for in this
Article Seventh or in any such contract.
Upon making a request for indemnification, an Indemnitee shall be presumed
to be entitled to indemnification under this Article Seventh and the corporation
shall have the burden of proof to overcome that presumption. Such
indemnification shall include the right to receive payment in advance of any
expenses incurred by an Indemnitee in connection with any Proceeding, consistent
with the provisions of Delaware Law.
Any repeal or amendment of the foregoing provisions of this Article Seventh
shall not adversely affect any right or protection of any director or any
Indemnitee existing at the time of such repeal or amendment.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of
Delaware, do make, file and record this Certificate, hereby declaring and
certifying that this is my act and deed and the facts herein stated are true,
and accordingly have hereunto set my hand this 4th day of February, 1998.
/s/ LINDA P. SHIH
------------------------------
Linda P. Shih
Incorporator
-2-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
Name Incorporation or Organization
------------------------- -----------------------------
Timberland Growth Limited Delaware
Partnership
<PAGE>
Exhibit 23.1
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
March 16, 1998
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Timberland Growth
Corporation on Form S-11 of our report on the consolidated financial statements
of Anderson-Tully Company dated February 10, 1998, appearing in the Prospectus,
which is part of this Registration Statement.
We also consent 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
March 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> FEB-27-1998
<PERIOD-END> FEB-27-1998
<CASH> 1500
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,500
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 1,499
<TOTAL-LIABILITY-AND-EQUITY> 1,500
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
CONSENT OF PROSPECTIVE DIRECTOR
The undersigned consents to being named as a prospective director of
Timberland Growth Corporation, a Delaware corporation (the "Company"), in the
Registration Statement on Form S-11 to be filed by the Company with the
Securities and Exchange Commission, and to the filing of this consent as an
exhibit to such Registration Statement.
Dated: February 10, 1998
/s/ CHRISTINE GARVEY
------------------------------
Christine Garvey
<PAGE>
EXHIBIT 99.2
CONSENT OF PROSPECTIVE DIRECTOR
The undersigned consents to being named as a prospective director of
Timberland Growth Corporation, a Delaware corporation (the "Company"), in the
Registration Statement on Form S-11 to be filed by the Company with the
Securities and Exchange Commission, and to the filing of this consent as an
exhibit to such Registration Statement.
Dated: February 23, 1998
/s/ PARNELL S. LEWIS
-----------------------------
Parnell S. Lewis
<PAGE>
EXHIBIT 99.3
CONSENT OF PROSPECTIVE DIRECTOR
The undersigned consents to being named as a prospective director of
Timberland Growth Corporation, a Delaware corporation (the "Company"), in the
Registration Statement on Form S-11 to be filed by the Company with the
Securities and Exchange Commission, and to the filing of this consent as an
exhibit to such Registration Statement.
Dated: February 6, 1998
/s/ JAMES RIPPEY
--------------------------
James Rippey
<PAGE>
EXHIBIT 99.4
CONSENT OF PROSPECTIVE DIRECTOR
The undersigned consents to being named as a prospective director of
Timberland Growth Corporation, a Delaware corporation (the "Company"), in the
Registration Statement on Form S-11 to be filed by the Company with the
Securities and Exchange Commission, and to the filing of this consent as an
exhibit to such Registration Statement.
Dated: February 6, 1998
/s/ WILL M. STOREY
----------------------------
Will M. Storey
<PAGE>
EXHIBIT 99.5
CONSENT OF PROSPECTIVE DIRECTOR
The undersigned consents to being named as a prospective director of
Timberland Growth Corporation, a Delaware corporation (the "Company"), in the
Registration Statement on Form S-11 to be filed by the Company with the
Securities and Exchange Commission, and to the filing of this consent as an
exhibit to such Registration Statement.
Dated: February 27, 1998
/s/ FREDERICK T. WEYERHAEUSER
---------------------------------------
Frederick T. Weyerhaeuser
<PAGE>
Exhibit 99.6
CONSENT OF PROSPECTIVE OFFICER AND DIRECTOR
The undersigned consents to being named as a prospective officer and
director of Timberland Growth Corporation, a Delaware corporation (the
"Company"), in the Registration Statement on Form S-11 to be filed by the
Company with the Securities and Exchange Commission, and to the filing of this
consent as an exhibit to such Registration Statement.
Dated: March 13, 1998
/s/ SCOTT R. JONES
---------------------------
Print Name: Scott R. Jones
