<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 1999
REGISTRATION NO. 333-71291
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
STRATEGIC TIMBER TRUST, INC.
(Exact name of registrant as specified in its governing instruments)
5 NORTH PLEASANT STREET
NEW LONDON, NEW HAMPSHIRE 03257
(603) 526-7800
(Address, including zip code, and telephone number, including area code, of
registrant's
principal executive offices)
C. EDWARD BROOM, PRESIDENT AND CHIEF EXECUTIVE OFFICER
STRATEGIC TIMBER TRUST, INC.
5 NORTH PLEASANT STREET
NEW LONDON, NEW HAMPSHIRE 03257
(603) 526-7800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
WILLIAM H. BRADLEY, ESQ. ROBERT V. JEWELL, ESQ.
THOMAS C. HERMAN, ESQ. CATHERINE S. GALLAGHER, ESQ.
SUTHERLAND ASBILL & BRENNAN LLP ANDREWS & KURTH L.L.P.
999 PEACHTREE STREET, N.E. 600 TRAVIS, SUITE 4200
ATLANTA, GEORGIA 30309-3996 HOUSTON, TEXAS 77002-3090
(404) 853-8000 (713) 220-4200
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration 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,
check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 19, 1999
PROSPECTUS
<TABLE>
<S> <C> <C>
16,600,000 SHARES
LOGO STRATEGIC TIMBER TRUST, INC.
COMMON STOCK
$ PER SHARE
</TABLE>
------------------
Strategic Timber Trust, Inc. acquires, owns and manages timberlands and
sells timber. We expect to qualify as a real estate investment trust, or a REIT,
for federal income tax purposes.
This is an initial public offering. We currently expect the initial public
offering price to be between $19 and $21 per share. We have applied to have the
common stock included for quotation on the Nasdaq National Market under the
symbol "STTR." The underwriters named in this prospectus may purchase up to
2,490,000 additional shares of common stock from us to cover over-allotments.
------------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9 FOR MATERIAL RISKS THAT MAY AFFECT YOUR INVESTMENT IN THE
COMMON STOCK, INCLUDING:
- The volatility of timber prices may reduce our revenues.
- Environmental and endangered species regulations restrict timber
harvesting and may otherwise restrict our ability to conduct our
business.
- Tax laws do not require us to distribute any cash to you.
- We do not have a significant operating history, and we incurred a
combined net loss of $16.4 million in 1998.
- Our management has never operated a REIT or a public company.
- We may not be able to achieve our intended growth.
- Acquisitions of additional timberlands involve numerous risks.
Tax laws and provisions of our organizational documents limit ownership of
our common stock by one person to 9.8% of all outstanding shares and may
otherwise restrict transfers of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------- ------------
<S> <C> <C>
Initial Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Strategic Timber (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to a number of conditions.
The underwriters expect to deliver the shares to purchasers on or about
, 1999.
------------------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
A.G. EDWARDS & SONS, INC.
WARBURG DILLON READ LLC
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO
INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
, 1999
<PAGE> 3
<PAGE> 4
[COMPANY LOGO] STRATEGIC TIMBER TRUST, INC.
[MAP DEPICTING LOCATION OF REGISTRANT'S TIMBERLANDS AND SURROUNDING
MARKETS APPEARS HERE]
<TABLE>
<CAPTION>
NUMBER OF
MILLS WITHIN
MERCHANTABLE TIMBER MARKET AREA OF
PROPERTY ACRES PREDOMINANT SPECIES (THOUSAND CUNITS*) PROPERTY
-------- ------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
California:
Coastal 79,026 Second-growth redwood, 1,927 22
Douglas-fir
Commander 43,313 Douglas-fir, white fir, 686 20
ponderosa pine
Louisiana 82,009 Slash and loblolly pine 1,989 50
Oregon 232,621 Ponderosa pine, Douglas-fir, 836 14
white fir
Washington 10,822 Douglas-fir, western 290 31
hemlock, cedar
------- ----- ---
Total 447,791 5,728 137
======= ===== ===
</TABLE>
*1 cunit equals 100 cubic feet of timber.
<PAGE> 5
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with additional or different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information contained
in this prospectus is accurate as of any date other than the date on the front
of this prospectus.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................. 1
Strategic Timber Trust, Inc........... 1
Summary Risk Factors.................. 2
Structure and Formation of Strategic
Timber.............................. 4
Summary of Equity Ownership of
Strategic Timber.................... 5
Benefits to Related Parties........... 5
The Offering.......................... 7
Tax Status............................ 7
Summary Selected Pro Forma Financial
and Operating Information........... 8
RISK FACTORS............................ 9
The volatility of timber prices may
reduce our revenues................. 9
Environmental and endangered species
regulations restrict timber
harvesting and may otherwise
restrict our ability to conduct our
business............................ 9
Tax laws do not require us to
distribute any cash to you.......... 12
We do not have a significant operating
history, and we incurred a combined
net loss of $16.4 million in 1998... 12
Our management has never operated a
REIT or a public company............ 12
We may not be able to achieve our
intended growth..................... 12
Acquisitions of additional timberlands
involve numerous risks.............. 13
Our recognition of revenues depends on
when buyers harvest our timber...... 13
We may be required to refund some or
all of the advance payments we
receive from timber buyers.......... 13
Our financial results and cash flow
will change from season to season... 13
Losses of timber from fire and other
causes are not insured.............. 14
We will be taxed as a regular
corporation if we fail to qualify as
a REIT.............................. 14
Tax laws and provisions of our
organizational documents may delay
or prevent a change in our ownership
or management that may be in your
best interests...................... 14
Our actual timber inventory may be
less than our current estimates..... 15
We may invest in timberlands in
countries outside the United States,
which may be substantially riskier
than investments in domestic
timberlands......................... 15
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
You will incur immediate dilution of
your common stock................... 15
Our common stock has not had a prior
trading market and we do not know if
one will develop.................... 16
The market price of our common stock
could fluctuate significantly....... 16
Shares eligible for sale in the future
may reduce the market price of our
common stock........................ 16
Some members of our management and
other continuing investors could
have conflicts of interest.......... 17
We may change our investment,
financing and other policies without
your approval....................... 17
We are subject to risks associated
with our interest rate swap
agreements.......................... 17
An investment in the common stock
involves other tax issues........... 18
FORWARD-LOOKING STATEMENTS.............. 18
STRUCTURE AND FORMATION OF STRATEGIC
TIMBER................................ 19
Our Structure......................... 19
Our Formation......................... 19
Benefits to Related Parties........... 23
DISTRIBUTION POLICY..................... 24
USE OF PROCEEDS......................... 25
CAPITALIZATION.......................... 26
DILUTION................................ 27
SELECTED HISTORICAL FINANCIAL AND
OPERATING INFORMATION................. 28
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION................. 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................ 42
Overview.............................. 42
Plan of Operation..................... 42
Recent Developments................... 44
Historical Results of Operations...... 45
Liquidity and Capital Resources....... 50
Commitments and Contingencies......... 52
Year 2000............................. 53
Market Risk........................... 55
BUSINESS AND PROPERTIES................. 57
Overview.............................. 57
Business Strategy..................... 59
Our Competitive Strengths............. 62
Timber Industry Overview.............. 63
Initial Timberland Properties......... 68
Harvest Methods....................... 83
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Access and Limitations on Access...... 83
Federal and State Regulations......... 83
Our Customers......................... 90
Competition........................... 91
Insurance Coverage.................... 91
Legal Proceedings..................... 91
Employees............................. 91
POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES............................ 93
Investment Policies................... 93
Financing Policies.................... 93
Working Capital Reserves.............. 94
Conflict of Interest Policies......... 94
Reports to Shareholders............... 95
Other Policies........................ 95
MANAGEMENT.............................. 97
Directors and Executive Officers...... 97
Management Relationships.............. 100
Committees of the Board of
Directors........................... 100
Executive Compensation................ 101
Compensation of Directors............. 101
1999 Incentive Plan................... 102
Employment and Non-Competition
Agreements.......................... 103
Compensation Committee Interlocks and
Insider Participation............... 104
TRANSACTIONS WITH RELATED PARTIES....... 105
PRINCIPAL SHAREHOLDERS.................. 106
DESCRIPTION OF CAPITAL STOCK............ 107
General............................... 107
Common Stock.......................... 107
Transfer Agent and Registrar.......... 107
Preferred Stock....................... 107
Restrictions on Ownership and Transfer
of Shares........................... 108
Nasdaq National Market Listing........ 109
MATERIAL PROVISIONS OF GEORGIA LAW AND
STRATEGIC TIMBER'S ARTICLES OF
INCORPORATION AND BYLAWS THAT MAY HAVE
AN ANTI-TAKEOVER EFFECT............... 110
Ownership Limit....................... 110
Business Combination Provisions of
Georgia Law......................... 110
The Board of Directors................ 111
Special Meetings of Shareholders;
Consents............................ 111
Preferred Stock....................... 111
Advance Notice of Director Nominations
and New Business.................... 112
Supermajority Vote Requirements....... 112
Amendment of Articles of Incorporation
and Bylaws.......................... 112
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Limitation of Liability and
Indemnification..................... 112
Insurance Policies.................... 114
SHARES AVAILABLE FOR FUTURE SALE........ 115
General............................... 115
Registration Rights................... 116
THE PARTNERSHIP AGREEMENT............... 117
Powers of Strategic Timber Operating
Co., as General Partner............. 117
Power of Attorney..................... 117
Transfer of the General Partner's and
Strategic Timber's Interests........ 117
Amendments to the Partnership
Agreement........................... 117
Transfer of Partnership Units;
Substitute Limited Partners......... 118
Redemption of Partnership Units....... 118
Issuance of Additional Limited
Partnership Interests; Additional
Capital Contributions............... 118
Other Covenants....................... 119
Exculpation and Indemnification of
Strategic Timber and Strategic
Timber Operating Co................. 119
Cash Distributions.................... 119
Tax Matters........................... 120
Term.................................. 120
FEDERAL INCOME TAX CONSEQUENCES......... 121
Legal Opinions........................ 121
Taxation of Strategic Timber.......... 122
Taxation of Taxable U.S.
Shareholders........................ 128
Taxation of Tax-Exempt Shareholders of
Strategic Timber.................... 129
Taxation of Non-U.S. Shareholders of
Strategic Timber.................... 130
Tax Aspects of Strategic Timber's
Ownership of Interests in Strategic
Timber Partners..................... 133
Other Taxes........................... 135
ERISA CONSIDERATIONS.................... 137
General............................... 137
Status of Strategic Timber and
Strategic Timber Partners under
ERISA............................... 138
UNDERWRITING............................ 140
EXPERTS................................. 142
LEGAL MATTERS........................... 142
WHERE YOU CAN FIND MORE INFORMATION..... 143
GLOSSARY OF SELECTED TIMBER INDUSTRY
TERMS................................. 144
INDEX TO FINANCIAL STATEMENTS........... F-1
</TABLE>
Until , 1999, all dealers that buy, sell or trade the common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
ii
<PAGE> 7
SUMMARY
This section summarizes information contained in other parts of this
prospectus. This summary does not contain all of the information you should
consider before investing in our common stock. You should read the entire
prospectus carefully before deciding to invest in our common stock.
Throughout this prospectus, when we say "we," "us" or "Strategic Timber,"
we generally mean Strategic Timber Trust, Inc., a Georgia corporation, and its
subsidiaries. These subsidiaries include Strategic Timber Partners, LP, a
Delaware limited partnership, and Pioneer Resources, LLC, an Oregon limited
liability company. If the context requires, "Strategic Timber" may refer to
Strategic Timber Trust, Inc. without its subsidiaries.
We operate our business through Strategic Timber Partners, LP, which we
refer to as our "operating partnership" or "Strategic Timber Partners" in this
prospectus. We own all the stock of the sole general partner of Strategic Timber
Partners, a Delaware corporation called Strategic Timber Operating Co.
Unless we state otherwise, the information in this prospectus assumes that
the transactions described under "Structure and Formation of Strategic Timber"
are completed, the underwriters' over-allotment option is not exercised and the
initial public offering price is $20 per share, the mid-point of the range of
anticipated initial public offering prices. Unless we state otherwise, all share
and per share information in this prospectus has been adjusted to reflect a
36.59-for-1 common stock split, which will occur before completion of this
offering.
STRATEGIC TIMBER TRUST, INC.
We acquire, own and manage timberlands and sell standing trees, commonly
referred to as timber. We have been in business since April 1998. We currently
own approximately 448,000 acres of timberlands in the states of California,
Louisiana, Oregon and Washington. Our timberlands are located in active and
competitive timber markets. They contain approximately 5.7 million cunits of a
variety of species of merchantable timber, which is timber that is suitable for
sale in local markets for commercial uses. Approximately 87% of our merchantable
timber is of sufficient size and quality to be manufactured into lumber or
plywood, which is more valuable than timber of the same species that can be
converted only into pulp, paper products or other wood products.
Our revenues come primarily from the sale of timber to purchasers who cut
the timber and then transport the cut timber, or logs, to mills that produce
lumber, plywood, paper or other wood products. Because we do not own any timber
conversion facilities, such as lumber mills or paper mills, we do not have the
cash operating expenses, working capital needs and capital expenditures
associated with these facilities. Our primary operating expense will be
depletion, which is a non-cash expense relating to the cost of timber harvested.
Accordingly, we expect the cash we generate from our operations to exceed our
earnings for accounting purposes. Some of the cash that we generate consists of
advance payments from our timber buyers, which are recorded as current customer
deposit liabilities. We reduce the deposit liabilities and record revenue as our
buyers cut timber. In 1998, before beginning full scale operations, our
businesses incurred a combined net loss of $16.4 million.
We will elect to be taxed as a REIT for federal income tax purposes. Most
of our net income will be treated as capital gains. The tax rules applicable to
REITs do not require us to distribute any of our capital gains to you. We intend
to use this flexibility, which is not available to REITs primarily earning
ordinary income, to retain a substantial part of the cash we generate to acquire
additional timberlands. We also expect to distribute a portion of our cash to
you. These distributions will generally be treated as either a return of capital
or as capital gains.
1
<PAGE> 8
Our principal objective is to maximize long-term shareholder value. We
believe that we are well-positioned to achieve this objective because:
WE BELIEVE TIMBER IS AN ATTRACTIVE INVESTMENT ASSET
- Trees grow predictably, and generally become worth more per unit of
volume as they grow because the logs they produce have higher value
end uses.
- Timber owners have flexibility to harvest more trees when local
timber prices are high. When local timber prices are low, owners can
harvest less and let the trees continue to grow.
- Historically, timber prices in the United States have risen faster
than inflation over the long term.
- We expect worldwide demand for wood products to increase over the
foreseeable future. By contrast, we expect that worldwide timber
supplies will be constrained relative to this demand.
OUR MANAGEMENT HAS SUBSTANTIAL EXPERIENCE IN ACQUIRING AND MANAGING
TIMBERLANDS
- Since 1985, members of our management have participated in a series
of timberland investments in the United States, Latin America and
New Zealand as principals, investment managers and investment
advisors.
WE BELIEVE THERE WILL BE INCREASING OPPORTUNITIES FOR US TO ACQUIRE
ADDITIONAL TIMBERLANDS
- We have observed a growing trend toward consolidation of timberland
ownership. We believe this trend will continue because of (1) the
desire of large forest products companies to recognize greater value
from their timberland assets and (2) the difficulties faced by
owners of smaller timberland tracts in efficiently managing their
timberlands.
WE BELIEVE WE CAN COMPETE EFFECTIVELY IN ACQUIRING TIMBERLANDS
- The tax rules do not require us to distribute most of our earnings
to our shareholders. This will permit us to retain a substantial
part of the cash we generate from the sale of timber for
acquisitions.
- Our structure allows a timberland owner to contribute timberlands to
us in exchange for interests in our operating partnership. This will
permit these owners to defer the tax on their gains while
diversifying and obtaining liquidity for their timberland assets.
- Forest products companies that operate mills may view us as a
preferred purchaser of their timberlands because we do not compete
with their manufacturing operations, since we do not own timber
conversion facilities.
HOW TO CONTACT US
Our principal executive offices are located at 5 North Pleasant Street, New
London, New Hampshire 03257, and our telephone number is (603) 526-7800.
SUMMARY RISK FACTORS
You should carefully consider, among other factors, the discussion under
"Risk Factors" in this prospectus before deciding whether to invest in our
common stock. We have summarized below some of these risk factors.
- The volatility of timber prices may reduce our revenues.
- Environmental and endangered species regulations restrict timber
harvesting and may otherwise restrict our ability to conduct our
business.
- Tax laws do not require us to distribute any cash to you.
2
<PAGE> 9
- We do not have a significant operating history and we incurred a combined
net loss of $16.4 million in 1998.
- Our management has never operated a REIT or a public company.
- We may not be able to achieve our intended growth.
- Acquisitions of additional timberlands involve numerous risks.
- Our recognition of revenues depends on when buyers harvest our timber.
- We may be required to refund some or all of the advance payments we
receive from timber buyers.
- Our financial results and cash flow will change from season to season.
- Losses of timber from fire and other causes are not insured.
- We will be taxed as a regular corporation if we fail to qualify as a
REIT.
- Tax laws and provisions of our organizational documents may delay or
prevent a change in our ownership or management that may be in your best
interests. These provisions limit ownership of our common stock by one
person to 9.8% of all outstanding shares.
- Our actual timber inventory may be less than our current estimates.
- We may invest in timberlands in countries outside the United States,
which may be substantially riskier than investments in domestic
timberlands.
- By purchasing common stock in this offering, you will incur immediate
dilution of $4.63 per share, based on an initial public offering price of
$20 per share.
- Our common stock has not had a prior trading market and we do not know if
one will develop.
- The market price of our common stock could fluctuate significantly.
- Shares available for sale in the future may reduce the market price of
our common stock.
- Some members of our management and other continuing investors could have
conflicts of interest.
- We may change our investment, financing and other policies without your
approval.
- We are subject to risks associated with our interest rate swap
agreements.
- An investment in the common stock involves other tax issues.
3
<PAGE> 10
STRUCTURE AND FORMATION OF STRATEGIC TIMBER
We formed Strategic Timber and our operating partnership, Strategic Timber
Partners, in April 1998 to acquire property in southwest Louisiana that now
consists of approximately 82,000 acres of timberland. We financed the
transaction through a combination of bank loans and the issuance of units in our
operating partnership to the sellers. In October 1998, companies formed by our
initial shareholders acquired Pioneer Resources, LLC, an entity that holds
approximately 366,000 acres of timberland in the U.S. Pacific Northwest. The
acquisition was financed through a combination of bank loans, the issuance of
units to the sellers, and an additional equity contribution by a company
affiliated with the sellers of the Louisiana property. At the completion of this
offering, the companies that acquired Pioneer will be merged into our operating
partnership. As a result, our operating partnership will control all of our
timberlands.
At the completion of this offering, we will have sold 16,600,000 shares of
common stock to the public and received net proceeds of $306.4 million, based on
an initial public offering price of $20 per share. We will use the net proceeds
of this offering, together with borrowings under a new credit facility,
primarily to (1) repay in full the amounts that we borrowed to acquire our
timberlands and finance our ongoing operations, and (2) redeem $47.0 million of
the existing units held by persons who sold timberland properties to us. See
"Use of Proceeds."
As a result of this offering and the transactions described above, our
structure will be as follows:
Public Shareholders (96.1%)
Continuing Investors (3.9%)
Strategic Timber Trust, Inc.
Common Stock Continuing
(100% of Shares) Investors
Strategic Timber Limited Partner Limited Partner
Operating Co. Interest (76.7%) Interest (22.3%)
General Partner
Interest (1.0%)
Strategic Timber Partners, LP
(holds all investment properties)
The percentages listed above do not reflect the potential issuance of
1,115,000 shares issuable upon the exercise of options we will grant at or
before the completion of this offering under our stock incentive plan. See
"Principal Shareholders" and "Management -- 1999 Incentive Plan."
4
<PAGE> 11
SUMMARY OF EQUITY OWNERSHIP OF STRATEGIC TIMBER
After we complete this offering and the formation transactions, the
ownership of Strategic Timber will be as follows:
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------
PERCENTAGE BEFORE
CONVERSION OF UNITS PERCENTAGE ASSUMING
INTO COMMON CONVERSION OF ALL UNITS
STOCK INTO COMMON STOCK
------------------- --------------------------
<S> <C> <C>
OWNERSHIP OF STRATEGIC TIMBER
Public Shareholders.................................. 96.1% 74.7%
Management........................................... 3.6 7.2
Other Continuing Investors........................... 0.3 18.1
----- -----
100.0% 100.0%
===== =====
</TABLE>
The percentages listed above do not reflect the potential issuance of
1,115,000 shares issuable upon the exercise of options we will grant at or
before the completion of this offering under our stock incentive plan. See
"Principal Shareholders" and "Management -- 1999 Incentive Plan."
BENEFITS TO RELATED PARTIES
Our executive officers and affiliates will benefit from this offering and
the formation transactions as follows:
- Our executive officers will hold shares of common stock and units valued
at $32.1 million, based on an initial public offering price of $20 per
share, as shown below.
<TABLE>
<CAPTION>
SHARES AND
UNITS VALUE
---------- -----------
<S> <C> <C>
C. Edward Broom...................................... 408,329 $ 8,166,580
Christopher J. Broom................................. 408,329 8,166,580
Thomas P. Broom...................................... 408,329 8,166,580
T. Yates Exley....................................... 108,516 2,170,320
Nicholas C. Brunet................................... 90,740 1,814,800
Vladimir Harris...................................... 90,740 1,814,800
Joseph E. Rendini.................................... 90,740 1,814,800
--------- -----------
Total............................................. 1,605,723 $32,114,460
========= ===========
</TABLE>
The shares and units that we issued to these executives, other than T.
Yates Exley, were in consideration of services. When issued, these shares
and units had an aggregate value of $1,100, which reflected the value of
Strategic Timber and Strategic Timber II prior to acquisition of their
properties. Mr. Exley received his units in connection with our
acquisition of Pioneer, as described below.
- Our executive officers will also receive options to acquire a total of
875,000 shares of our common stock at the initial public offering price.
These options will vest in equal amounts over the three years following
completion of this offering.
- We have employment agreements with Messrs. C. Edward Broom, Christopher
J. Broom, Thomas P. Broom, Kenneth L. Chute, Nicholas C. Brunet, Vladimir
Harris and Joseph E. Rendini.
- Louisiana Timber Partners, LLC, the company that sold us the right to
acquire the Louisiana property, will receive $12.9 million in cash in
redemption of a portion of its units, and will own 1,762,974 units upon
completion of this offering. Hanns A. Pielenz, who has agreed to serve on
our Board of Directors, and Larry J. Woodard are the principal owners of
Louisiana Timber. The units retained by Louisiana Timber will have a
value of $35.3 million, based on an initial public offering
5
<PAGE> 12
price of $20 per share. Louisiana Timber acquired its units in exchange
for contributing to our operating partnership a contract to acquire the
Louisiana property.
- Mach One Partners, LLC, a separate company owned equally by Messrs.
Pielenz and Woodard, will receive $10.0 million in cash and 100,110 units
at the completion of this offering in redemption of its interest in
Strategic Timber Partners II, LP. Strategic Timber Partners II is one of
the companies that will be merged into our operating partnership. Mach
One acquired its interest in Strategic Timber Partners II in exchange for
a cash contribution of $10.0 million that was used to finance our
acquisition of Pioneer, and the cash and units it receives will have a
value of $12.0 million, based on an initial public offering price of $20
per share. Mach One will receive these units in satisfaction of its right
to receive an annual return of 40% on its original investment under the
Strategic Timber Partners II limited partnership agreement.
- In connection with our acquisition of Pioneer, we paid $35.0 million in
cash and issued interests in Strategic Timber Partners II to the former
members of Pioneer, including Gregory M. Demers. Mr. Demers, together
with a company he owns and controls, beneficially owned 76.5% of Pioneer
at the time of the acquisition. Upon completion of this offering and the
merger of Strategic Timber Partners II into our operating partnership,
Mr. Demers and his company will receive $18.4 million in cash in
redemption of a portion of their interests in Strategic Timber Partners
II and will beneficially own 1,660,333 units. These units will have a
value of $33.2 million, based on an initial public offering price of $20
per share.
- In connection with our acquisition of Pioneer, T. Yates Exley, one of the
former members of Pioneer and one of our Vice Presidents, received an
interest in Strategic Timber Partners II. Mr. Exley will receive $1.2
million in cash and, as indicated above, 108,516 units in redemption of
this interest upon completion of this offering. These units will have a
value of $2.2 million, based on an initial public offering price of $20
per share.
You should review "Transactions with Related Parties" for additional
information concerning benefits to executive officers, directors and other
continuing investors.
6
<PAGE> 13
THE OFFERING
Common stock we are offering........ 16,600,000 shares
Common stock to be outstanding after
this offering....................... 17,271,770 shares
Common stock and units to be
outstanding after this offering..... 22,237,975 shares and units
Use of Proceeds..................... Primarily to repay indebtedness and to
redeem the interests of some of the
continuing investors.
Proposed Nasdaq symbol.............. We have applied to have the common
stock included for quotation on the
Nasdaq National Market under the symbol
"STTR."
Each unit is redeemable for cash or, at our option, for one share of our
common stock. The number of shares of common stock listed above excludes
1,115,000 shares issuable upon the exercise of options we will grant at or
before the completion of this offering under our stock incentive plan. See "The
Partnership Agreement," "Structure and Formation of Strategic Timber" and
"Management -- 1999 Incentive Plan."
TAX STATUS
We plan to elect to be taxed as a REIT for federal income tax purposes
beginning with our 1998 tax year. Sutherland Asbill & Brennan LLP has acted as
our counsel in connection with this offering and our election to be taxed as a
REIT. Based on assumptions and factual representations we made to it, Sutherland
Asbill & Brennan LLP is of the opinion that we will meet the requirements to
qualify as a REIT for federal income tax purposes, and that our proposed method
of operation will enable us to continue to meet the requirements for
qualification and taxation as a REIT. We have received favorable tax rulings
from the IRS that confirm the opinion of Sutherland Asbill & Brennan LLP that:
- Timberlands and timber qualify as real property and therefore as real
estate assets for purposes of the tax rules applicable to REITs; and
- Gross income from the type of timber cutting agreements we will use to
sell our timber is qualifying income for purposes of the tax rules
applicable to REITs.
As a REIT, we generally will not be subject to federal income taxes on the
portion of our net income that we distribute to you. We may, however, be subject
to certain federal income taxes and certain state and local taxes on our income
and property. See "Risk Factors -- We will be taxed as a regular corporation if
we fail to qualify as a REIT," " -- An investment in the common stock involves
other tax issues" and "Federal Income Tax Consequences."
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<PAGE> 14
SUMMARY SELECTED PRO FORMA FINANCIAL AND OPERATING INFORMATION
In this section, we have provided you with a summary of the unaudited pro
forma financial information. The pro forma balance sheet information presents
our pro forma financial condition as if the formation transactions and this
offering had occurred as of December 31, 1998. The pro forma operating results
for the year ended December 31, 1998 present our pro forma operating results as
if this offering and the formation transactions had occurred as of January 1,
1998, except as described below. The pro forma operating results include:
- the historical results of Pioneer, our predecessor operation, as adjusted
to eliminate the results of operations and related assets and liabilities
we did not acquire;
- the historical results from our Louisiana property only from April 27,
1998, the date we purchased these timberlands; and
- the historical results from the Coastal forest portion of our Pacific
Northwest timberlands only from July 5, 1998, the date Pioneer purchased
these timberlands.
The pro forma operating results do not include the historical results of
the Louisiana property before we purchased these timberlands. We acquired these
timberlands from an unrelated group of families that did not actively manage the
property for commercial timber operations. The pro forma operating results also
do not include the historical results of the Coastal forest portion of the
Pacific Northwest timberlands before the purchase of these timberlands by
Pioneer in July 1998. We believe that there is limited continuity between the
operation of the Coastal forest before and after Pioneer acquired these
timberlands. Because of the lack of continuity of operations before and after
these purchases, we believe that inclusion of historical financial information
for the Louisiana property and the Coastal forest in the pro forma operating
results prior to the dates of acquisition would not be helpful to your
understanding of our business or operations.
This section is a summary. We have included more complete pro forma
financial information, as well as historical financial information, in other
parts of this prospectus. We urge you to read this summary together with
"Structure and Formation of Strategic Timber," "Pro Forma Condensed Consolidated
Financial Information," "Selected Historical Financial and Operating
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as with the historical financial statements
and accompanying notes located elsewhere in this prospectus.
The pro forma financial information does not necessarily indicate what our
financial condition or results of operations actually would have been if all of
our pro forma assumptions were correct. Furthermore, we do not believe that this
information is indicative of our financial position and results of operations in
the future.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31, 1998
-----------------
(UNAUDITED)
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
AMOUNT)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 37,567
Cost of products sold....................................... 11,056
Cost of timberland and property sales....................... 2,257
Depletion, depreciation and amortization.................... 14,742
Selling, general and administrative expenses................ 8,809
Operating income............................................ 39
Interest expense............................................ 18,483
Minority interest........................................... 1,430
Loss from continuing operations............................. (16,969)
Basic and diluted loss from continuing operations per
share..................................................... $ (0.98)
Weighted average number of shares used in the calculation of
basic and diluted loss from continuing operations per
share..................................................... 17,271,770
BALANCE SHEET DATA (AT PERIOD END):
Timberlands................................................. $ 607,867
Total assets................................................ 620,854
Long-term debt.............................................. 270,469
Minority interest........................................... 62,603
Shareholders' equity........................................ 282,578
</TABLE>
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<PAGE> 15
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risk factors, as well as the other information
presented in this prospectus, in deciding whether to invest in our common stock.
Each of these factors could adversely affect the market price of our common
stock and our financial results.
THE VOLATILITY OF TIMBER PRICES MAY REDUCE OUR REVENUES
CHANGES IN SUPPLY AND DEMAND AFFECT TIMBER PRICES AND OUR REVENUES
The volatile nature of timber prices can reduce our revenues. The market
price for timber can change substantially, based on changes in supply and
demand, especially for a particular species or in a particular geographic area.
Decreases in demand, increases in supply, or both, may reduce prices for our
timber, which in turn could reduce our revenues and negatively affect our
financial results.
The industries that use wood products drive the demand for timber. The vast
majority of our timberlands are stocked with softwood sawtimber. The demand for
most softwood sawtimber depends on the level of construction, repair and
remodeling activity. Interest rates and other local, national and international
economic conditions affect the level of construction, repair and remodeling
activity. A slowdown in construction is likely to reduce demand for our timber,
which would reduce our revenues. Wood substitutes and products made from lower
quality wood increasingly compete with higher quality sawtimber, which may also
reduce demand for our timber.
The number of timber sellers and the volume of timber they have available
for sale determine the supply of timber. Historically, increases in timber
prices have caused owners of timberlands to cut more trees. This increase in
supply may reduce the amount of price increases. Some government agencies,
principally the United States Forest Service and the Bureau of Land Management,
own large amounts of timberlands. If these agencies choose to sell more timber
than they have been selling in recent years, timber prices could fall. The
supply of timber available for harvest is also affected by, among other things,
environmental and other legal restrictions on harvesting, self-imposed
restrictions on harvesting attributable to timberland management decisions, and
natural events that destroy trees or entire forests, such as insect infestation,
severe weather and fire. See "Business and Properties -- Timber Industry
Overview -- Timber Demand, Supply and Prices."
WEAK EXPORT MARKETS MAY REDUCE DEMAND FOR OUR TIMBER
Weak overseas markets for wood and wood products, including weak demand in
Asia due to its continuing economic problems, and the resulting increase in
domestic supply, have reduced and may continue to reduce the prices that we can
obtain for our timber.
ENVIRONMENTAL AND ENDANGERED SPECIES REGULATIONS RESTRICT TIMBER HARVESTING AND
MAY OTHERWISE RESTRICT OUR ABILITY TO CONDUCT OUR BUSINESS
THE PRESENCE OF ENDANGERED OR THREATENED SPECIES RESTRICTS HARVESTING
Federal, state and local laws and regulations intended to protect
threatened and endangered species limit and may prevent timber harvesting, road
building and other activities on our lands. We have identified approximately
27,000 acres of our timberlands that are subject to some level of harvest
restriction, approximately 22,000 acres of which are affected by the presence of
threatened and endangered species on or near those timberlands. These threatened
and endangered species restrictions apply to activities that would kill, injure
or harass a protected species or significantly degrade its habitat. The habitat
of a protected species includes areas in which it lives, nests, shelters,
breeds, forages or feeds or areas that are for some other reason necessary for
the conservation of the protected species. The size of the area subject to
restriction will vary depending on the protected species at issue, the time of
year and other factors, but can range from less than one to hundreds of acres. A
number of species that naturally live on or near our timberlands, including the
peregrine falcon, bald eagle, northern spotted owl, red
9
<PAGE> 16
cockaded woodpecker, marbled murrelet, bull trout and coho salmon, are protected
under the federal Endangered Species Act and similar state laws.
OTHER REGULATIONS AND ENVIRONMENTAL RISKS MAY ADVERSELY AFFECT US
Our operations and properties are also subject to laws and regulations
governing silvicultural practices, which include forestry operations, the
environment, and health and safety. Some of these laws and regulations could
impose significant costs, penalties and liabilities on us for violations or
existing conditions whether or not we caused or knew about them. Our lands are
also subject to laws and regulations designed to protect wetlands, which may
restrict future harvesting, road building and other activities to the extent
that these activities change a wetland area so that it no longer constitutes a
wetland. Compliance with, or damages or penalties for violating, current and
future laws and regulations could result in significant expense.
Our Louisiana property contains natural gas and oil wells and pipelines
that have been and will continue to be operated by third parties. The operation
of those wells and pipelines involves hazards such as well blowouts, cratering,
explosions, uncontrollable flows of oil or well fluids, fires, formations with
abnormal pressures, pollution, pipeline ruptures and spills, releases of toxic
gas and other environmental hazards and risks. The occurrence of any of these
events could cause us to incur substantial losses and could negatively affect
our financial results. In addition, we may be liable for any environmental
damage caused by operators of natural gas and oil wells and pipelines on our
Louisiana property.
WE MAY ACQUIRE PROPERTIES SUBJECT TO ENVIRONMENTAL AND OTHER LIABILITIES
We may acquire timberlands subject to environmental liabilities and certain
other existing or potential liabilities. We may not be able to recover any of
these liabilities from the sellers of these properties. In addition, we could be
subject to claims or losses under environmental laws for conditions that are not
revealed by investigations of those properties by environmental consultants.
THE NUMBER OF ACRES WE BELIEVE ARE CURRENTLY SUBJECT TO REGULATORY
RESTRICTIONS ON HARVESTING MAY BE UNDERESTIMATED
As mentioned above, we have identified approximately 27,000 acres of our
timberlands that are subject to some level of harvest restrictions. These
restrictions apply as a result of federal, state and local laws and regulations
governing threatened and endangered species, as well as waterways. These
restrictions limit and may prevent harvests on these timberlands. Consistent
with what we believe is standard practice in the timber industry, we have
included the timber on these acres in our inventory but excluded that timber, to
the extent restricted, from our timber sales plan. Our estimates of the number
of restricted acres are based on information acquired from prior owners, public
sources and limited surveys performed by ourselves and others. Before we
authorize harvesting activities on any of our properties, we survey the harvest
area for the presence of threatened and endangered species. As we gain
additional information regarding the presence of threatened or endangered
species on our timberlands or if regulatory agencies change the manner in which
they apply related restrictions to our timberlands, the number of our restricted
acres could increase.
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<PAGE> 17
REGULATION IS LIKELY TO BECOME MORE RESTRICTIVE AND REDUCE THE AMOUNT OF
OUR TIMBER THAT IS AVAILABLE FOR HARVESTING
Laws, regulations and related judicial decisions and administrative
interpretations affecting our business are subject to change and new laws and
regulations that may affect our business are frequently introduced. These laws
and regulations may relate to, among other things:
- the protection of timberlands;
- endangered species;
- environmental protection;
- air and water quality; and
- timber harvesting practices.
During the last ten years, the number of environmental, endangered species
and forestry laws and regulations has increased markedly and the enforcement of
such regulations has generally intensified. This has resulted in an increase in
the number of acres subject to harvest restrictions. We believe that these laws
and regulations will become more restrictive over time, possibly resulting in a
significant increase in the number of our acres that may not be included in our
timber sales plan. For example, the number of species of salmon and other fish
designated as threatened or endangered has recently increased. As a result, we
anticipate that regulations concerning streams on some of our Pacific Northwest
properties may become more restrictive.
In general, if the United States Congress or the state legislatures in
states where we own timberlands change existing laws or regulations or enact new
laws or regulations, these enactments could result in new or additional
restrictions on harvesting on our properties. In addition, the timber industry
in California and the Pacific Northwest is particularly vulnerable to potential
state or local ballot initiatives and evolving federal and state case law that
could adversely affect our timber harvesting practices. We cannot assess the
effect of any future legislative, judicial or administrative events on our
business or our revenues. See "Business and Properties -- Federal and State
Regulations -- Endangered Species Laws."
ENVIRONMENTAL GROUPS AND INTERESTED INDIVIDUALS MAY SEEK TO PREVENT
HARVESTING ON OUR TIMBERLANDS
We expect that environmental groups and interested individuals will
intervene with increasing frequency in the harvest permit process in the states
where we own timberlands. These challenges could materially delay or prevent
harvesting on our properties.
In addition, groups and individuals may file or threaten to file lawsuits
that seek to prevent us from implementing our timber sales plans. For example,
these parties may bring suit challenging approval by the California Department
of Forestry or the similar agency in another state of a particular timber
harvest plan claiming that the plan does not properly analyze or mitigate
significant environmental effects of our proposed timber operations. Any lawsuit
or even a threatened lawsuit could delay harvesting on our timberlands. A
lawsuit that results in a judgment against us could restrict harvesting on our
timberlands.
Because we do not recognize revenue until buyers under our timber cutting
contracts harvest our timber, any delay in or restriction on harvesting due to
the intervention of environmental groups or interested individuals could have an
adverse affect on our operating results.
IF OUR REGULATORY FILINGS ARE DELAYED OR REJECTED, HARVESTING ON OUR
TIMBERLANDS COULD BE RESTRICTED
In connection with timber harvesting on our properties, we are required to
make regulatory filings with the Department of Forestry and Fire Protection in
California, the Department of Forestry in Oregon and the Department of Natural
Resources in Washington. We may also have to make regulatory filings with
similar agencies in other jurisdictions where we acquire property. Any of these
agencies could delay review of or reject any one of our filings, including our
timber harvest plans. Any delay in a filing could result in a delay in
harvesting on our timberlands. In addition, the rejection of a filing could
result in the restriction or prohibition of harvesting on our timberlands. Any
delay in or restriction on harvesting could have an adverse affect on our
operating results.
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<PAGE> 18
TAX LAWS DO NOT REQUIRE US TO DISTRIBUTE ANY CASH TO YOU
We anticipate that our ongoing operations will produce net capital gains
and net ordinary losses. Unlike most existing REITs, we do not anticipate that
we will produce significant ordinary income. Accordingly, we do not anticipate
that we will be required to distribute any material amounts of cash to satisfy
the tax requirement that a REIT distribute 95% of its ordinary income. As a
result, we have more discretion over the amounts of distributions we make than
most other REITs. We intend to retain a substantial portion of the cash we
generate to acquire additional timberlands.
WE DO NOT HAVE A SIGNIFICANT OPERATING HISTORY, AND WE INCURRED A COMBINED NET
LOSS OF $16.4 MILLION IN 1998
Strategic Timber and our operating partnership were formed in April 1998
and neither entity has any significant operating history. Some of our initial
timberlands have relatively short or no operating history under our management
and some of our initial timberlands have no operating history at all. For
example, before our acquisition of the Louisiana property in April 1998, these
timberlands had not been actively managed as a commercial timber property. In
addition, before our acquisition of the Pacific Northwest properties in October
1998, these timberlands were managed as part of Pioneer's overall business,
which included the operation of mills. Thus, the financial statements contained
in this prospectus may not be helpful to your understanding of our business,
operations or prospects.
Our businesses incurred combined net losses of approximately $16.4 million
for the period from April 21, 1998 through December 31, 1998 and we expect that
we will continue to incur net losses in the near term. You should evaluate an
investment in Strategic Timber in light of the risks, expenses and difficulties
frequently encountered by companies in their early stages of development. We do
not own or operate mills or other timber conversion facilities, so we need to
find independent buyers for the timber we want to sell. Our ability to become
and stay profitable depends on a number of factors beyond our control, including
our ability to find buyers for as much timber as we want to sell.
OUR MANAGEMENT HAS NEVER OPERATED A REIT OR A PUBLIC COMPANY
Although some of our executive officers and directors have substantial
experience in the timber industry and managing timberlands held for investment,
none of the members of our management has prior experience operating a public
company or a REIT.
WE MAY NOT BE ABLE TO ACHIEVE OUR INTENDED GROWTH
Our business plan depends on our acquiring additional timberland
properties. Our ability to acquire any property will be subject to a number of
factors beyond our control, such as competition from other purchasers for timber
properties, our ability to obtain any financing we need to purchase the property
and the overall availability of timber properties.
We compete with traditional paper and forest products companies, other
public and private timber investment firms, governmental entities and
preservationist groups for U.S. timber properties. Many of our competitors have
substantially greater financial resources than we do. Competition for these
properties may increase prices and may make it difficult for us to acquire
timberlands at prices that are acceptable to us. Similar competitive forces may
make international timber properties more expensive. See "Business and
Properties -- Competition."
We intend to issue units in our operating partnership as payment for some
of our acquisitions because this would allow the sellers to defer taxes on their
gain from these sales. Any decrease in the market price of our common stock
could make it more difficult or more expensive for us to do this.
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<PAGE> 19
ACQUISITIONS OF ADDITIONAL TIMBERLANDS INVOLVE NUMEROUS RISKS
Any acquisition that we make will involve numerous risks, which could
include some or all of the following:
- incurrence of additional debt, repayment of which may adversely affect
our cash flow and financial results;
- issuance of more common stock or preferred stock or units in our
operating partnership, which may dilute the value of our outstanding
common stock;
- assumption of liabilities that we are unaware of at the time of the
acquisition, such as environmental liabilities;
- uncertainties associated with operating in new markets; and
- difficulties in combining operations of the acquired company or
timberlands with our other operations.
Our acquisition strategy includes exploring acquisition opportunities
outside the United States, especially in undeveloped or underdeveloped markets.
In addition to the risks mentioned above, international acquisitions will
involve the risks described under "-- We may invest in timberlands in countries
outside the United States, which may be substantially riskier than investments
in domestic timberlands."
OUR RECOGNITION OF REVENUES DEPENDS ON WHEN BUYERS HARVEST OUR TIMBER
We enter into cutting contracts with timber buyers that, within limits, let
them choose when to harvest our timber. Contracts of two years or longer
generally require the buyer to cut minimum amounts of timber each year. For
accounting purposes, we recognize revenue at the time the buyer cuts and takes
title to the timber. Therefore, the buyer's timing of its timber harvest affects
our recognition of revenue.
WE MAY BE REQUIRED TO REFUND SOME OR ALL OF THE ADVANCE PAYMENTS WE RECEIVE FROM
TIMBER BUYERS
Many of our cutting contracts require the buyer to make advance payments at
the inception of the cutting contract. The aggregate advance payments under our
cutting contracts existing at March 31, 1999 represent approximately 16% of the
total expected 1999 annual payments for harvests under these contracts, and are
offset as the buyer harvests the timber. We do not escrow these advance payments
and are free to use them in our business for any purpose.
We may have to refund some or all of these advance payments in two
circumstances. First, if a casualty, such as fire, storm or disease, destroys so
much of the timber subject to the contract that the remaining balance of the
advance payment cannot be offset by the value of actual harvests, we will refund
this difference. Second, if the buyer breaches its contractual obligation to
harvest the timber, we will offset our damages from the buyer's breach of the
cutting contract against any remaining balance of advance payments and refund
any difference to the buyer. Our damages are sometimes specified as liquidated
damages in our contracts. In other cases, the refunds would be offset against
our actual damages. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business and Properties."
OUR FINANCIAL RESULTS AND CASH FLOW WILL CHANGE FROM SEASON TO SEASON
Rain in winter and our fire prevention measures in spring and summer limit
timber harvesting on our Louisiana property. Similarly, harvesting in the
Pacific Northwest is typically interrupted for periods during the winter and
spring due to snow and melting snow and, occasionally, in the late summer due to
our fire prevention measures. These seasonal limitations will reduce our
revenues during those periods, and may restrict our ability to distribute cash
to you. If we acquire additional properties in other locations, the seasonality
of our operating results may change.
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<PAGE> 20
LOSSES OF TIMBER FROM FIRE AND OTHER CAUSES ARE NOT INSURED
Fire, insect infestation, severe weather, disease, natural disasters and
other causes beyond our control may reduce the volume and value of timber that
can be harvested from our timberlands and hurt our financial results and cash
flow. As is typical in the industry, we do not maintain insurance for any loss
to our timber, including losses due to these causes.
WE WILL BE TAXED AS A REGULAR CORPORATION IF WE FAIL TO QUALIFY AS A REIT
We will elect to be taxed as a REIT for federal income tax purposes
beginning in 1998. Although we believe that we qualify as a REIT, it is possible
that future economic, market, legal, tax or other considerations may cause us to
fail to qualify as a REIT or may cause us to elect not to be taxed as a REIT.
The IRS could challenge our qualification as a REIT. Qualification as a REIT
involves highly technical and complex Internal Revenue Code provisions and there
are few authoritative interpretations of these provisions. The complexity of
these provisions and of the applicable income tax regulations under the Internal
Revenue Code is greater in the case of a REIT that holds its assets through a
partnership as we do. In addition, future legislation, regulations,
administrative interpretations or court decisions could significantly change the
tax laws with respect to qualification as a REIT or the federal income tax
consequences of REIT qualification. See "-- An investment in the common stock
involves other tax issues" and "Federal Income Tax Consequences."
If we fail to qualify as a REIT in any taxable year, we would not be
allowed a deduction for cash distributions to you in computing our taxable
income and would owe federal and state income tax on our taxable income at
regular corporate rates. The highest federal income tax rate for corporations
currently is 35.0%. The highest state income tax rate for corporations in a
state in which we currently own timberlands or maintain an office is
approximately 8.8%. With some exceptions, we would also be disqualified from
treatment as a REIT for the four taxable years after the year we first failed to
qualify. As a result, we would have significantly less money available to
purchase additional timberlands or distribute to you in each of the years in
which we were disqualified as a REIT, and any net income we could distribute
would be taxed as ordinary income to you.
TAX LAWS AND PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS MAY DELAY OR PREVENT A
CHANGE IN OUR OWNERSHIP OR MANAGEMENT THAT MAY BE IN YOUR BEST INTERESTS
Our Articles of Incorporation and Bylaws, the partnership agreement that
governs our operating partnership and Georgia law place restrictions on the
ownership and transfer of shares of common stock and units. These restrictions
are intended in part to ensure we comply with federal tax requirements
applicable to REITs, and in part to discourage a change in control of Strategic
Timber without the consent of our Board of Directors. These provisions could
delay or prevent a change in our ownership or removal of our existing
management, even where such a change could be beneficial to or desired by you.
Our Articles of Incorporation prohibit beneficial ownership by any person
of more than 9.8% of our outstanding shares of common stock or preferred stock,
if any, unless our Board of Directors waives the restriction. In addition, the
election of our Board of Directors is staggered over a three-year period, which
may have an anti-takeover effect because a potential acquiror cannot obtain
immediate control of our Board of Directors. See "Material Provisions of Georgia
Law and Strategic Timber's Articles of Incorporation and Bylaws That May Have an
Anti-Takeover Effect."
Our Articles of Incorporation authorize the Board of Directors to issue
preferred stock with whatever rights and preferences it may choose, without your
approval. These rights and preferences could include, for example, dividend
rights, liquidation preferences, conversion rights or voting rights or other
provisions that could reduce your voting power or other rights. We could use
this preferred stock, under certain circumstances, as a method of discouraging,
delaying or preventing a change in our ownership or management, even when the
holders of a majority of our shares of common stock would approve or benefit
from the change in control. Although we have no current intention to issue any
shares of preferred stock, we may choose to do so in the future. See
"Description of Capital Stock -- Preferred Stock."
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<PAGE> 21
OUR ACTUAL TIMBER INVENTORY MAY BE LESS THAN OUR CURRENT ESTIMATES
Independent forestry consultants have estimated the total volume of our
timber inventories based on sampling techniques that cannot identify with
certainty the actual volume of timber on our lands. We believe these estimates
are reasonably accurate and we use them to calculate the amount of harvestable
timber from our timberlands. Our actual timber inventories may differ from these
estimates. If the volume of timber we actually own is less than these estimates,
the amount of harvestable timber would be less than we anticipate. This would
hurt our financial results and cash flow. See "Business and Properties --
Initial Timberland Properties."
WE MAY INVEST IN TIMBERLANDS IN COUNTRIES OUTSIDE THE UNITED STATES, WHICH MAY
BE SUBSTANTIALLY RISKIER THAN INVESTMENTS IN DOMESTIC TIMBERLANDS
Our business strategy includes investing in timberlands located outside the
United States when our management believes that these timberlands offer higher
potential returns after taking into account the increased risks involved. This
strategy may include acquiring timberlands in developed and developing countries
in South America, Asia, Eastern Europe and other regions.
The lack of infrastructure in undeveloped and underdeveloped markets
increases the risks of acquiring and operating timberlands in those markets.
This may include the absence of:
- mills and other timber buyers near the timberlands;
- roads or means of transportation needed to reach the timberlands for
harvesting and to ship logs to local mills or export markets; or
- labor to manage the timberlands and harvest timber.
Given the difficulties of evaluating properties outside the United States, the
returns on foreign investments may be less than we expect. Future changes in the
economic or political conditions in foreign countries in which we may acquire
timberlands could affect our ability to retain and sell timber for harvest from
those timberlands. Foreign governments may seek to take over or nationalize our
timberlands, renegotiate or nullify existing contracts or other rights, or
impose laws or regulations that might severely limit the harvesting of
timberlands and the import and export of wood and wood products. Foreign
governments may impose other policies that might negatively impact our
operations, such as production restrictions, price controls, export controls,
income and other taxes and environmental regulations. Other political risks,
such as changes in governments, civil unrest, war, insurrection, acts of
terrorism and diplomatic developments could also adversely affect us.
We may be subject to other financial risks of overseas investment,
including inflation, changing fiscal policies, general economic instability and
changing currency exchange rates. From time to time, we may attempt to lessen
the effect of changes in exchange rates through foreign currency hedging
transactions, but we may not be able to do so.
We also cannot predict whether U.S. customs, quotas, duties, taxes or other
charges, or changes in U.S. foreign trade and investment laws and regulations,
will affect the import and export of forest products in the future, or what
effects such actions could have on our financial condition or operations.
YOU WILL INCUR IMMEDIATE DILUTION OF YOUR COMMON STOCK
We are offering our common stock at a price greater than our net tangible
book value. Net tangible book value equals the value of our tangible assets
minus the amount of our liabilities. Based on an initial public offering price
of $20 per share, our expected net tangible book value immediately following
this offering is $15.37 per share. Thus, by purchasing common stock in this
offering, you will incur immediate dilution of $4.63 per share. See "Dilution."
15
<PAGE> 22
OUR COMMON STOCK HAS NOT HAD A PRIOR TRADING MARKET AND WE DO NOT KNOW IF ONE
WILL DEVELOP
Prior to this offering, our common stock has not been traded in any public
market. We do not know if investor interest will lead to the development of an
active trading market or how quickly you will be able to find a buyer for your
shares if you want to sell them.
Together with representatives of the underwriters, we will determine the
initial public offering price for the common stock. This initial price may bear
no relationship to the price at which the common stock will trade after
completion of this offering. See "Underwriting" for a description of the factors
we and the underwriters will consider in determining the initial public offering
price.
We have applied to have our common stock included for quotation on the
Nasdaq National Market. If we are approved for quotation on the Nasdaq National
Market, we would be subject to financial and market-related tests established by
the Nasdaq National Market to maintain our listing.
THE MARKET PRICE OF OUR COMMON STOCK COULD FLUCTUATE SIGNIFICANTLY
The market price of our common stock may fluctuate significantly due to a
number of factors, such as:
- changes in timber prices,
- changes in environmental or tax laws,
- the issuance or revisions of securities analysts' estimates regarding
us or the timber industry or
- announcements of changes in federal or state timber sales or timber
management policies.
The market price of our common stock could also be subject to significant
fluctuations in response to market forces, many of which are out of our direct
control. For instance, the price of our common stock may decrease if interest
rates increase. This could occur because an increase in interest rates could
cause some financial instruments, such as U.S. government bonds, to become
relatively more attractive investments than our common stock. Additionally, the
Nasdaq Stock Market and other stock markets have recently experienced
significant and sometimes rapid changes in both price and volume levels.
These and other factors have, from time to time, depressed the market
prices of stock in both forest products companies and REITs. Often, these
changes occur without regard to these companies' operating performances. These
forces could similarly affect the price of our common stock.
SHARES ELIGIBLE FOR SALE IN THE FUTURE MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK
Our Articles of Incorporation authorize the issuance of a total of
200,000,000 shares of common stock without additional shareholder approval. See
"Description of Capital Stock." We will offer to the public 16,600,000 shares in
this offering. We have reserved a total of 2,224,000 shares of our common stock
for issuance under our stock incentive plan. We intend to register all of the
shares issuable under this plan for sale in the public market.
One year from the date of the completion of this offering, the continuing
investors may exchange their units for cash, or, at our option, for shares of
our common stock on a one-for-one basis. See "The Partnership
Agreement -- Redemption of Partnership Units." As of that date, we have also
agreed to register up to 4,966,205 shares of common stock issuable on redemption
of units owned by our continuing investors. See "Shares Available for Future
Sale."
We intend to acquire additional timberlands in the future. We anticipate
funding these acquisitions through the sale of common stock, the issuance of
additional units, the issuance of debt or with cash we have retained, or a
combination of these methods. Efforts to raise additional capital through the
sale of common stock or additional units may cause the market price of our
common stock to decrease.
If we issue any additional shares of common stock, whether pursuant to
existing stock options or otherwise, the value of your common stock and your
relative voting power may decrease. Our Articles of
16
<PAGE> 23
Incorporation do not grant you preemptive rights, which would allow you to
purchase a pro rata portion of any future common stock or securities convertible
into common stock that we issue. The market price of our common stock may
decrease if the market perceives that we may issue additional shares of common
stock, even if we do not choose to do so.
SOME MEMBERS OF OUR MANAGEMENT AND OTHER CONTINUING INVESTORS COULD HAVE
CONFLICTS OF INTEREST
Conflicts of interest create a risk that people will put other interests
ahead of our interests when making decisions that affect us.
Our President, Chief Executive Officer and Chairman of our Board of
Directors, C. Edward Broom, is on the Board of Directors of several privately
held timber investment funds. All but one of these funds have been fully
invested and no additional timberland investments can be made. The one fund that
has not been fully invested could compete with us in acquiring timberlands if we
decide to acquire timberlands outside the United States. Under the terms of his
employment agreement with us, Mr. Broom has agreed that if we wish to bid on a
property and a fund with which he is affiliated is either the seller of the
property or also wishes to bid on the property, he will not participate in the
transaction on behalf of the fund. We have agreed that Mr. Broom may spend up to
5% of his time working for these timber funds, which will reduce the amount of
time he devotes to our business.
Our continuing investors could compete with us in our efforts to sell
timber from our timberlands, as well as in our efforts to acquire additional
timberlands. Some of the continuing investors are engaged in the timber
business. In particular, a company controlled by Mr. Demers currently purchases
timber from our Oregon timberlands for use in its sawmills.
WE MAY CHANGE OUR INVESTMENT, FINANCING AND OTHER POLICIES WITHOUT YOUR APPROVAL
Our Board of Directors determines our investment, financing and other
significant 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 your approval. See "Policies with Respect to Certain
Activities."
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR INTEREST RATE SWAP AGREEMENTS
Because our indebtedness bears interest at variable rates, we bear the risk
of increases in interest rates with respect to our indebtedness. To reduce the
risks of rising interest rates, our new credit agreement requires us to enter
into interest rate swap agreements that effectively fix the interest rate on
some of our indebtedness. In the event we desire or need to terminate our swap
agreements before the end of the contractual period, we may be required to make
cash payments to the counterparty. This would occur if interest rates at the
time of the termination were lower than the fixed rate we must pay under our
obligation. If we terminated our existing swap agreements on March 31, 1999, we
would have been required to make a cash payment of approximately $4.5 million.
We are also exposed to the risk that our hedging activities may not fully
or adequately protect us against rising interest rates. For example, we will
enter into swap agreements with a total notional amount that is less than our
total borrowings. This means that the interest payments we recover from the
counterparties to our swap agreements may be less than the additional interest
we must pay our lenders if interest rates increase. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Market Risk."
We are also exposed to risks of nonperformance of the interest rate swap
agreements by the counterparties. Should these counterparties be unable to
perform their obligations and upon an increase in interest rates, we would be
required to pay additional interest to our lenders and we would not receive any
offsetting payments under the swap agreements.
17
<PAGE> 24
AN INVESTMENT IN THE COMMON STOCK INVOLVES OTHER TAX ISSUES
FEDERAL TAX LAW CHANGES MAY BE UNFAVORABLE
We are one of the first REITs to focus on timberland ownership and sales of
timber, and our business plan would not have been feasible before certain
changes to the Internal Revenue Code were enacted in 1997. Because the complex
REIT rules were not generally designed to accommodate investments in timber
properties, there is no established law governing the interplay of the tax rules
generally applicable to REITs and those applicable to timber operations. Over
time, the IRS, the Treasury Department or various courts may adopt new
interpretations governing this interplay, and these interpretations may be
unfavorable to us. See "Federal Income Tax Consequences."
STATE TAX LAWS MAY NOT CONFORM TO FEDERAL TAX LAW
Though we expect to qualify as a REIT for federal income tax purposes, our
qualification as a REIT under the laws of each individual state will depend,
among other things, on that state's conformity with federal tax law.
If you live in a state that does not conform to the federal tax treatment
of REITs, even if we do not do business in that state, cash distributions to you
will likely be characterized as ordinary income rather than capital gains for
purposes of computing your state taxes. You should consult with your tax advisor
concerning the state tax consequences of an investment in our common stock.
CAPITAL GAINS DISTRIBUTIONS TO NON-U.S. SHAREHOLDERS ARE GENERALLY SUBJECT
TO WITHHOLDING
We anticipate that substantially all of the amounts of cash we pay out to
you will generally be treated as either capital gains or a return of capital.
Under the provisions of the Foreign Investment in Real Property Tax Act, which
apply to non-U.S. shareholders, capital gain distributions are generally subject
to withholding at a rate of 35%.
FORWARD-LOOKING STATEMENTS
Some statements in this prospectus represent our expectations for Strategic
Timber and our common stock. These forward-looking statements are made only as
of the date of this prospectus. You can generally identify these forward-looking
statements by the use of the words "may," "will," "expects," "intends,"
"estimates," "anticipates" or "believes" or similar language.
We believe the expectations expressed in all forward-looking statements are
reasonable and accurate based on information we currently have. However, our
expectations may not prove to be correct. Important factors that could cause
actual results to differ from our expectations are disclosed under "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business and Properties" and in other parts of this
prospectus.
18
<PAGE> 25
STRUCTURE AND FORMATION OF STRATEGIC TIMBER
OUR STRUCTURE
At the completion of this offering, we will conduct our business through an
operating partnership called Strategic Timber Partners, LP, a Delaware limited
partnership, and through its wholly owned subsidiary, Pioneer Resources, LLC, an
Oregon limited liability company. After we refinance our existing bank credit
facility, we will contribute the net proceeds of this offering to Strategic
Timber Partners in exchange for a number of its partnership units equal to the
number of shares of common stock sold in this offering. Upon the sale of any
additional shares of common stock, we will contribute the net proceeds of the
sale to Strategic Timber Partners in exchange for a number of partnership units
equal to the number of shares sold. For a description of the partnership units,
see "The Partnership Agreement." Strategic Timber Operating Co., a Delaware
corporation and wholly owned subsidiary of Strategic Timber, is the sole general
partner of Strategic Timber Partners.
OUR FORMATION
On April 21, 1998, we organized Strategic Timber, Strategic Timber Partners
and Strategic Timber Operating Co. to acquire our Louisiana property, which now
consists of approximately 82,000 acres of timberland in southwest Louisiana.
Louisiana Timber Partners, LLC, a Georgia limited liability company,
contributed to Strategic Timber Partners a contract to acquire the Louisiana
property in exchange for a 19.6% limited partnership interest in Strategic
Timber Partners. We valued this contract at $50.0 million, which we believed to
be the difference between the value of the property and the purchase price under
the contract that Louisiana Timber held. Strategic Timber retained a 79.4%
limited partnership interest in the partnership and Strategic Timber Operating
Co. retained the remaining one percent general partner interest in the
partnership. The partnership then purchased the Louisiana property on April 27,
1998 for $205.0 million in cash. The partnership funded the purchase price of
the Louisiana property and related transaction costs by borrowing $125.8 million
under a $215.0 million bank revolving credit facility, and with a cash
contribution of $85.0 million by Strategic Timber. Strategic Timber borrowed
these funds under a bank bridge loan.
After we acquired the Louisiana property, our structure was:
<TABLE>
<S> <C> <C>
- -----------------------------------------------
Strategic Timber Trust, Inc.
- -----------------------------------------------
100% 79.4% limited
partner
interest
- ------------------------ ------------------------------------------
Strategic Timber
Operating Co. Louisiana Timber Partners, LLC
- ------------------------ -------------------------------------------
1.0% general 19.6% limited
partner partner
interest interest
---------------------------------------------------------------------------------------
Strategic Timber Partners, LP
---------------------------------------------------------------------------------------
Louisiana property
</TABLE>
19
<PAGE> 26
Our initial shareholders formed Strategic Timber Trust II, LLC, a Georgia
limited liability company, Strategic Timber Two Operating Co., LLC, a Georgia
limited liability company, and Strategic Timber Partners II, LP, a Georgia
limited partnership, in September 1998. Our initial shareholders formed these
entities to acquire Pioneer, which holds approximately 366,000 acres of
timberland in the Pacific Northwest.
Strategic Timber Partners II acquired all of the membership interests in
Pioneer from its members on October 9, 1998, in exchange for $35.0 million in
cash and a 59.1% interest in Strategic Timber Partners II, which we valued at
$65.0 million. Strategic Timber Partners II funded the cash portion of the
purchase price for Pioneer and related transaction costs with a cash
contribution of $35.0 million by Strategic Timber Two Operating Co. in exchange
for a 31.8% interest in Strategic Timber Partners II, and a cash contribution of
$10.0 million by Mach One Partners, LLC, an affiliate of Louisiana Timber, in
exchange for a 9.1% interest in Strategic Timber Partners II. To fund Strategic
Timber Two Operating Co.'s contribution, Strategic Timber II borrowed $35.0
million under a bank bridge loan. In connection with the acquisition, Pioneer
refinanced its existing bank debt, leaving approximately $255.0 million
outstanding under its credit facility.
After Strategic Timber Partners II acquired Pioneer, our structure included
the following additional entities:
<TABLE>
<S> <C> <C>
- ----------------------------------------
Strategic Timber Trust II, LLC
- ----------------------------------------
100%
------------------------- ------------------------- --------------------------
Strategic Timber Former Pioneer Mach One
Two Operating Co. Members Partners, LLC
------------------------- ------------------------- --------------------------
1.0% general 30.8% limited 59.1% limited 9.1% limited
partner partner partner partner
interest interest interest interest
------------------------------------------------------------------------------------------------------
Strategic Timber Partners II, LP
------------------------------------------------------------------------------------------------------
100%
----------------------------------
Pioneer Resources, LLC
----------------------------------
Pacific Northwest properties
</TABLE>
Upon completion of this offering, Strategic Timber II, Strategic Timber Two
Operating Co. and Strategic Timber Partners II will be merged into Strategic
Timber Partners, leaving Pioneer as a wholly owned subsidiary of Strategic
Timber Partners. In connection with this merger, the owners of the merging
entities will receive cash and units in Strategic Timber Partners.
20
<PAGE> 27
As of the completion of the offering and the merger of the entities
described above into Strategic Timber Partners, and assuming we sell 16,600,000
shares of common stock in the offering at a price of $20 per share, our
structure will be as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Public Shareholders (96.1%)
Continuing Investors (3.9%)
- ----------------------------------
Strategic Timber Trust, Inc.
- ----------------------------------
- ----------------- ---------------- ------------------- -------------- -------------- -----------------
Strategic Timber 76.7% Limited Former Louisiana Former
Operating Co. partner interest Strategic Timber II Timber Mach One Pioneer
Members Partners, LLC Partners, LLC Members
- ----------------- ---------------- ------------------- -------------- -------------- -----------------
1.0% general partner 4.2% limited 7.9% limited 0.4% limited 9.8% limited
interest partner interest partner interest partner interest partner interest
- -----------------------------------------------------------------------------------------------------------------------------
Strategic Timber Partners, LP
- -----------------------------------------------------------------------------------------------------------------------------
100% Louisiana property
- ---------------------------
Pioneer Resources, LLC
- ---------------------------
Pacific Northwest properties
</TABLE>
21
<PAGE> 28
The table below summarizes the amounts contributed in connection with the
formation transactions, and the amount and value of cash, common stock and
partnership units the parties to the formation transactions will receive as of
the completion of the offering. Amounts under "Aggregate Value To Be Received at
Completion of Offering" are based on an initial public offering price of $20 per
share.
<TABLE>
<CAPTION>
SHARES/UNITS AGGREGATE
ESTIMATED OR AND CASH TO BE VALUE TO BE
AGREED RECEIVED FOR RECEIVED AT RECEIVED AT
ORIGINAL VALUE AT ORIGINAL COMPLETION COMPLETION
NAME CONTRIBUTION CONTRIBUTION CONTRIBUTION OF OFFERING OF OFFERING
- ---- ------------ ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Louisiana Timber Purchase contract to $ 50,000,000 5,000 units of 1,762,974 units of $48,204,480
Partners acquire the Strategic Timber Strategic Timber
Louisiana property Partners Partners
and
$12,945,000 cash
Mach One Partners $10,000,000 $ 10,000,000 909 units of 100,110 units of $12,002,200
Strategic Timber Strategic Timber
Partners II Partners
and
$10,000,000 cash
Former Pioneer 100% of the $100,000,000 5,909 units of 2,170,086 units of $67,456,720
Members membership interests Strategic Timber Strategic Timber (not including
(collectively) in Pioneer Partners II Partners cash received
and and for original
$35,000,000 cash $24,055,000 cash contribution)
Strategic Timber Services Nominal value 671,770 shares of 671,770 shares of $32,096,100
Management and at time of Strategic Timber Strategic Timber
Other Original organization and and
Investors 2,810 units of 933,035 units of
(collectively) Strategic Timber II Strategic Timber
Partners
</TABLE>
At or immediately before the closing of this offering:
- We will sell 16,600,000 shares of common stock in the offering.
- Strategic Timber Partners will enter into a new $375.0 million credit
facility.
- We will use the net proceeds of this offering and will borrow
approximately $266.8 million under our new credit facility to repay in
full our outstanding bank debt and to redeem a portion of the partnership
units held by Louisiana Timber and a portion of the Strategic Timber
Partners II partnership units held by the former Pioneer members and Mach
One. See "Use of Proceeds."
- Strategic Timber Partners will issue 3,203,231 partnership units to the
owners of Strategic Timber II, the former Pioneer members and Mach One.
As a result of the formation transactions described above, Strategic Timber will
beneficially own 17,271,770 partnership units, which will represent an
approximate 77.7% interest in Strategic Timber Partners.
The terms of the formation transactions were determined after arm's-length
negotiations between representatives of Strategic Timber, Louisiana Timber,
Pioneer, the former Pioneer members and Mach One.
22
<PAGE> 29
BENEFITS TO RELATED PARTIES
Our executive officers and affiliates will benefit from this offering and
the formation transactions as follows:
- Our executive officers will hold shares of common stock and units valued
at $32.1 million, based on an initial public offering price of $20 per
share, as shown below.
<TABLE>
<CAPTION>
SHARES AND
UNITS VALUE
---------- -----------
<S> <C> <C>
C. Edward Broom............................................. 408,329 $ 8,166,580
Christopher J. Broom........................................ 408,329 8,166,580
Thomas P. Broom............................................. 408,329 8,166,580
T. Yates Exley.............................................. 108,516 2,170,320
Nicholas C. Brunet.......................................... 90,740 1,814,800
Vladimir Harris............................................. 90,740 1,814,800
Joseph E. Rendini........................................... 90,740 1,814,800
--------- -----------
Total............................................. 1,605,723 $32,114,460
========= ===========
</TABLE>
The shares and units that we issued to these executives, other than T.
Yates Exley, were in consideration of services. When issued, these shares
and units had an aggregate value of $1,100, which reflected the value of
Strategic Timber and Strategic Timber II prior to acquisition of their
properties. Mr. Exley received his units in connection with our acquisition
of Pioneer, as described below.
- Our executive officers will also receive options to acquire an aggregate
of 875,000 shares of common stock at the initial public offering price.
These options will vest in equal amounts over the three years following
completion of this offering.
- We have employment and non-competition agreements with Messrs. C. Edward
Broom, Christopher J. Broom, Thomas P. Broom, Kenneth L. Chute, Nicholas
C. Brunet, Vladimir Harris and Joseph E. Rendini.
- Louisiana Timber will receive $12.9 million in cash in redemption of a
portion of its partnership units, and will own 1,762,974 partnership
units upon completion of this offering. Hanns A. Pielenz, who has agreed
to serve on our Board of Directors, and Larry J. Woodard are the
principal owners of Louisiana Timber. The partnership units retained by
Louisiana Timber will have a value of $35.3 million, based on an initial
public offering price of $20 per share. Louisiana Timber acquired its
partnership units in exchange for contributing to Strategic Timber
Partners a contract, valued by the parties at $50.0 million, to acquire
the Louisiana property.
- Mach One, which is owned equally by Messrs. Pielenz and Woodard, will
receive $10.0 million in cash and 100,110 partnership units at the
completion of this offering in redemption of its interest in Strategic
Timber Partners II. Mach One acquired its interest in Strategic Timber
Partners II in exchange for a cash contribution of $10.0 million that was
used to finance our acquisition of Pioneer, and the cash and units it
receives will have a value of $12.0 million, based on an initial public
offering price of $20 per share. Mach One will receive these units in
satisfaction of its right to receive an annual return of 40% on its
original investment under the Strategic Timber Partners II limited
partnership agreement.
- In connection with the Pioneer acquisition, Strategic Timber Partners II
paid $35.0 million in cash and issued partnership interests valued by the
parties at $65.0 million to the former Pioneer members, including Gregory
M. Demers. Mr. Demers, together with a company he owns and controls,
beneficially owned 76.5% of Pioneer at the time of the acquisition. Upon
completion of this offering and the merger of Strategic Timber Partners
II into Strategic Timber Partners, Mr. Demers and his company will
receive $18.4 million in cash in redemption of a portion of their
partnership interests in Strategic Timber Partners II, and will
beneficially own 1,660,333 partnership units. These partnership units
will have a value of $33.2 million, based on an initial public offering
price of $20 per share.
23
<PAGE> 30
- In connection with the Pioneer acquisition, T. Yates Exley, one of the
former Pioneer members and a Vice President of Strategic Timber, received
a partnership interest in Strategic Timber Partners II. Mr. Exley will
receive $1.2 million in cash and, as indicated above, 108,516 partnership
units in redemption of his partnership interest in Strategic Timber
Partners II upon the completion of this offering. The partnership units
will have a value of $2.2 million, based on an initial public offering
price of $20 per share.
Additional information concerning benefits to executive officers, directors
and other continuing investors is set forth under "Management" and "Transactions
with Related Parties."
DISTRIBUTION POLICY
We have not previously made any cash distributions on our common stock. On
April 12, 1999, our Board of Directors declared a cash distribution on our
common stock. This distribution will be based on a quarterly distribution of
$0.175 per share, but will be prorated for the partial quarter between the
closing of the offering and June 30, 1999. This distribution will be payable
only if we complete the formation transactions and the offering no later than
June 30, 1999. The cash distribution is permitted under Georgia law and our new
credit facility.
The distribution will be payable on July 15, 1999 to shareholders of record
as of June 30, 1999. If we complete the offering after June 20, 1999, the record
date for the distribution will be the 15th day following the date of completion
and the distribution will be paid 15 days after the record date. If we complete
the offering on or about May 15, 1999, which is the approximate midpoint of the
second quarter, the aggregate distribution payable would be approximately
$1,528,000, or approximately $1,748,000 if the underwriters exercise in full
their over-allotment option. Because the dividend was declared in April 1999, no
amount was accrued at December 31, 1998.
Our Board of Directors, in its sole discretion, will determine whether
subsequent distributions will be made. Our new credit facility allows us to make
distributions to shareholders so long as the distributions do not cause us to
default under other provisions of the credit agreement. Our Board of Directors
will base its determination on our financial results, available cash flow,
possible acquisitions and capital requirements, as well as prevailing economic
conditions. We intend to retain a substantial portion of the cash we generate
from operations to acquire additional timberlands rather than distributing it to
you. We do not expect the tax rule that generally requires a REIT to distribute
to shareholders 95% of its ordinary income to affect us. We cannot provide any
assurance that we will make cash distributions in the future or the amount of
any distribution that we may make.
24
<PAGE> 31
USE OF PROCEEDS
We estimate that we will receive net cash proceeds from this offering of
approximately $306.4 million after deducting estimated underwriting discounts
and commissions and estimated offering expenses and based on an initial public
offering price of $20 per share. If the underwriters exercise their
over-allotment option in full, we estimate that we will receive net cash
proceeds from this offering of approximately $352.7 million.
We will use the net proceeds of this offering, together with approximately
$266.8 million of borrowings under our new credit facility, as follows:
- approximately $515.0 million to repay in full debt described in the table
below and accrued interest on this debt;
- approximately $47.0 million to redeem partnership units and other
partnership interests held by our continuing investors;
- approximately $7.9 million for termination fees on interest rate swaps
and related debt; and
- $3.3 million for financing costs on our new credit facility.
See "Structure and Formation of Strategic Timber."
The table below summarizes the debt to be repaid upon completion of this
offering, based on principal balances at March 31, 1999. The actual amounts
repaid may differ to the extent of any changes in the principal balance of loans
occurring subsequent to March 31, 1999.
<TABLE>
<CAPTION>
PRINCIPAL BALANCE AT
MARCH 31, 1999 INTEREST RATE MATURITY DATE
-------------------- ------------- ------------------
<S> <C> <C> <C>
Strategic Timber Partners credit
facility......................... $139,297,000 7.50%(1) April 25, 2003
Strategic Timber bridge loan....... 85,000,000 9.00%(1) October 27, 1999
Pioneer credit facility............ 252,950,000 7.57%(1) September 30, 2003
Strategic Timber II bridge loan.... 35,000,000 9.06%(2) October 27, 1999
------------ -----
Total/Weighted Average... $512,247,000 7.89%
============ =====
</TABLE>
- ---------------
(1) These loans each bear interest at a floating rate based on LIBOR plus an
applicable margin. The rates shown are interest rates at March 31, 1999.
(2) In addition to the stated interest, on April 1, 1999, an additional payment
of $3.3 million became due on the Strategic Timber II bridge loan. We will
pay this amount at the closing of this offering.
Assuming an initial public offering price of $20 per share, after this
offering, we will have approximately $266.8 million of debt outstanding under
our new credit facility. For a description of the terms of our new credit
facility, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
If the underwriters exercise in full their over-allotment option to
purchase 2,490,000 additional shares of common stock, we expect to use the
additional net proceeds of approximately $46.3 million to reduce amounts
outstanding under our new credit facility.
Amounts outstanding under our operating partnership's credit facility, the
Strategic Timber bridge loan, the Pioneer credit facility and the Strategic
Timber II bridge loan were each incurred within the past year to pay for our
initial timberlands and to finance working capital requirements prior to
commencing full-scale operations.
Pending the uses described above, we will invest any unused portion of the
net proceeds in interest-bearing accounts or short-term, interest-bearing
securities, or both, which are consistent with our intention to qualify for
taxation as a REIT.
25
<PAGE> 32
CAPITALIZATION
The following table sets forth the combined historical capitalization of
Strategic Timber and Strategic Timber II as of December 31, 1998. As described
in "Structure and Formation of Strategic Timber," we currently conduct our
operations through two separate entities, Strategic Timber and Strategic Timber
II. Because these entities will be merged before the completion of this
offering, we believe it is meaningful to present the combined capitalization of
these entities as of December 31, 1998. The following table also sets forth our
pro forma capitalization as of December 31, 1998 assuming that we completed the
formation transactions and this offering and that we used the estimated net
proceeds of this offering and borrowings under our new credit facility as set
forth under "Use of Proceeds." You should read the following table in
conjunction with the financial statements and notes to the financial statements
included elsewhere in this prospectus, "Selected Historical Financial and
Operating Information," "Pro Forma Condensed Consolidated Financial Information"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
STRATEGIC TIMBER AND
STRATEGIC TIMBER II COMBINED
----------------------------
ACTUAL PRO FORMA
-------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Bridge loans.............................................. $120,000 $ --
Current portion of long-term debt......................... 136,287 --
Long-term debt............................................ 252,500 270,469
Minority interest........................................... 119,332 62,603
Shareholders' equity:
Preferred Stock, $.01 par value(1)........................ -- --
Common Stock, $.01 par value(2)........................... 1 173
Additional paid-in capital................................ -- 312,542
Accumulated deficit....................................... (16,367) (30,137)
-------- --------
Total shareholders' equity (deficit).............. (16,366) 282,578
-------- --------
Total Capitalization.............................. $611,753 $615,650
======== ========
</TABLE>
- ---------------
(1) 50,000,000 shares of preferred stock will be authorized upon completion of
this offering. No shares of preferred stock are currently, or at the
completion of this offering will be, issued and outstanding.
(2) 200,000,000 shares of common stock will be authorized at the completion of
this offering. 671,770 actual shares of common stock are currently issued
and outstanding. 17,271,770 shares of common stock will be issued and
outstanding at the completion of this offering, excluding (a) 4,966,205
shares of common stock that we may issue to redeem partnership units; (b)
2,490,000 shares of common stock that the underwriters have the option to
purchase solely to cover over-allotments; and (c) 1,115,000 shares of common
stock issuable upon exercise of options to be granted under our 1999
Incentive Plan upon completion of this offering. We will reserve a total of
2,224,000 shares of common stock for issuance under the 1999 Incentive Plan.
See "The Partnership Agreement -- Redemption of Partnership Units,"
"Underwriting" and "Management -- 1999 Incentive Plan."
26
<PAGE> 33
DILUTION
The assumed initial public offering price of $20 per share exceeds the net
combined tangible book value per share of Strategic Timber and Strategic Timber
II. Therefore, if you purchase common stock in this offering, you will incur an
immediate dilution in the net tangible book value of your shares. The following
table illustrates the dilution to purchasers of shares of common stock sold in
this offering.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $20.00
Net combined tangible book value per share before this
offering(1)............................................ $16.20
Decrease in net combined tangible book value per share
attributable to this offering.......................... (0.83)
------
Pro forma net tangible book value per share after this
offering(2)............................................ 15.37
------
Dilution per share purchased in this offering............. $ 4.63
======
</TABLE>
- ---------------
(1) Determined by subtracting the total liabilities of Strategic Timber and
Strategic Timber II from the total tangible assets of Strategic Timber and
Strategic Timber II and dividing the difference by the sum of the total
number of shares of common stock issued and outstanding immediately prior to
this offering and the number of shares of common stock issuable upon the
exchange of all partnership units issued or to be issued in connection with
the formation transactions.
(2) Determined by subtracting our total liabilities from our total tangible
assets and dividing the difference by the number of shares of common stock
and partnership units that will be outstanding after this offering. This
calculation is based on our pro forma condensed consolidated balance sheet.
The following table summarizes the number of shares of common stock we will
sell in this offering, the total price to be paid for these shares, the number
of shares of common stock and partnership units previously issued or to be
issued in the formation transactions, and the net tangible book value of the
average contribution per share based on total contributions. All amounts are
determined as if this offering and the formation transactions had been completed
on December 31, 1998.
<TABLE>
<CAPTION>
SHARES SOLD BY BOOK VALUE OF
STRATEGIC TIMBER AND CONTRIBUTIONS TO
PARTNERSHIP UNITS ISSUED STRATEGIC TIMBER/
BY STRATEGIC TIMBER STRATEGIC TIMBER PURCHASE PRICE/
PARTNERS PARTNERS BOOK VALUE OF
------------------------ ------------------ CONTRIBUTION
NUMBER PERCENT AMOUNT PERCENT PER SHARE/UNIT
------------ --------- -------- ------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE/UNIT DATA)
<S> <C> <C> <C> <C> <C>
New investors in this offering.......... 16,600,000 74.7% $332,000 96.2% $20.00
Common stock and partnership units
outstanding or to be issued in the
formation transactions................ 5,637,975 25.3 13,181 3.8 2.34
---------- ----- -------- -----
Total......................... 22,237,975 100.0% $345,181 100.0%
========== ===== ======== =====
</TABLE>
27
<PAGE> 34
SELECTED HISTORICAL FINANCIAL AND OPERATING INFORMATION
The following tables show the selected historical consolidated financial
and operating information for Strategic Timber, Strategic Timber II and Pioneer.
Pioneer is the predecessor to Strategic Timber II.
Information for Strategic Timber and Strategic Timber II is presented as of
and for the period ended December 31, 1998. The information is derived from the
audited historical financial statements of Strategic Timber and Strategic Timber
II, and should be read in conjunction with those financial statements, which are
included elsewhere in this prospectus. The information shown for Strategic
Timber reflects the results of operations for the period from April 21, 1998,
the date of inception, to December 31, 1998. Information shown for Strategic
Timber II reflects the results of operations for the period from October 9,
1998, the date on which Strategic Timber II acquired Pioneer, to December 31,
1998.
Information is also presented for both Pioneer and its predecessor, Old
Pioneer Resources, LLC, which we will refer to as Old Pioneer. Old Pioneer was
formed in April 1994 for the purpose of acquiring certain timber-related assets.
The assets of Old Pioneer were contributed to Pioneer upon the formation of
Pioneer on January 3, 1996.
The selected historical financial and operating information of Pioneer as
of and for the years ended December 31, 1996 and December 31, 1997 and for the
period from January 1, 1998 to October 8, 1998 is derived from the audited
historical financial statements of Pioneer included elsewhere in this prospectus
and should be read in conjunction with those financial statements. Information
presented for Old Pioneer is derived from the audited historical financial
statements of Old Pioneer as of and for the year ended December 31, 1995.
Information presented for Old Pioneer as of and for the period from April 15,
1994, the date of inception, to December 31, 1994 is derived from unaudited
financial statements that were prepared on the same basis as those that were
audited.
The selected historical information presented for Strategic Timber and
Strategic Timber II is not comparable to the information presented for Pioneer
because the historical financial statements of Pioneer include the results of
conversion facilities and aircraft operations that were not acquired by
Strategic Timber II. In addition, the historical results of operations of
Strategic Timber include one-time start-up costs of approximately $140,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The results of operations of Old Pioneer and Pioneer among the periods
presented are not comparable to one another because:
- financial information of Old Pioneer was prepared using a different basis
of accounting than that of Pioneer;
- financial and operating information of Pioneer were affected by several
acquisitions in 1996, 1997 and 1998, including the acquisition of the
assets of Old Pioneer on January 3, 1996, each of which was accounted for
under the purchase method of accounting; and
- Old Pioneer conducted different operations than Pioneer.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and the accompanying notes
to financial statements included elsewhere in this prospectus.
This financial and operating information is historical in nature.
Information may not be representative of how we plan to manage our operations
after this offering.
28
<PAGE> 35
STRATEGIC TIMBER TRUST, INC. AND STRATEGIC TIMBER TRUST II, LLC
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
STRATEGIC TIMBER STRATEGIC TIMBER II
AS OF AND FOR THE AS OF AND FOR THE
PERIOD FROM INCEPTION PERIOD FROM INCEPTION
(APRIL 21, 1998) TO (OCTOBER 9, 1998) TO
DECEMBER 31, 1998 DECEMBER 31, 1998
--------------------- ---------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:............................................. $ 507 $ 9,018
Operating Expenses:
Cost of timber sold................................. 403 5,746
Amortization of deferred financing costs............ 1,743 499
General and administrative expenses................. 1,820 1,738
--------- --------
Operating income (loss)............................. (3,459) 1,035
Other Income (Expense):
Interest expense.................................... (13,781) (5,657)
Interest income..................................... 33 12
--------- --------
Loss before minority interest......................... (17,207) (4,610)
Minority interest in loss of subsidiary partnership... 2,863 2,587
--------- --------
Net loss.............................................. $ (14,344) $ (2,023)
========= ========
CASH FLOW AND OTHER DATA:
EBITDDA(a)............................................ $ (1,312) $ 7,268
Depletion............................................. 403 5,703
Depreciation and amortization......................... 1,744 530
Cash provided by (used in) operating activities....... (6,913) 5,268
Cash used in investing activities..................... (205,235) (295,218)
Cash provided by financing activities................. 212,458 295,793
BALANCE SHEET DATA (AT PERIOD END):
Working capital (b)................................... $(226,623) $(38,617)
Timberlands........................................... 251,597 354,298
Total assets.......................................... 260,878 369,082
Total debt............................................ 218,787 290,000
Minority interest..................................... 46,919 72,413
Shareholders'/members' deficit........................ (14,343) (2,023)
OPERATING DATA (UNAUDITED):
Timber harvested...................................... 10,923tons 11,601(c)
Timber sold under timber deed......................... -- 19,295(c)
</TABLE>
- ---------------
(a) EBITDDA is defined as operating income (loss) plus depletion, depreciation
and amortization. You should not construe EBITDDA to be an alternative to
operating income, as an indicator of our operating performance, or as an
alternative to cash flow from operating activities, as a measure of our
liquidity. EBITDDA is not a financial measure determined in accordance with
generally accepted accounting principles and may not be comparable to
similarly titled measures of other companies.
EBITDDA is calculated as follows:
<TABLE>
<CAPTION>
STRATEGIC STRATEGIC
TIMBER TIMBER II
---------- ----------
<S> <C> <C>
Operating income (loss)................................ $(3,459) $1,035
Depletion.............................................. 403 5,703
Depreciation and amortization.......................... 1,744 530
------- ------
$(1,312) $7,268
======= ======
</TABLE>
(b) The negative working capital of Strategic Timber is caused primarily by the
classification of all Strategic Timber debt as current. This classification
is due to the inclusion of clauses in the debt agreements that allow the
lenders to call the debt prior to its maturity in the event of a "material
adverse change" in the business of Strategic Timber. The negative working
capital of Strategic Timber II is attributable primarily to debt maturing
in less than one year, accrued interest on debt and obligations under
interest rate swap agreements.
(c) In thousands of board feet.
29
<PAGE> 36
PIONEER RESOURCES, LLC
(PREDECESSOR TO STRATEGIC TIMBER II)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OLD PIONEER PIONEER
--------------------------- ------------------------------------
PERIOD
FROM
APRIL 15, JANUARY 1,
1994 TO YEAR ENDED YEAR ENDED DECEMBER 31, 1998 TO
DECEMBER 31, DECEMBER 31, ----------------------- OCTOBER 8,
1994(A) 1995(A) 1996 1997 1998
------------ ------------ ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Log sales.................................. $ 42 $ 1,600 $ 25,901 $ 39,505 $ 23,097
Lumber and by-product sales................ 15,115 31,409 36,004 52,623 45,213
Timberland and property sales.............. 6,503 1,865 613 6,774 5,901
------- ------- -------- -------- ---------
Total revenues..................... 21,660 34,874 62,518 98,902 74,211
Operating Expenses:
Cost of products sold...................... 11,331 22,953 25,897 39,602 45,498
Cost of timberland and property sales...... 2,672 1,330 486 4,292 2,536
Depletion, depreciation and amortization... 2,907 2,982 15,366 25,259 12,966
Selling, general and administrative
expenses................................ 1,205 2,354 3,144 7,444 7,137
Write down of real estate investments...... -- -- -- -- 583
------- ------- -------- -------- ---------
Operating income................... 3,545 5,255 17,625 22,305 5,491
Other Income (Expense):
Interest expense........................... (1,871) (3,062) (6,070) (8,722) (12,505)
Interest income............................ 236 46 248 224 56
Other income (expense), net................ 239 343 -- 502 (780)
------- ------- -------- -------- ---------
Income (loss) from continuing operations
before income taxes and minority
interests.................................. 2,149 2,582 11,803 14,309 (7,738)
Income tax benefit (provision)............... -- -- (978) 355 336
------- ------- -------- -------- ---------
Income (loss) from continuing operations
before minority interest................... 2,149 2,582 10,825 14,664 (7,402)
Minority interest in loss of subsidiary...... -- -- 262 51 12
------- ------- -------- -------- ---------
Income (loss) from continuing operations..... 2,149 2,582 11,087 14,715 (7,390)
Discontinued operation, net(b)............... -- -- (48) (945) (897)
------- ------- -------- -------- ---------
Income (loss) before extraordinary item...... 2,149 2,582 11,039 13,770 (8,287)
Extraordinary item(c)........................ -- -- (780) -- (2,106)
------- ------- -------- -------- ---------
Net income (loss)............................ $ 2,149 $ 2,582 $ 10,259 $ 13,770 $ (10,393)
======= ======= ======== ======== =========
CASH FLOW AND OTHER DATA:
EBITDDA(d)................................... $ 9,363 $ 9,910 $ 33,477 $ 52,358 $ 20,213
Cash provided by operating activities........ (e) 16,451 26,806 24,749 7,767
Cash used in investing activities............ (e) (9,612) (58,110) (46,515) (162,297)
Cash provided by (used in) financing
activities................................. (e) (6,492) 35,733 18,699 153,168
BALANCE SHEET DATA (AT PERIOD END):
Working capital.............................. $(8,563) $(9,219) $ 1,167 $ 20,127
Timber, timberlands and timber cutting
rights..................................... 26,603 27,230 86,294 99,126
Total assets................................. 44,892 52,139 132,060 154,430
Total debt................................... 40,456 33,964 96,565 126,941
Members' equity.............................. 2,150 5,922 9,740 19,937
</TABLE>
30
<PAGE> 37
<TABLE>
<CAPTION>
OLD PIONEER PIONEER
--------------------------- ------------------------------------
PERIOD
FROM
APRIL 15, JANUARY 1,
1994 TO YEAR ENDED YEAR ENDED DECEMBER 31, 1998 TO
DECEMBER 31, DECEMBER 31, ----------------------- OCTOBER 8,
1994(A) 1995(A) 1996 1997 1998
------------ ------------ ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING DATA (UNAUDITED):
Fee timber harvested (million board feet).... 35 51 106 125 75
Non-fee timber purchased (million board
feet)...................................... 12 15 31 28 36
Lumber production (million board feet)....... 22 47 71 106 112
</TABLE>
- ---------------
(a) Financial and operating data for the period from April 15, 1994 to December
31, 1994 and for the year ended December 31, 1995 for Old Pioneer are not
comparable to other periods presented in this table. See the financial
statements of Pioneer and accompanying notes included elsewhere in this
prospectus for additional information.
(b) Relates to the plywood operations of Lane Plywood, which were discontinued
in 1997.
(c) In 1996 and 1998, borrowings of Pioneer were refinanced, resulting in the
write-off of certain deferred financing costs as extraordinary, non-cash
charges.
(d) EBITDDA is defined as operating income plus other income (expense),
depletion, depreciation and amortization and cost of timberland and
property sales. Cost of timberland and property sales represents the cost
basis of timber and property sold. Similar costs are included in "Cost of
timber sold" for both Strategic Timber and Strategic Timber II in the
statements of operations and in "Depletion" in the statements of cash
flows. You should not construe EBITDDA to be an alternative to operating
income, as an indicator of Pioneer's operating performance, or as an
alternative to cash flow from operating activities, as a measure of
Pioneer's liquidity. EBITDDA is not a financial measure determined in
accordance with generally accepted accounting principles and may not be
comparable to similarly titled measures of other companies.
EBITDDA is calculated as follows:
<TABLE>
<CAPTION>
OLD PIONEER PIONEER
--------------------------- -----------------------------------------
PERIOD
FROM
APRIL 15, JANUARY 1,
1994 TO YEAR ENDED YEAR ENDED DECEMBER 31, 1998 TO
DECEMBER 31, DECEMBER 31, --------------------------- OCTOBER 8,
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Operating income..................... $3,545 $5,255 $17,625 $22,305 $ 5,491
Other income (expense)............... 239 343 -- 502 (780)
Depletion, depreciation and
amortization....................... 2,907 2,982 15,366 25,259 12,966
Cost of timberland and property
sales.............................. 2,672 1,330 486 4,292 2,536
------ ------ ------- ------- -------
$9,363 $9,910 $33,477 $52,358 $20,213
====== ====== ======= ======= =======
</TABLE>
(e) Information regarding these amounts for the period from April 15, 1994 to
December 31, 1994 is not available.
31
<PAGE> 38
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The following tables show, for the periods and dates indicated, pro forma
condensed consolidated financial information for Strategic Timber. The Pro Forma
Condensed Consolidated Balance Sheet presents our unaudited pro forma financial
condition as if the formation transactions and this offering had occurred as of
December 31, 1998. The Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1998 presents our unaudited pro forma operating
results as if this offering and the formation transactions, except for our
acquisitions of the Louisiana property and the Coastal forest portion of the
Pacific Northwest properties, had occurred as of January 1, 1998.
The Pro Forma Condensed Consolidated Statement of Operations includes the
historical results of Pioneer for the period from January 1, 1998 to October 8,
1998, as this entity represents our predecessor business. These historical
results of Pioneer have been adjusted to eliminate results of operations and
related assets and liabilities attributable to Pioneer's timber conversion
facilities and aircraft operations that we did not acquire.
The Pro Forma Condensed Consolidated Statement of Operations, however, does
not include the historical results of the Louisiana property prior to our
purchase of these timberlands on April 27, 1998. These timberlands were acquired
from an unrelated family group that did not actively manage the property for
commercial timber operations. The Pro Forma Condensed Consolidated Statement of
Operations also does not include the historical results of the Coastal forest
portion of the Pacific Northwest properties prior to the purchase of these
timberlands by Pioneer in July 1998. We believe that there is limited continuity
between the prior operation of the Coastal forest and Pioneer's actual and our
intended forestry activities on these timberlands. Because of the lack of
continuity of operations before and after these purchases, we believe that
inclusion of historical financial information for the Louisiana property and the
Coastal forest in the Pro Forma Condensed Consolidated Statement of Operations
prior to the dates of acquisition would not be helpful to your understanding of
our business or operations.
The pro forma condensed consolidated financial information does not purport
to represent what our financial position or results of operations actually would
have been had the formation transactions occurred on the dates indicated. The
pro forma condensed consolidated financial information also does not purport to
project our financial position or results of operations at any future date or
for any future period. This information should be read in conjunction with the
following:
- Audited consolidated financial statements of Strategic Timber as of and
for the period from inception (April 21, 1998) to December 31, 1998,
- Audited consolidated financial statements of Strategic Timber II as of
and for the period from inception (October 9, 1998) to December 31, 1998,
- Audited consolidated financial statements of Pioneer as of and for the
years ended December 31, 1996 and 1997 and for the period from January 1,
1998 to October 8, 1998,
- "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and
- "Selected Historical Financial and Operating Information."
32
<PAGE> 39
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
INTERCOMPANY
HISTORICAL HISTORICAL ELIMINATIONS AND
STRATEGIC STRATEGIC PRO FORMA
TIMBER TIMBER II ADJUSTMENTS(A) PRO FORMA
---------- ---------- ---------------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents.................. $ 310 $ 5,843 $ -- $ 6,153
Trade accounts receivable.................. 57 109 -- 166
Prepaid expenses........................... 1,312 146 (1,312)(b) 146
Due from affiliate......................... -- 1,476 (1,476)(c) --
-------- -------- --------- --------
Total current assets.................. 1,679 7,574 (2,788) 6,465
Timberlands.................................. 251,597 354,298 1,972(d) 607,867
Property and equipment, net.................. 16 186 -- 202
Land subject to repurchase................... 3,000 -- -- 3,000
Deferred financing costs, net................ 4,586 7,024 (11,610)(e) 3,320
3,320(e)
-------- -------- --------- --------
Total assets....................... $260,878 $369,082 $ (9,106) $620,854
======== ======== ========= ========
LIABILITIES:
Current liabilities
Bridge loans............................... $ 85,000 $ 35,000 $(120,000)(e) $ --
Current portion of long-term debt.......... 133,787 2,500 (136,287)(e) --
Accounts payable and other accrued
liabilities............................. 1,688 531 (1,312)(b) 907
Accrued interest........................... 2,054 4,845 (6,899)(e) --
Due to affiliates.......................... 2,236 -- (1,476)(c) 760
Deferred revenue........................... 3,537 -- -- 3,537
Obligations under interest rate swaps...... -- 3,316 (3,316)(e) --
-------- -------- --------- --------
Total current liabilities............. 228,302 46,192 (269,290) 5,204
Long-term debt............................... -- 252,500 (252,500)(e) 270,469
270,469(e)
Minority interest............................ 46,919 72,413 (45,028)(d) 62,603
(3,473)(e)
(1,907)(f)
(6,321)(g)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock............................... 1 -- 172(h) 173(h)
Additional paid-in capital................. -- -- 306,221(i) 312,542
6,321(g)
Accumulated deficit........................ (14,344) (2,023) (15,677)(e) (30,137)
1,907(f)
-------- -------- --------- --------
Total shareholders' equity
(deficit)........................ (14,343) (2,023) 298,944 282,578
-------- -------- --------- --------
Total liabilities and shareholders'
equity (deficit)................. $260,878 $369,082 $ (9,106) $620,854
======== ======== ========= ========
</TABLE>
The accompanying notes to pro forma condensed consolidated balance sheet
are an integral part of this balance sheet.
33
<PAGE> 40
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(a) For purposes of this Pro Forma Condensed Consolidated Balance Sheet, the
following proceeds from this offering, and uses of these proceeds, are
assumed:
<TABLE>
<S> <C> <C>
Proceeds from offering:
Shares to be issued....................................... 16,600,000
Offering price per share.................................. $ 20
-----------
Gross proceeds from this offering......................... $332,000
Borrowings under new credit facility...................... 270,469(e)
--------
Total proceeds.................................... $602,469
========
Uses of proceeds:
Repayment of existing debt and accrued interest thereon... $ 515,686(e)
Debt financing costs on new credit facility............... 3,320(e)
Early termination payments on Strategic Timber II bridge
loan................................................... 3,300(e)
Termination of interest rate swaps........................ 7,556(e)
Partial redemption of minority interests.................. 47,000(d)
Fees and expenses associated with this offering........... 25,607(i)
-----------
Total uses of proceeds............................ $602,469
========
</TABLE>
(b) Represents the reversal of offering expenses incurred and accrued as of
December 31, 1998. The recording of all expenses associated with this
offering is shown in note (i).
(c) Represents the elimination of intercompany receivables and payables.
(d) As of December 31, 1998, the following units are held by minority
unitholders in Strategic Timber Partners and Strategic Timber Partners II,
respectively:
<TABLE>
<CAPTION>
UNITS OWNED % OF TOTAL UNITS
----------- ----------------
<S> <C> <C>
Strategic Timber Partners
Louisiana Timber.......................................... 5,000 19.6%
Strategic Timber Partners II
Former Pioneer Members.................................... 5,909 59.1%
Mach One.................................................. 909 9.1%
</TABLE>
In connection with this offering, these minority unitholders will receive
$47,000 representing a partial redemption of their current holdings as
shown below:
<TABLE>
<CAPTION>
UNITS TO BE CASH TO BE
REDEEMED RECEIVED
----------- ----------
<S> <C> <C>
Strategic Timber Partners
Louisiana Timber.......................................... 1,295 $12,945
Strategic Timber Partners II
Former Pioneer Members.................................... 2,187 24,055
Mach One.................................................. 909 10,000
-------
$47,000
=======
</TABLE>
This amount represents a $1,972 premium over the minority unitholders'
account balances at December 31, 1998. The premium represents additional
consideration related to Strategic Timber's
34
<PAGE> 41
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
purchase of the Louisiana property and Strategic Timber II's acquisition of
Pioneer. Accordingly, we have reflected this premium as an increase in
basis in our timberlands.
The remainder of these unitholders' ownership interests will be converted
into units of Strategic Timber Partners. After this conversion, these
unitholders will have the following ownership interest in Strategic Timber
Partners:
<TABLE>
<CAPTION>
UNITS OWNED % OF TOTAL UNITS
----------- ----------------
<S> <C> <C>
Louisiana Timber............................................ 1,762,974 7.9%
Former Pioneer Members...................................... 2,170,086 9.8%
Mach One.................................................... 100,110(f) 0.4%
--------- ------
4,033,170 18.1%
========= ======
</TABLE>
(e) In conjunction with this offering, we plan to repay all of our outstanding
debt and any accrued interest associated with this debt, as shown below:
<TABLE>
<S> <C>
Strategic Timber and Strategic Timber II bridge loans..... $120,000
Strategic Timber credit facility and current portion of
long term debt......................................... 136,287
Pioneer credit facility................................... 252,500
Accrued interest.......................................... 6,899
--------
$515,686
========
</TABLE>
Concurrently, we plan to enter into a new credit facility that provides for
a $200,000 term loan and a revolving line of credit of up to $175,000. We
expect to immediately borrow $270,469 on this facility. Of the amount
expected to be drawn under this facility, approximately $200,000 will relate
to the term loan bearing interest at a variable rate expected to initially
approximate 7.2% and which will be payable in quarterly installments through
May 15, 2004. The remaining $70,469 will relate to a revolving line of
credit bearing interest at a variable rate also expected to initially
approximate 7.2% and maturing on May 15, 2004. Unused commitment fees on the
new credit facility will approximate 0.5%. We expect to incur approximately
$3,320 in debt issuance costs associated with the new credit facility.
In connection with the early extinguishment of our existing debt
instruments, we will write-off unamortized debt issuance costs on our
existing debt totaling $11,610 at December 31, 1998. In addition, we will be
obligated to make an additional payment of approximately $3,300 on the early
retirement of the Strategic Timber II bridge loan. All other debt may be
retired prior to maturity without penalty.
We also anticipate that we will terminate all existing interest rate swaps
at the date of this offering and enter into replacement swaps to mitigate
interest rate exposures on variable rate borrowings under our new credit
facility. We have estimated the cost to terminate these swaps to be $7,556,
which represents the fair value of all outstanding swaps as of December 31,
1998.
35
<PAGE> 42
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
As a result of the termination of our existing debt and interest rate swaps,
we will record an extraordinary loss from the early extinguishment of debt.
This loss is estimated to be approximately $19,150, of which $3,473 will be
allocated to minority interests, as shown below:
<TABLE>
<S> <C> <C>
Write-off of unamortized debt issuance costs......................... $11,610
Early termination fees............................................... 3,300
Termination of interest rate swaps, net of amount applied against
obligations under interest rate swaps of $3,316.................... 4,240
-------
Total extraordinary loss............................................. 19,150
Multiply by: minority interest percentage................... 18.1%
-------
Portion allocated to minority interests..................... 3,473
-------
Extraordinary loss................................................... $15,677
=======
</TABLE>
The actual amount of this loss may differ from this estimate.
(f) Mach One is entitled to a dividend of $1,907. Mach One has elected to
receive 100,110 units in Strategic Timber Partners in lieu of cash payment
of this dividend.
(g) Represents adjustment required to report initial minority interest of a
REIT, in accordance with Emerging Issues Task Force Issue 94-2, "Treatment
of Minority Interests in Certain Real Estate Investment Trusts."
(h) Represents 17,271,770 shares of common stock outstanding after this
offering with a par value of $0.01 per share.
(i) Amount is calculated as follows:
<TABLE>
<S> <C>
Proceeds from offering...................................... $332,000(a)
Less: portion applicable to common stock.................. (172)(h)
Less: Underwriters discounts and commissions.............. (21,082)
Less: Other fees and expenses, including legal,
accounting, financial advisory and listing fees and
printing costs...................................... (4,525)
--------
$306,221
========
</TABLE>
36
<PAGE> 43
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(j) The following represents the historical balance sheet of Pioneer
immediately prior to its acquisition by Strategic Timber II. In addition,
this statement shows the adjustments required to the historical balance
sheet to show the cost basis of the net assets acquired by Strategic Timber
II on October 9, 1998.
<TABLE>
<CAPTION>
ELIMINATION OF
ASSETS NOT
ACQUIRED AND PRO FORMA NET
LIABILITIES ASSETS ACQUIRED
AS OF OCTOBER 8, NOT BY STRATEGIC
1998 ASSUMED TIMBER II
---------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents.......................... $ -- $ -- $ --
Trade accounts receivable.......................... 4,506 (4,506) --
Receivables, related party......................... 683 (683) --
Inventories........................................ 11,815 (11,815) --
Prepaid expenses and deposits...................... 55 -- 55
Real estate investments............................ 3,100 (3,100) --
Current portion of notes receivable................ 2,527 (2,527) --
Net current assets of discontinued operations...... 1,394 (1,394) --
-------- -------- --------
Total current assets....................... 24,080 (24,025) 55
Timber, timberlands and timber cutting rights........ 252,248 (22,181) 230,067
Real estate investments.............................. 6,532 (6,532) --
Property, plant and equipment, net................... 12,971 (12,812) 159
Other assets......................................... 2,645 (2,645) --
-------- -------- --------
Total assets............................... $298,476 $(68,195) $230,281
======== ======== ========
LIABILITIES:
Current liabilities
Accounts payable................................... $ 3,966 $ (3,966) $ --
Accrued liabilities................................ 2,882 (2,882) --
Deferred income taxes.............................. 385 (385) --
-------- -------- --------
Total current liabilities.................. 7,233 (7,233) --
Long-term debt....................................... 288,716 (288,716) --
Deferred income taxes................................ 1,689 (1,689) --
Minority interest.................................... 283 (283) --
-------- -------- --------
Net assets................................. $ 555 $229,726 $230,281
======== ======== ========
</TABLE>
37
<PAGE> 44
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------
PIONEER
STRATEGIC STRATEGIC (PREDECESSOR
TIMBER TIMBER II TO STRATEGIC
FOR THE PERIOD FOR THE PERIOD TIMBER II)
FROM FROM FOR THE PERIOD
INCEPTION INCEPTION FROM
(APRIL 21, (OCTOBER 9, JANUARY 1,
1998) TO 1998) TO 1998 THROUGH ELIMINATION OF
DECEMBER 31, DECEMBER 31, OCTOBER 8, NON-ACQUIRED PRO FORMA
1998 1998 1998 OPERATIONS(A) ADJUSTMENTS(B) PRO FORMA
-------------- -------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Timber and log sales....... $ 267 $ 9,018 $ 23,097 $ -- $ -- $ 32,382
Lumber and by-product
sales.................... -- -- 45,213 (45,213) -- --
Timberland and property
sales and other.......... 240 -- 5,901 (956) -- 5,185
-------- ------- -------- -------- ------- -----------
Total revenues...... 507 9,018 74,211 (46,169) -- 37,567
Operating Expenses:
Cost of products sold...... -- 43 45,498 (34,485) -- 11,056
Cost of timberland and
property sales........... 7 -- 2,536 (957) 671(c) 2,257
Depletion, depreciation and
amortization............. 397 5,734 12,789 (6,787) 2,551(c) 14,742
58(d)
Amortization of deferred
financing costs.......... 1,743 499 177 -- (1,755)(e) 664
Selling, general and
administrative
expenses................. 1,819 1,707 7,137 (1,854) --(f) 8,809
Write down of real estate
investments.............. -- -- 583 (583) -- --
-------- ------- -------- -------- ------- -----------
Operating income
(loss)................. (3,459) 1,035 5,491 (1,503) (1,525) 39
Other Income (Expense):
Interest expense........... (13,781) (5,657) (12,505) -- 13,460(e) (18,483)
Interest income............ 33 12 56 (56) -- 45
Other income (expense),
net...................... -- -- (780) 780 -- --
-------- ------- -------- -------- ------- -----------
Income (loss) from
continuing operations
before income taxes and
minority interest...... (17,207) (4,610) (7,738) (779) 11,935 (18,399)
Income tax (provision)
benefit.................... -- -- 336 -- (336)(g) --
-------- ------- -------- -------- ------- -----------
Income (loss) from
continuing operations
before minority
interest............... (17,207) (4,610) (7,402) (779) 11,599 (18,399)
Minority interest............ 2,863 2,587 12 (12) (4,020)(h) 1,430(h)
-------- ------- -------- -------- ------- -----------
Income (loss) from
continuing
operations............. $(14,344) $(2,023) $ (7,390) $ (791) $ 7,579 $ (16,969)
======== ======= ======== ======== ======= ===========
Basic and diluted loss from
continuing operations per
share: $ (0.98)(i)
===========
Weighted average number of
shares used in the
calculation of basic and
diluted loss from
continuing operations per
share: 17,271,770(i)
===========
</TABLE>
The accompanying notes to pro forma condensed consolidated statement of
operations are an integral part of this statement.
38
<PAGE> 45
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(a) Amounts represent the elimination of revenues and expenses associated with
operations of Pioneer that were not acquired by Strategic Timber II. These
operations primarily include Pioneer's timber conversion facilities and
aircraft operations.
Certain reclassifications have been made to the historical statements of
operations of Strategic Timber and Strategic Timber II to conform with the
presentation of the historical Pioneer statement of operations.
(b) For purposes of this Pro Forma Condensed Consolidated Statement of
Operations, the following proceeds from this offering, and uses of these
proceeds, are assumed:
<TABLE>
<S> <C> <C>
Proceeds from offering:
Shares to be issued....................................... 16,600,000
Offering price per share.................................. $ 20
-----------
Gross proceeds from this offering......................... $332,000
Borrowings under new credit facility...................... 270,469(e)
--------
Total proceeds.................................... $602,469
========
Uses of proceeds:
Repayment of Strategic Timber II debt and accrued interest
thereon................................................ $ 294,845(e)
Debt financing costs on new credit facility............... 3,320(e)
Early termination payments on Strategic Timber II bridge
loan................................................... 3,300(e)
Termination of Strategic Timber II interest rate swaps.... 4,763(e)
Partial redemption of minority interests.................. 47,000
Fees and expenses associated with this offering........... 25,607 378,835
----------- --------
Excess cash proceeds................................. $223,634
========
</TABLE>
Excess cash proceeds arise due to certain assumptions regarding the timing
of this offering and the purchase of the Louisiana property. Specifically,
the accompanying Pro Forma Condensed Consolidated Statement of Operations
assumes that the formation transactions and this offering occur on January
1, 1998, but does not reflect the historical financial results of the
Louisiana property until after our acquisition of these timberlands on
April 27, 1998. We have assumed the following related to these excess cash
proceeds:
- For the period from January 1, 1998 until our acquisition of the
Louisiana property on April 27, 1998, we utilized $70,469 of these excess
proceeds to pay down the revolving line of credit portion of the new
credit facility initially borrowed in connection with this offering. See
note (e).
- On April 27, 1998, we then re-borrowed the $70,469 in excess proceeds and
used this amount, together with the remaining excess cash proceeds, to
purchase the Louisiana property.
- We have not recognized any interest income on any excess proceeds as we
do not expect to maintain this level of cash after this offering.
(c) Represents adjustment to reflect additional depletion expense after
stepping-up the basis in the timberlands we acquired from Pioneer,
resulting from the application of purchase accounting.
(d) Amount represents depreciation expense on property and equipment acquired
from Pioneer. This property and equipment will be depreciated over periods
ranging from three to five years.
(e) In conjunction with this offering, we plan to repay all of our outstanding
debt and any accrued interest associated with this debt. Concurrently, we
plan to enter into a new credit facility that provides for a
39
<PAGE> 46
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
$200,000 term loan and a revolving line of credit of up to $175,000. We
expect to immediately borrow $270,469 on this facility. Of the amount
expected to be drawn under this facility, approximately $200,000 will
relate to the term loan bearing interest at a variable rate expected to
initially approximate 7.2% and which will be payable in quarterly
installments through May 15, 2004. The remaining $70,469 will relate to a
revolving line of credit bearing interest at a variable rate also expected
to initially approximate 7.2% and maturing on May 15, 2004. Unused
commitment fees on the new credit facility will approximate 0.5%.
Based on expected levels of debt to be outstanding under this facility,
expected interest costs would be $18,483 for the year ended December 31,
1998. The adjustment shown on the accompanying Pro Forma Condensed
Consolidated Statement of Operations is calculated as follows:
<TABLE>
<S> <C>
Expected interest expense................................... $ 18,483
Less: previously recognized interest expense of:
Strategic Timber..................................... (13,781)
Strategic Timber II.................................. (5,657)
Pioneer.............................................. (12,505)
--------
$(13,460)
========
</TABLE>
An increase in the interest rates of 1/8% would yield additional annual
interest expense of approximately $338, based on the level of debt we
expect to be outstanding after this offering.
We expect to incur approximately $3,320 in debt issuance costs associated
with the new credit facility. Such costs will be amortized over a period of
five years. The adjustment shown on the accompanying Pro Forma Condensed
Consolidated Statement of Operations is calculated as follows:
<TABLE>
<S> <C>
Pro forma amortization expense.............................. $ 664
Less: previously recognized amortization expense of:
Strategic Timber..................................... (1,743)
Strategic Timber II.................................. (499)
Pioneer.............................................. (177)
-------
$(1,755)
=======
</TABLE>
As a result of the termination of our existing debt and interest rate
swaps, we will record an extraordinary loss from the early extinguishment
of debt. This loss would approximate $19,150 using historical amounts
reported in the Strategic Timber and Strategic Timber II consolidated
financial statements as of December 31, 1998. The actual amount of this
loss may differ from this estimate. This loss has not been reflected in the
Pro Forma Condensed Consolidated Statement of Operations, which shows only
pro forma income (loss) from continuing operations.
(f) Historical selling, general and administrative expenses have not been
adjusted to reflect the reductions in such costs anticipated by management
after this offering. Such reductions are anticipated primarily due to:
- expected cost savings from the reduction of personnel due to the
consolidation of all current operations, net of additional costs
associated with being a public company and
- changes in the way we plan to operate our Pacific Northwest properties.
(g) Represents the elimination of all historical taxes recorded by Pioneer
because we expect to qualify as a REIT and, thus, we expect to be subject
only to nominal state taxes.
40
<PAGE> 47
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(h) Represents the minority interest charges, assuming minority ownership in
Strategic Timber Partners of 18.1% after the formation transactions and
this offering. Amount is calculated as follows:
<TABLE>
<S> <C>
Loss from continuing operations before minority interest
expense................................................... (18,399)
Multiply by: minority interest percentage................... 18.1%
--------
Minority interest before dividends.......................... 3,337
Less: Dividend on minority interests........................ (1,907)
--------
Minority interest........................................... $ 1,430
========
</TABLE>
One of the minority unitholders, Mach One, will be entitled to a dividend
of $1,907 based upon contractual commitments with the Company. Mach One has
elected to receive 100,110 partnership units in lieu of cash payment of
this dividend.
(i) For the year ended December 31, 1998, basic loss from continuing operations
per share is calculated by dividing loss from continuing operations by the
weighted average shares outstanding during the period. It is assumed that
17,271,770 shares were outstanding during the entire reporting period.
Diluted loss from continuing operations per share is calculated by dividing
income from continuing operations by the weighted average shares
outstanding during the period plus the weighted average of potentially
dilutive securities outstanding during the period. Approximately 4,966,205
partnership units, which are convertible on a share for share basis into
shares of our common stock, have not been included in this calculation
since these potential shares are antidilutive in periods in which a loss
from continuing operations is reported. Diluted loss from continuing
operations per share also does not include the effects of stock options to
be granted under the 1999 Incentive Plan, as such stock options will be
granted on the date of this offering with an exercise price equal to the
offering price.
41
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
This section contains management's discussion and analysis of the
historical financial condition and results of operations of Strategic Timber,
Strategic Timber II and Pioneer, the predecessor to Strategic Timber II. The
following also presents our pro forma financial condition and results of
operations after giving effect to the formation transactions and this offering.
See "Structure and Formation of Strategic Timber."
The discussions of historical results are based on the historical financial
statements of
- Strategic Timber as of and for the period from inception (April 21, 1998)
to December 31, 1998,
- Strategic Timber II as of and for the period from inception (October 9,
1998) to December 31, 1998 and
- Pioneer as of and for the years ended December 31, 1996 and 1997 and for
the period from January 1, 1998 to October 8, 1998,
and should be read in conjunction with those financial statements contained
elsewhere in this prospectus. Discussions of our plan of operation are based, in
part, on information contained in "Pro Forma Condensed Consolidated Financial
Information."
The following discussion first addresses our expected operating plan after
giving effect to the formation transactions and this offering. Following this
section are analyses of the historical operating results of Strategic Timber,
Strategic Timber II and Pioneer, and discussions of our historical and
anticipated liquidity and capital resources, commitments and contingencies, Year
2000 compliance plans and market risks.
PLAN OF OPERATION
GENERAL
The following discussion is based, in part, on the pro forma information
contained in "Pro Forma Condensed Consolidated Financial Information." We
believe that the pro forma financial information, as presented, will not be
comparable to the results of operations and cash flows that we will derive in
1999 and beyond. The primary reason for this belief is that the pro forma
results for the Louisiana property and certain California timberlands, which
together represent the majority of our merchantable timber inventory, include
only partial years of operations at actual harvest levels that are well below
expected future levels.
The pro forma condensed consolidated statements of operations include
results of operations of the Louisiana property only for the period from its
acquisition on April 27, 1998 to December 31, 1998. The results of operations
prior to April 27, 1998 are not included in the Pro Forma Condensed Consolidated
Statement of Operations due to a lack of continuity of operations and a
fundamental change in the management of the Louisiana property after
acquisition. Because the Louisiana property had not been operated as a
commercial forest prior to our acquisition of these timberlands, the age of the
timber located on the Louisiana property is disproportionately weighted to
over-mature timber that has remained standing beyond its economic rotation
age -- that is, the age at which the timber should be optimally harvested. In
the southern United States, economic rotation age varies by species but
generally approximates 30 to 32 years. Starting in 1999, we will actively focus
on the sale of this over-mature timber. Accordingly, we expect harvest volumes
and revenues to be much greater than historical amounts.
Furthermore, from the date of the acquisition of the Louisiana property
through December 31, 1998, we conducted only limited operations on the Louisiana
property, while preparing the property for active commercial timber operations.
These preparations included conducting a complete timber inventory, detailed
mapping, preparation of timber sales plans and initiation of commercial
marketing activities. We
42
<PAGE> 49
incurred significant one-time preparatory expenses totaling approximately
$140,000 prior to the commencement of the commercial operation of the Louisiana
property that will not occur in future periods. These expenses have been
recorded as a component of general and administrative expenses in the historical
financial statements of Strategic Timber.
The pro forma condensed consolidated financial statements also exclude the
historical financial results of certain California timberlands prior to the date
of acquisition by Pioneer in July 1998 due to a lack of continuity of
operations. These California timberlands, known as the Coastal forest, were
recently managed in a substantially different manner by the prior owners than we
expect to manage them. Before Pioneer acquired the Coastal forest, the previous
owners held these timberlands primarily to seek capital appreciation. Harvests
were conducted at relatively low levels in recent years with the objectives of
thinning and extraction of hardwood species from softwood tracts. Also, Pioneer
postponed planned harvesting of the Coastal forest in anticipation of the
eventual sale of Pioneer to Strategic Timber II.
In May 1998, shortly before Pioneer's acquisition of the Coastal forest,
the prior owners received approval of an "Option A" timber management plan for
the Coastal forest from the California Department of Forestry and Fire
Protection. The Option A timber management plan was developed pursuant to a
California regulatory process that establishes long-term growth and sustainable
harvest for a specified forest. See "Business and Properties -- Federal and
State Regulations -- State Forestry Regulations." This Option A plan establishes
a decade-by-decade harvesting model for the Coastal forest. Under the Option A
plan, we must file timber harvest plans with respect to specific tracts from
which we propose to sell timber for harvest with the California Department of
Forestry and Fire Protection. The California Department reviews these timber
harvest plans for compliance with our Option A plan, and for other matters such
as erosion control and effects on wildlife, in connection with its approval
process. We intend to manage the property in accordance with the Option A plan.
The Option A plan contemplates the harvest of up to approximately 40 million
board feet of timber from the Coastal forest per year, on average, for the
initial decade of the Option A plan. For the next five years, we intend to sell
less timber from the Coastal forest than the Option A plan contemplates. The
prior owner of this forest did not harvest these timberlands for commercial
purposes to the extent contemplated by the Option A plan. Thus, we expect to
increase substantially harvest volumes and revenues from the Coastal forest as
compared with recent historical results. See "Business and Properties -- Initial
Timberland Properties -- The California Timberlands" and "-- Federal and State
Regulations -- State Forestry Regulations."
REVENUES
In 1999 and beyond, we intend to execute a timber sales plan that will
enable us to generate an increasing revenue stream. This plan primarily will
involve the harvesting of mature timber on our timberlands. For example, timber
on the Louisiana property is weighted to over-mature timber as the prior owners
allowed the timber to remain standing beyond its economic rotation age.
Similarly, components of the Commander forest in California and the Washington
property consist of mature, high-value timber that is at its optimal harvest
age. Our timber sales plan for these tracts calls for removing this low-growth
timber and replanting with seedlings selected for superior genetic
characteristics to increase growth rates. While this plan will involve immediate
harvests of over-mature tracts, we believe that it will allow us to develop a
sustained yield forestry management approach on a long-term basis. In selecting
tracts to be sold for harvesting in a given year, we will evaluate our holdings
on an overall basis, taking into account the relative maturity levels and
current productivity of tracts available for harvest, the strength of local
markets and the desirability of reforesting a particular area so that we can
increase the growth rate of our timber and better balance the age class
distribution of our holdings. Our timber sales plan will be modified
periodically to adjust for changes in growth patterns, future acquisitions of
timberlands, unforeseen events and general economic conditions.
We enter into cutting contracts under which the buyer, at its expense, will
be required to cut and haul the purchased timber to its own conversion facility,
or to another purchaser to whom it is reselling. Our contracts extend for up to
six years, and we may enter in longer-term contracts in the future. Contracts
with terms of two or more years provide for price adjustments at least annually
and typically require the buyer to cut minimum amounts of timber each year.
Within these limits, the buyer has discretion as to
43
<PAGE> 50
when it harvests our timber. We recognize revenue at the time the buyer cuts and
takes title to the timber. Therefore, the buyer's discretion as to the timing of
its timber harvest affects our recognition of revenue.
In addition to cutting contracts, we also expect to derive revenues from
several other sources. We will grant hunting, grazing, camping and other rights
of access to approved hunting clubs and individuals. These hunting leases and
other rights will both produce revenues and provide us with assistance in
maintaining and protecting our properties. We expect that approximately $1.0
million of our 1999 revenues will be derived from the issuance of hunting,
grazing, camping and other rights. From time to time, we expect to make
incidental sales of portions of our properties that have a higher and better use
than the long-term production of timber. See "Business and Properties."
EXPENSES
Our primary operating expense will be depletion, which is a non-cash
expense relating to the cost of timber harvested. Depletion will be calculated
based on the capitalized cost of the timber harvested, including cost of
acquisition and any silvicultural activities, divided by available timber volume
based on timber surveys. Timber surveys are expected to be performed annually to
assess available merchantable timber volumes. Accordingly, depletion rates will
be adjusted at that time and applied prospectively. Based on our projected
harvest levels, as well as current depletion rates, our expected 1999 depletion
expense will be approximately $48.8 million.
We expect that 1999 selling, general and administrative costs will be
approximately one-third lower than pro forma selling, general and administrative
costs for the year ended December 31, 1998. This decline is attributable to the
anticipated cost savings from the reduction of personnel due to the
consolidation of all current operations, net of additional costs associated with
being a public company, as well as changes in the way we plan to operate the
Pacific Northwest properties. In the past, Pioneer focused on log sales from the
Pacific Northwest properties. Pioneer was responsible for cutting timber and
converting it into logs prior to sale. We plan to focus our sales efforts on
sales of standing timber, where customers will be responsible for cutting and
hauling timber. This change in business strategy will mitigate or eliminate
previously incurred administrative costs associated with maintaining sorting
areas, log yards and other facilities to convert timber into logs.
SEASONALITY
Rain in winter and our fire prevention measures in spring and summer limit
timber harvesting on the Louisiana property. Similarly, harvesting on our
timberlands in the Pacific Northwest has been interrupted for periods during the
winter and spring due to snow and melting snow, and occasionally in the late
summer due to our fire prevention measures. Accordingly, our results of
operations may fluctuate on a quarterly basis due to the seasonal nature of
harvesting activities, as follows:
<TABLE>
<CAPTION>
QUARTER EFFECT
------- ------
<S> <C>
First/Fourth Rain in the southeast and snow in the northwest could affect
all harvesting activities.
Second/Third Our fire prevention measures limit harvesting on our
Louisiana property and could limit harvesting on our
Pacific Northwest properties.
</TABLE>
EFFECTS OF INFLATION
Prices for our timber will be subject to cyclical fluctuations due to
market or other economic conditions, including the level of construction and
remodeling activity. Although timber prices in the U.S. have historically risen
faster than inflation over the long-term, these prices generally do not directly
follow short-term inflationary trends. Costs of forest operations and general
and administrative expenses do tend to reflect inflationary trends.
RECENT DEVELOPMENTS
To date, we have entered into contracts providing for aggregate 1999 timber
harvests valued at approximately $17.5 million. These include new contracts on
our Louisiana property with six separate buyers -- Boise Cascade Corporation,
Heath Timber Company, Inc., Hunt Forest Products, Inc., Louisiana-Pacific Corp.,
Nash-Co. Industries Forest Products, Inc. and Temple-Inland Inc. -- and provide
44
<PAGE> 51
for harvests of up to 300,000 tons of timber in 1999. The 1999 harvests also
include sales of 17.4 million board feet from our Commander forest to
Sierra-Pacific Industries, Inc.
We expect to sell more timber in the Pacific Northwest as the effects of
winter weather subside.
HISTORICAL RESULTS OF OPERATIONS
The following discussion focuses on the historical operating results of
Strategic Timber, Strategic Timber II and Strategic Timber II's predecessor,
Pioneer. This discussion is historical in nature and may not be representative
of how we plan to manage our operations after this offering and the formation
transactions. See "-- Overview," "-- Plan of Operation" and "Structure and
Formation of Strategic Timber."
STRATEGIC TIMBER TRUST, INC.
Strategic Timber and Strategic Timber Partners were formed in April 1998 to
acquire the Louisiana property, which now consists of approximately 82,000 acres
of timberland. Louisiana Timber contributed to Strategic Timber Partners a
contract to acquire the Louisiana property in exchange for a 19.6% limited
partnership interest valued at $50.0 million. This value represented the
difference between the fair value of the Louisiana property and the purchase
price under the contract contributed by Louisiana Timber. Strategic Timber
retained a 79.4% limited partnership interest in Strategic Timber Partners and
Strategic Timber Operating Co., Strategic Timber's wholly owned subsidiary,
retained the remaining 1.0% general partner interest. The partnership then
purchased the Louisiana property on April 27, 1998 for $205.0 million in cash.
The partnership funded the purchase price of the Louisiana property and related
transaction costs by borrowing $125.8 million under a $215.0 million bank
revolving credit facility, and with a cash contribution of $85.0 million by
Strategic Timber. Strategic Timber borrowed these funds under a bank bridge
loan.
The historical financial statements of Strategic Timber include the results
of operations for the period from inception, April 21, 1998, to December 31,
1998. Since the acquisition of the Louisiana property, Strategic Timber has
deferred active harvesting on these timberlands to prepare for full-scale
commercial operations. During this time, Strategic Timber conducted a detailed
timber inventory, mapped its property, prepared timber sales plans and initiated
marketing activities for timber to be sold from the property. The operating
results reflect only limited harvesting operations, including the sale of
salvage timber and thinning. Expenses incurred relate primarily to interest
expense on bank debt, amortization of deferred financing costs and the
preparation of the property for active commercial timber operations.
Revenues. During the reporting period, Strategic Timber sold salvage timber
and property for approximately $323,000. In addition, Strategic Timber
recognized approximately $184,000 of revenues related to hunting, grazing and
farming leases issued on the Louisiana property.
Expenses. Cost of timber sold of approximately $403,000 represents
depletion on timber harvested. The calculation of depletion is based on the
capitalized cost of the harvested timber, including cost of acquisition and any
silvicultural activities, divided by available timber volume based on timber
surveys. Timber surveys are expected to be performed annually to assess
available merchantable timber volumes. Accordingly, depletion rates will be
adjusted at that time and applied prospectively.
Amortization of deferred financing costs of approximately $1.7 million
represents the amortization of costs incurred to obtain financing used for our
acquisition and working capital requirements. These costs are being amortized
over the terms of the underlying debt, ranging from one to five years.
General and administrative expenses of approximately $1.8 million are
composed primarily of consulting and management fees for managing and tracking
available timber and corporate salaries. These expenses also include one-time
costs totaling $140,000 associated with preparing the Louisiana property for
active commercial timber operations. Such preparations included the conducting
of a complete timber inventory, detailed mapping, preparation of harvest plans
and implementation of commercial marketing activities.
45
<PAGE> 52
Interest expense of approximately $13.8 million represents interest costs
on Strategic Timber's existing debt, net of the effects of an interest rate swap
used to hedge certain exposures to variable interest rates. See "-- Market
Risk."
Minority interest of approximately $2.9 million is the share of the
operating partnership's losses attributable to the minority unitholders of the
operating partnership.
Strategic Timber will elect to be treated as a REIT under provisions of the
Internal Revenue Code beginning with the tax year ended December 31, 1998. As a
result, Strategic Timber is not subject to federal income taxes on distributed
income but, instead, Strategic Timber's shareholders are taxed. No benefit for
income taxes has been provided on the loss since inception, as the benefit is
not currently "more likely than not" to be realized by Strategic Timber due to
its limited operating history. Strategic Timber's net operating loss is
approximately $15.8 million at December 31, 1998.
STRATEGIC TIMBER TRUST II, LLC
Our initial shareholders formed Strategic Timber II in September 1998 to
acquire Pioneer, which holds approximately 366,000 acres of timberland in the
Pacific Northwest. Strategic Timber II acquired all of the membership interests
in Pioneer from its members on October 9, 1998, in exchange for $35.0 million in
cash and a 59.1% interest in Strategic Timber Partners II, which we valued at
$65.0 million. Strategic Timber Partners II funded the cash portion of the
purchase price for Pioneer and related transaction costs with a cash
contribution of $35.0 million by Strategic Timber Two Operating Co. in exchange
for a 31.8% interest in Strategic Timber Partners II, and a cash contribution of
$10.0 million by Mach One, in exchange for a 9.1% interest in Strategic Timber
Partners II. To fund Strategic Timber Two Operating Co.'s contribution,
Strategic Timber II borrowed $35.0 million under a bank bridge loan. In
connection with the acquisition, Pioneer refinanced its existing bank debt,
leaving approximately $255.0 million outstanding under its credit facility.
Strategic Timber II accounted for this acquisition under the purchase
method of accounting. The following summarizes the fair value of interests held
by the former members of Pioneer and Mach One immediately following the
application of purchase accounting:
<TABLE>
<CAPTION>
FAIR VALUE FAIR VALUE
OF INTEREST NUMBER OF UNITS PER UNIT
----------- --------------- ----------
<S> <C> <C> <C>
Former Members of Pioneer........................ $65,000,000 5,909 $11,000
Mach One......................................... 10,000,000 909 11,000
</TABLE>
The historical financial statements of Strategic Timber II include the
results of operations for the period from inception, October 9, 1998, to
December 31, 1998. The operating results reflect only limited harvesting
activities, as Strategic Timber II primarily focused on transitioning systems
and personnel in the months immediately following the acquisition.
Revenues. During the reporting period, Strategic Timber II recorded
revenues of approximately $9.0 million. Approximately $5.6 million of this
amount relates to revenues recognized under a timber deed with Kinzua Resources.
See "-- Commitments and Contingencies." The remaining $3.4 million represents
sales of timber from our Commander forest and our Oregon and Washington
properties. Excluding amounts harvested under the timber deed, approximately
11.6 million board feet were harvested during the period from inception to
December 31, 1998.
Expenses. Cost of timber sold of approximately $5.7 million primarily
represents depletion on timber harvested. The calculation of depletion is based
on the capitalized cost of the harvested timber, including cost of acquisition
and any silvicultural activities, divided by available timber volume based on
timber surveys. Timber surveys are expected to be performed annually to assess
available merchantable timber volumes. Accordingly, depletion rates will be
adjusted at that time and applied prospectively.
Amortization of deferred financing costs of approximately $499,000
represent the amortization of costs incurred to obtain financing used for our
acquisition and working capital requirements. These costs are being amortized
over the terms of the underlying debt, ranging from one to five years.
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<PAGE> 53
General and administrative expenses of approximately $1.7 million are
composed primarily of salaries, consulting fees and reimbursement of expenses
incurred by an affiliate, Strategic Timber, on Strategic Timber II's behalf.
Consulting fees totaling approximately $261,000 represent fees paid to outside
vendors for managing and tracking available timber. Reimbursed costs include
Strategic Timber II's portion of certain shared expenses, such as rent,
utilities and insurance, which initially were paid by Strategic Timber.
Reimbursed costs also represent allocations of Strategic Timber salaries and
other expenses for management resources dedicated to the operations of Strategic
Timber II. During the period from inception to December 31, 1998, Strategic
Timber II recognized expenses of approximately $624,000 for reimbursed costs.
Interest expense of approximately $5.7 million represents interest costs on
Strategic Timber II's existing debt, net of the effect of three interest rate
swaps used to hedge certain exposures to variable interest rates. See "-- Market
Risk."
Minority interest of approximately $2.6 million is the share of the
operating partnership's losses attributable to the minority unitholders of the
operating partnership.
PIONEER RESOURCES, LLC
The historical financial statements of Pioneer are presented as Pioneer is
the predecessor to Strategic Timber II. In addition to the Pacific Northwest
properties, these financial statements include the operating results of
Pioneer's timber conversion facilities and aircraft operations, neither of which
were acquired by Strategic Timber II. See "Pro Forma Condensed Consolidated
Financial Information" for a discussion of pro forma adjustments required to be
made to the historical Pioneer financial statements to reflect the results of
operations that Strategic Timber II acquired.
Introduction. The predecessor to Pioneer, Old Pioneer, was originally
formed in 1994. Pioneer and Old Pioneer, directly or through affiliated
companies, have completed a number of significant timberland and other asset
acquisitions since inception. In addition, Pioneer has engaged, on a small
scale, in the sale or disposal of timberlands not integral to its operations.
These acquisitions are described in more detail below and in the notes to the
financial statements of Pioneer, which are included elsewhere in this
prospectus.
Each acquisition by Pioneer was accounted for using the purchase method of
accounting. Accordingly, the historical financial and operating results vary
significantly as a result of the inclusion in the later periods of the effects
of these acquisitions and, therefore, are not necessarily comparable and are not
indicative of future results of operations. The following table identifies
Pioneer's significant acquisitions. Information regarding acreage and
merchantable timber are given as of the date of acquisition.
<TABLE>
<CAPTION>
MERCHANTABLE
ACQUISITION ACREAGE TIMBER SELLER DATE CONSIDERATION
- ----------- ------- ------------ ----------------- -------------- -------------
(BOARD FEET
IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Kinzua (East Oregon) 175,525 781.7 Kinzua April 1994 $130.0
Lane Plywood (West Oregon) 3,130 31.9 Lane Plywood May 1996 10.0
Pilot Rock (East Oregon) 130,207 188.6 Louisiana Pacific June 1996 34.0
Commander (California) 43,313 313.7 Louisiana Pacific September 1997 25.0
Skelly Panther and Swamp Creek
(West Oregon) 1,194 14.2 Weyerhaeuser December 1997 7.4
Riffe Lake (West Washington) 4,899 63.3 Weyerhaeuser February 1998 15.1
Aloha (West Washington) 5,922 70.5 Weyerhaeuser May 1998 17.0
Coastal forest (California) 79,026 839.2 Coastal Forest July 1998 130.0
</TABLE>
Period From January 1, 1998 to October 8, 1998
Effective July 2, 1998, Pioneer completed its acquisition of the Longview
and Willits Woods timberlands in California. Together, these timberlands are
referred to as the Coastal forest. Prior to this
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<PAGE> 54
acquisition, the operations of Pioneer consisted primarily of timberlands and
sawmills in Oregon, California and Washington. The Coastal forest acquisition,
as with all of Pioneer's other acquisitions, was accounted for under the
purchase method of accounting.
Revenues. Revenues for the period ended October 8, 1998 were $74.2 million.
Approximately 61% of revenues were derived from lumber and by-product sales,
which due to a backlog of delayed sales deliveries in the second half of 1997,
were shipped in the first six months of 1998.
The volume of lumber sold during the period was 112.2 million board feet.
The Heppner sawmill increased volume to 63.9 million board feet due to capital
improvement projects and productivity gains resulting from an increased work
shift that was instituted in the later half of 1997. The Pilot Rock sawmill
increased volume to 48.3 million board feet due to productivity gains from
capital improvement projects implemented in the later half of 1997.
Additionally, sales volumes for both mills were affected by the delay in sales
deliveries in the latter half of 1997 discussed above.
Pioneer's average lumber prices for the period from January 1, 1998 to
October 8, 1998 decreased by 26% from the comparable period of 1997 due to the
industry-wide price declines associated with the Asian export market. Pioneer's
average lumber prices were consistent with the lumber market during this time.
Revenues from the sale of logs totaled $23.1 million on sales volume of 42
million board feet. Revenues from log sales, on an annualized basis, were less
than 1997 levels due to a general decrease in the market price of logs
compounded with a decrease in the volume of Asian export quality logs harvested
from the Western Oregon timberlands. Pioneer's management made the decision in
1997 to harvest the majority of the Western Oregon timberlands acquired in May
1996 from Lane Plywood in anticipation of a declining export log market.
Boise Cascade reduced harvesting on its timber contracts during the period
ended October 8, 1998 over prior period levels. The Boise Cascade contracts
generated revenues of $2.3 million for the period ended October 8, 1998 and
$16.2 million for the nine months ended September 30, 1997.
Revenues from the sale of non-strategic parcels of timberland and other
property sold during the period was $5.9 million. During this period, Pioneer's
land management staff actively sought higher and better uses for strategic
parcels of property.
Expenses. Excluding timber and property sales and depletion, depreciation
and amortization, cost of products sold was 67% of net revenues for the period
ended October 8, 1998. Annualized gross margin during the period, in dollars and
as a percentage of sales, declined from 1997 levels due to a variety of factors,
the most important of which was the decrease in lumber prices during the period.
For the period ended October 8, 1998, Pioneer's lumber mills experienced an
operating loss of $1.2 million compared to an operating profit of $5.4 million
in the nine month period ended September 30, 1997.
Depletion, depreciation and amortization was $13.0 million for the period
ended October 8, 1998. Depletion, depreciation and amortization, on an
annualized basis, declined from 1997 levels due to a small overall decrease in
logs harvested and a substantial decrease in the harvest from the more highly
valued Western Oregon timberlands acquired from Lane Plywood. In 1998, Pioneer
did not harvest any volumes from these timberlands, which have higher depletion
rates than those of its other timberlands.
Selling, general, and administrative expenses were $7.1 million for the
period ended October 8, 1998. Selling general and administrative expenses
primarily consisted of salary expense and consulting and legal expenses
associated with Pioneer's acquisitions and expanded operations.
During the reporting period, Pioneer recorded non-cash charges of
approximately $1.3 million related to write-downs of assets to estimated
realizable value. Pioneer wrote down the value of one of its real estate
investments by $583,000, based on Pioneer's current assessment of the fair value
of this property. This investment was not among the properties purchased by
Strategic Timber II as part of its acquisition of Pioneer on October 9, 1998. In
addition, Pioneer wrote down approximately $700,000 of inventory at its Lane
Plywood facility to the lower of cost or market. This charge was recorded as a
component of the loss on the disposal on this discontinued operation.
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<PAGE> 55
Interest expense during the period totaled $12.5 million, resulting from
increased debt associated with Pioneer's timberland acquisitions.
Other expense consisted of $780,000 in expenses during the period ended
October 8, 1998. The majority of this amount relates to land and property
Pioneer donated to a trust for public lands.
Income taxes relate to Lane Plywood, the only taxable entity within the
combined group, and are not material to the combined results of operations.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues for 1997 increased by 58% compared to 1996, from $62.5
million to $98.9 million. Revenues from the sale of lumber and by-products
increased by 46% from $36.0 million to $52.6 million. These increases are due
primarily to a full year of operations for the Pilot Rock lumber mill. The Pilot
Rock lumber mill operations which Pioneer acquired from Louisiana Pacific in
June 1996, generated revenues of $9.8 million and $23.8 million respectively,
for the years ended December 31, 1996 and 1997.
The volume of lumber sold increased 49% from 71 million board feet to 106
million board feet. This increase in sales volume was due to the full year of
operations for the Pilot Rock sawmill facility that had volumes of 20 million
board feet in 1996 and 50 million board feet in 1997, respectively. The Heppner
sawmill also increased volume from 51 million board feet in 1996 to 56 million
board feet in 1997. The increased volumes are due to gains achieved from capital
improvement projects and productivity gains resulting from an increased work
shift that was instituted in August 1997.
Pioneer's average lumber prices remained approximately the same for both
1996 and 1997, and were consistent with the lumber market during this time.
There was an improvement in lumber prices starting in the first part of 1996
which peaked in the first quarter of 1997. By year-end 1997, prices had declined
to comparable levels of those at the beginning of 1996.
Revenues from the sale of logs increased by 53% from $25.9 million to $39.5
million. The volume of logs sold increased from 56 million board feet in 1996 to
83 million board feet in 1997. The increased volume was a result of Pioneer's
decision to increase contracted harvesting with Boise Cascade and to increase
harvest volumes of export quality logs. The Boise Cascade contracts generated
volumes of 32 million board feet in 1996 and 65 million board feet in 1997.
Pioneer decided to increase harvesting on the Western Oregon timberlands
acquired in May 1996 from Lane Plywood in anticipation of a declining export log
market. The Western Oregon timberland sales volumes were 9 million board feet in
1996 and 18 million board feet in 1997. Pioneer's overall average price of logs
sold increased during this period due to an increased mix of the higher valued
export quality logs. The export quality logs had an average price decrease of
16% during this period, which was consistent with industry-wide decreases in log
prices.
The Boise Cascade contracts generated revenues of $12.3 million and $26.6
million, respectively, for the years ended December 31, 1996 and 1997. The
Western Oregon timberlands that Pioneer acquired from Lane Plywood generated
revenues of $7.3 million and $12.3 million, respectively, for the years ended
December 31, 1996 and 1997.
Revenues from sales of non-strategic parcels of timberland and other
property sold during the period increased significantly from $0.6 million in
1996 to $6.8 million in 1997. The increased 1997 revenues were attributed to
Pioneer's staffing addition of an experienced land management group that was put
in place in late 1996. During 1997, the Company sold a total of 6,222 acres in
approximately 20 separate transactions.
Expenses. Excluding timberland and other property sales and depletion,
depreciation and amortization, cost of products sold remained relatively
consistent at 42% of net revenues for 1996 and 43% of net revenues in 1997. Both
the Pilot Rock and Heppner lumber mills maintained comparable operating margins
for both 1996 and 1997.
Depletion, depreciation and amortization increased 64% from $15.4 million
for 1996 to $25.3 million in 1997 due to several factors affecting depletion.
First, Pioneer harvested 19 million board feet more
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<PAGE> 56
timber in 1997 than in 1996. Second, Pioneer harvested 9 million board feet more
timber in 1997 than in 1996 from the Western Oregon timberlands that Pioneer
acquired from Lane Plywood. The depletion rate on these export quality
timberlands was more than that on the other timberlands. Depreciation and
amortization were generally consistent between these periods.
Selling, general and administrative expenses increased 137% from $3.1
million in 1996 to $7.4 million in 1997. The increase in selling, general and
administrative expenses was due to salary expenses associated with staff
increases and additional consulting and legal expenses associated with Pioneer's
expanded operations.
Interest expense increased 44% from $6.1 million in 1996 to $8.7 million in
1997. Most of this increase resulted from the increased debt associated with the
1997 timberland acquisitions.
Other income and expense consisted of $0.5 million of income in 1997. This
income consisted mainly of the gain associated with the sale of an aircraft.
Income taxes are related to Lane Plywood, the only taxable entity within
the combined group, and are not material to the combined results of operations.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL
Strategic Timber has financed its operations through commercial loans. At
March 31, 1999, Strategic Timber had borrowings under a bridge loan of $85.0
million. At March 31, 1999, Strategic Timber Partners had borrowings under its
revolving credit facility of approximately $139.3 million. The Strategic Timber
bridge loan bears interest at a variable rate based on LIBOR plus an applicable
margin (9.00% as of March 31, 1999) and matures on October 27, 1999. The maximum
borrowing allowed under the operating partnership credit facility is $215.0
million, subject to a borrowing base calculation described in the credit
agreement. The borrowing base is based on the value of merchantable timber on
the Louisiana property, as estimated by Strategic Timber's lenders. The
operating partnership credit facility bears interest at a variable rate based on
LIBOR plus an applicable margin (7.50% as of March 31, 1999) and terminates on
April 25, 2003.
Strategic Timber II has financed its acquisition of the Pacific Northwest
properties by issuing $290.0 million in debt instruments. At March 31, 1999,
Strategic Timber II had borrowings under the Strategic Timber II bridge loan in
the amount of $35.0 million, and under the Pioneer credit facility, which
consists of a term loan of $200.0 million and a revolving credit facility of
$53.0 million. The Strategic Timber II bridge loan bears interest at a fixed
rate of 9.06% and matures on October 27, 1999. The term loan bears interest at
adjusted LIBOR plus an applicable margin (7.57% at March 31, 1999) and matures
on September 30, 2003. Term loan payments must be made in quarterly installments
and will commence on December 31, 1999. The maximum borrowing allowed under the
revolving credit facility is $70.0 million, of which approximately $35.0 million
can be used for letters of credit. A portion of the revolving credit facility
bears interest at LIBOR plus an applicable margin (7.57% at March 31, 1999),
while the remaining portion bears interest at the base rate plus an applicable
margin (7.50% at March 31, 1999). The revolving credit facility terminates on
September 30, 2003.
Strategic Timber and Strategic Timber II are required to meet certain
financial and non-financial covenants under each of the debt instruments,
including restrictions on additional borrowings, the maintenance of financial
ratios and limitations on capital spending, investments, and asset sales. The
bridge loans generally prohibit Strategic Timber and Strategic Timber II from
making shareholder distributions while the loans are outstanding. At March 31,
1999, the companies were in compliance with all covenants and expect to remain
in compliance in the immediate future. All borrowings are secured by the
companies' interests in the operating partnerships, as well as the assets of
those partnerships.
Until the completion of the formation transactions and this offering,
Strategic Timber and Strategic Timber II expect to finance their on-going
operations with cash flows from harvesting activities on their
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<PAGE> 57
timberlands, as well as by additional borrowings under the Strategic Timber
Partners revolving credit facility and the revolving credit facility portion of
the Pioneer credit facility. After that time, we plan to extinguish all existing
debt using proceeds from this offering as well as funds from a new credit
facility.
We will be required to pay additional costs of approximately $3.3 million
in connection with our expected repayment in full of the existing debt
agreements. Additionally, assuming that the repayment occurs on or about May 15,
1999, we expect to recognize an extraordinary loss of approximately $13.6
million, before allocation to minority interests, associated with the
extinguishment of existing debt instruments prior to their maturity dates.
In connection with the formation transactions, we have the option to
terminate all existing interest rate swaps and to enter into replacement swap
agreements required by the new credit facility. We have elected to terminate the
existing swaps. Assuming the terminations had occurred on March 31, 1999, we
would have recognized a loss of approximately $4.5 million, before allocation to
minority interests, associated with the terminations.
NEW CREDIT FACILITY
In connection with this offering, we have entered into a five year $375.0
million credit facility with ABN AMRO Bank, N.V., NationsBank, N.A. and Societe
Generale, as agents on behalf of a syndicate of commercial banks and other
lending institutions.
The new credit facility, to close at the same time as this offering, will
include both a single-advance term loan of $200.0 million and a revolving line
of credit of $175.0 million. Assuming net proceeds from the initial public
offering of $306.4 million, we expect to borrow at the time of closing
approximately $66.8 million under the revolving line of credit and all $200.0
million of the term loan. Strategic Timber and Strategic Timber II will use this
credit facility to repay all existing debt, fund future acquisitions and provide
for ongoing working capital requirements.
The new credit facility will have a five-year term. No repayment of
principal will be required prior to maturity, though the percentage we may
borrow against merchantable timber will be reduced on each anniversary of the
facility closing. Both the term and revolving line of credit portions of the
facility, together with any related interest rate swap obligations, will be
secured by first liens on all of our assets, including all of our interests in
Strategic Timber Partners, Pioneer and Strategic Timber Operating Co.
The amount we will be able to borrow under the $175.0 million revolving
line of credit will be limited to agreed-upon percentages of a borrowing base.
The borrowing base is comprised of the value of merchantable timber and of
timber sale contracts containing terms approved by the lenders. Initially, we
may borrow up to the sum of 60% of independently valued merchantable timber and
80% of the amounts owed to us under eligible timber sale contracts, less amounts
outstanding under the term loan. At each anniversary of the closing of the
credit facility, the percentage that we may borrow against merchantable timber
will be reduced by 2%, so that during the final year of the five-year loan, we
will be able to borrow only 52% of the value of merchantable timber.
Interest rates under the new credit facility and a commitment fee on unused
portions of the revolving line of credit will be adjusted each quarter.
Adjustment will be based on the ratio of our total debt at the end of the
quarter to cash flows achieved in the four-quarter period concluding at the end
of the quarter. We will have the option to borrow on the basis of rates tied
either to LIBOR or a bank prime rate. Interest rates could vary under the
adjustment formulas between a margin of 175 and 300 basis points for advances
borrowed on a LIBOR-rate basis. Interest rates could vary between a margin of 25
and 150 basis points for advances borrowed on a prime rate basis. The unused
commitment fee could vary between 37.5 and 50 basis points, determined on an
annual basis. Interest and commitment fees will be paid quarterly.
Our operations will have to produce a minimum ratio of EBITDDA to interest
expense, measured at the end of each fiscal quarter for the prior twelve months.
The required minimum EBITDDA to interest ratio is 2.00 to 1 at the end of each
fiscal quarter through March 31, 2000, 2.25 to 1 at the end of each fiscal
quarter during the period commencing April 1, 2000 through June 30, 2000 and
increasing to 2.50 to
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<PAGE> 58
1 for each later fiscal-quarter end. We also must maintain a minimum ratio of
EBITDDA to the sum of expenditures for interest, shareholder distributions and
capital purchases, measured at the end of each fiscal quarter for the prior
twelve months. This ratio must exceed 1.00 to 1 at the end of each fiscal
quarter through June 30, 2000 and must exceed 1.25 to 1 at the end of later
fiscal quarters.
The new credit facility will require us to stay below a maximum ratio of
outstanding debt to EBITDDA generated during the prior twelve months. The
maximum ratio is 6.00 to 1 at the end of each fiscal quarter through June 30,
2000, 5.50 to 1 at the end of each fiscal quarter during the period commencing
July 1, 2000 through September 30, 2001 and is 5.00 to 1 for each later quarter.
We expect the provisions of the new credit facility to provide us with
significant operating flexibility. There will be no restriction on acquisitions
of timberlands within the United States, as long as the acquisitions do not
cause us to be out of compliance with borrowing base and financial covenant
terms contained in the credit agreement. Timberland acquisitions outside the
United States will require lender approval.
The new credit facility will allow us to make shareholder distributions, so
long as they do not cause us to default under other terms of the credit
agreement or cause us to be out of compliance with borrowing base terms
contained in the credit agreement. We will be able to make up to $5.0 million in
capital expenditures each year and execute capitalized leases with total
payments aggregating less than $1.0 million annually. We will be able to execute
operating leases with payments aggregating less than $1.0 million annually.
Borrowing limitations under the new credit facility will not be as
restrictive as those currently applicable to Strategic Timber and Strategic
Timber II. We will be able to borrow outside the new credit facility on an equal
basis, so long as these borrowings do not contain more restrictive covenants or
require principal repayment prior to the five-year maturity of the new credit
facility. We expect to be allowed to secure these other borrowings with first
liens on certain of our timberland and other properties.
We expect costs of entering into the new credit facility will be
approximately $3.3 million.
We anticipate that our initial working capital, together with anticipated
cash flow from operations and anticipated borrowings under the new credit
facility, will provide us adequate liquidity to fund our current activities
during the five-year term of the new credit facility. However, although we may
have substantial availability under the new credit facility immediately after
this offering, we may still need to obtain additional financing. In particular,
one of our principal business strategies is to acquire additional timberlands.
The implementation of this strategy may require us to obtain external financing
in addition to the new credit facility.
COMMITMENTS AND CONTINGENCIES
During the period ended December 31, 1998, Strategic Timber entered into a
cutting contract whereby the buyer was granted the right to cut approximately
625 acres of timber. Upon closing the contract, Strategic Timber received an
advance payment of approximately $450,000. The contract became effective on
December 29, 1998 and expires on December 31, 2000.
Strategic Timber also entered into an agreement in December 1998 with its
President and Chief Executive Officer, C. Edward Broom, to sell to Mr. Broom for
$3.0 million approximately 6,700 acres of agricultural land that was acquired as
part of the Louisiana property without any separate determination of cost. The
sale was effected to provide a source of cash for Strategic Timber to make
required payments of bank debt. Mr. Broom and other members of management
determined this purchase price to produce the necessary funds to make these
payments. The purchase price does not necessarily reflect the price Strategic
Timber might have been able to obtain if the property had been fully prepared
for sale and exposed to the market for a sufficient period of time to produce
the highest price. To protect Strategic Timber's economic interest in the
property, Mr. Broom has agreed that Strategic Timber may repurchase the property
at any time before December 31, 2000 at the price paid by Mr. Broom, plus a pro
rata annual increase at the rate of 8%, compounded annually. See "Transactions
with Related Parties."
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On December 29, 1998, Strategic Timber II entered into a contract granting
Kinzua Resources, LLC the right to harvest timber on a tract in the Pacific
Northwest properties (approximately 42,000 acres). The contract is in the form
of a timber deed where risk of loss passed to Kinzua Resources for the duration
of the contract. The contract expires September 30, 1999. Kinzua Resources may
harvest any timber on the defined acreage during the period of the contract.
After the contract expires, any standing timber on the tract reverts to
Strategic Timber II. Kinzua Resources paid approximately $5.6 million for these
rights, none of which is refundable. Accordingly, Strategic Timber II recognized
revenues for the full value of the contract during the period ended December 31,
1998. Kinzua Resources, which operates sawmills, is controlled by Gregory M.
Demers, a continuing investor. See "Transactions with Related Parties."
Revenues, net income and cash flow from our operations will be dependent to
a significant extent on our ability to harvest timber at adequate levels. Among
other factors, conditions that may restrict harvesting of our timberlands
include insect infestation, severe weather, fire, natural disasters and other
causes beyond our control. As is typical in the forest products industry we do
not, and likely will not, maintain insurance coverage with respect to damage to
our timberlands. Even if such insurance was available, the cost would be
prohibitive.
The harvesting of timber is also subject to a variety of state and federal
laws and regulations, including environmental, threatened and endangered species
and habitat for such species, and air and water quality. These laws and
regulations are modified from time to time and are subject to judicial and
administrative interpretation. Pending regulatory and legal matters or future
governmental regulations, legislation or judicial or administrative decisions
may have a material adverse effect on our financial position, results of
operations or liquidity. See "Risk Factors -- Environmental and endangered
species regulations restrict timber harvesting and may otherwise restrict our
ability to conduct our business" and "Business and Properties -- Federal and
State Regulations."
Strategic Timber and Strategic Timber II have made limited capital
expenditures to date. Upon the completion of this offering and the formation
transactions, we plan to make capital expenditures in the form of reforestation
and silvicultural activities on all of our timberlands. These activities will
include thinning, the planned conversion of uneven-aged pine forests to
even-aged plantations, and road building and maintenance. These expenditures are
expected to be approximately $2.0 million during 1999. In addition, we have
engaged Mason, Bruce & Girard, Inc., an independent forestry consultant, for a
fee of approximately $1.3 million to develop timber harvest plans with respect
to our Coastal forest to be submitted to the California Department of Forestry
and Fire Protection. See "Business and Properties -- Initial Timberland
Properties."
On April 12, 1999, our Board of Directors declared a $0.175 distribution
per share of common stock, prorated for the partial quarter between the closing
of this offering and June 30, 1999. The distribution will be payable only if we
complete the formation transactions and this offering no later than June 30,
1999. Assuming we complete this offering on or about May 15, 1999, the aggregate
amount that we would distribute to our shareholders would approximate $1.5
million, or $1.7 million if the underwriters exercise in full their
over-allotment option. We intend to fund this distribution using operating cash
flow or borrowings under our new credit facility, as permitted by this facility.
YEAR 2000
The Year 2000 issue refers to the problems that may arise from the improper
processing of dates and date-sensitive calculations by computers and
microprocessors embedded in other systems as the year 2000 approaches and is
reached. Historically, most computer hardware and software and other systems
have used two digits to determine the year in a date. For example, the year 1975
would be identified by 75. Therefore, some systems cannot distinguish dates in
the 2000s from dates in the 1900s.
To address this issue, we have taken an inventory of all of our information
technology, or IT, systems, such as computer hardware and software, and non-IT
systems, such as fire alarms, and have assessed the readiness of these systems
for the year 2000.
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We use personal computers and personal computer-based applications in our
daily operations. Because we purchased most of the hardware and software for
these systems during 1998, we believe that most of our IT systems should already
be Year 2000 compliant. We have received assurances from the manufacturer that
the personal computers we purchased are Year 2000 compliant. To verify this, we
have tested our hardware, all of which appears to be Year 2000 compliant. In
addition, we have begun to assess the readiness of software packages we use,
including our geographic information system. In most cases, we have received
assurances from the manufacturers of these software packages that the programs
are Year 2000 compliant. We are currently in the process of obtaining these
assurances in writing. We expect that testing on software applications will be
completed by the end of the second quarter of 1999.
Due to our recent formation, and because of Pioneer's historical methods of
operations, there are a limited number of non-IT systems requiring assessment.
Accordingly, our Year 2000 compliance plans involve assessing and testing IT
systems first and non-IT systems second. The Year 2000 compliance of non-IT
systems has not yet been assessed. We expect to assess these systems beginning
in the second quarter of 1999.
We rely on our customers for revenue and rely on vendors for services,
including inventory tracking, reforestation, and other services. Inadequate Year
2000 compliance programs by these parties could have an adverse effect on our
operations. For instance, if customers become unable to pay, our receivable
balances would increase, affecting cash flows. If vendors provided inaccurate
inventory data, our harvest plans would not be optimized. Our most significant
vendors are independent scaling bureaus in the Pacific Northwest that measure
the volume of timber harvested by our customers. They record and transmit data
relating to measured volumes electronically using computer software. If this
software is not Year 2000 compliant, measurements could be inaccurate or we
would have to rely on manual calculation and delivery of measurement data. We
are currently writing to the scaling bureaus and other key vendors, suppliers
and customers to determine the status of their Year 2000 compliance programs. We
expect to have all responses accumulated by the end of the second quarter. We
have not developed any contingency plans in the event any of our key vendors is
not compliant at this time. We will develop contingency plans, if needed, after
assessing the responses we receive from our vendors and suppliers.
On a combined basis, we have spent less than $10,000 through December 31,
1998 on our Year 2000 compliance programs. We expect to spend approximately
$15,000 during the remainder of 1999 to address the Year 2000 issue.
We believe that our most reasonably possible worst case scenario related to
the Year 2000 issue is that our key information systems, such as our geographic
information system, will not be Year 2000 compliant. We also would have
operational difficulties if the parties who measure the volumes of timber
harvests, which may be our customers or independent scaling bureaus, are unable
to record and transmit data because they are not Year 2000 compliant. If this or
any other component of our Year 2000 compliance plan is not adequately completed
prior to January 1, 2000, we can operate our businesses manually until such time
as all systems become compliant. We do not expect that the short-term manual
operation of our businesses would have a material adverse effect on the
financial condition or results of operations.
We cannot be certain that we have identified all potential Year 2000 issues
or that we will be Year 2000 compliant by January 1, 2000. Non-compliance by us
or our key vendors and customers could have a material adverse effect on our
future results of operations or financial condition.
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MARKET RISK
Financial market risk is the risk of loss from adverse changes in financial
market prices and rates. Our principal financial market risk is related to
changes in interest rates because we borrow money based upon variable rates of
interest. For debt obligations as of March 31, 1999, the table below presents
principal cash flows and related weighted average interest rates by expected
maturity dates.
<TABLE>
<CAPTION>
INTEREST
RATE
AT MARCH 31,
1999 2000 2001 2002 2003 TOTAL 1999
----------- ----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt:
Strategic Timber II bridge
loan...................... $35,000,000 $ -- $ -- $ -- $ -- $ 35,000,000 9.06%
=========== =========== =========== =========== ============ ============
Interest rate............... 9.06% --% --% --% --% 9.06%
=========== =========== =========== =========== ============ ============
Variable Rate Debt:
Strategic Timber bridge
loan...................... $85,000,000 $ -- $ -- $ -- $ -- $ 85,000,000 9.00%
Strategic Timber Partners
credit facility........... -- -- -- -- 139,297,034 139,297,034 7.50%
Strategic Timber II term
loan...................... 2,500,000 13,750,000 27,500,000 36,250,000 120,000,000 200,000,000 7.57%
Strategic Timber II
revolving credit
facility.................. -- -- -- -- 52,950,000 52,950,000 7.55%
----------- ----------- ----------- ----------- ------------ ------------
Total variable rate debt.... $87,500,000 $13,750,000 $27,500,000 $36,250,000 $312,247,034 $477,247,034
=========== =========== =========== =========== ============ ============
Weighted average interest
rate...................... 8.96% 7.57% 7.57% 7.57% 7.54% 7.80%
=========== =========== =========== =========== ============ ============
</TABLE>
The carrying value of our debt approximates its fair value.
None of these debt obligations mature after 2003. Maturities of debt
obligations at March 31, 1999 were not significantly different from those at
December 31, 1998. The table below reflects the weighted average interest rates,
by maturity date, at March 31, 1999 and December 31, 1998 for our variable rate
debt:
<TABLE>
<CAPTION>
MATURITY MARCH 31, 1999 DECEMBER 31, 1998
- -------- -------------- -----------------
<S> <C> <C>
1999........................................................ 8.96% 9.21%
2000........................................................ 7.57% 7.85%
2001........................................................ 7.57% 7.85%
2002........................................................ 7.57% 7.85%
2003........................................................ 7.54% 7.85%
</TABLE>
To lessen our risks associated with changing interest rates, we have
entered into interest rate swap agreements. Under our swap agreements, we must
pay a third party, often called a counterparty, a fixed interest rate on a
specific amount of money, or notional amount. In turn, the counterparty pays us
interest on the notional amount at a rate that is tied to a fluctuating market
rate. The fluctuating rate is calculated on periodic calculation dates based on
a three month maturity of LIBOR. In most instances under our swap agreements,
the net amount that we either pay or receive is determined on each calculation
date and then we either receive or make a payment three months after the
calculation date.
Swap agreements serve to protect us against rising interest rates and the
counterparty against falling interest rates. If interest rates rise, then the
amount that we receive from the counterparty increases. We use this additional
amount to pay the increased market rate for borrowings under our credit
facility. If interest rates decrease, then the amount that the counterparty
would receive from us increases. We would be required to pay the counterparty
interest on the notional amount equal to the difference between the higher fixed
rate and the lower market rate. The lower market rate of interest on our credit
facility would offset our payments to the swap counterparty. Although the swap
agreement limits our risk to rising interest rates, it also minimizes our
benefit if interest rates decrease.
However, swap agreements do not completely protect us from increases in
interest rates. At March 31, 1999, the total notional amount represented by all
of our swap agreements was $200.0 million,
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<PAGE> 62
although we had $512.2 million in total borrowings under our debt instruments as
of that date. The table below presents notional amounts, maturities, interest
rates and fair values for all of Strategic Timber's and Strategic Timber II's
interest rate swap obligations at March 31, 1999. The fair value of the swap
represents the amount that Strategic Timber or Strategic Timber II would have to
pay to terminate the swap. The aggregate fair value of our swaps was
approximately ($7.6 million) at December 31, 1998.
<TABLE>
<CAPTION>
VARIABLE RATE AT
MARCH 31, 1999 FAIR VALUE
NOTIONAL FIXED --------------------- OF SWAP AT
AMOUNT MATURITY DATE RATE RATE BASED ON MARCH 31, 1999
- ------------------- ------------------ ----- ----- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Strategic Timber
$100,000,000 May 13, 2002 5.99% 5.00% 3 Month LIBOR ($1,555,728)
Strategic Timber II
$25,000,000 October 14, 2003 6.69% 5.06% 3 Month LIBOR (1,299,048)
$25,000,000 October 14, 2003 6.69% 5.06% 3 Month LIBOR (1,206,329)
$50,000,000 September 30, 2003 5.77% 5.06% 3 Month LIBOR (424,215)
-----------
($4,485,320)
===========
</TABLE>
Our new credit facility will require us to enter into swap agreements for
at least $100.0 million in total notional amount. Accordingly, we will terminate
our existing swap agreements. Assuming that we terminated these agreements on
March 31, 1999, we would have recognized a loss of approximately $4.5 million
before allocation to minority interests. We intend to enter into new swap
agreements with terms that are similar to our existing swaps, although we cannot
assure you that this will be the case. In addition, we expect that we will not
incur any material costs in connection with entering into new swap agreements.
It is likely that the total notional amount of new swaps we enter into will
be less than the total borrowings under the new credit facility. This means that
the interest payments we recover from all counterparties under our swap
agreements may be much less than the total amount of any additional interest we
must pay to our lenders if interest rates increase. Despite any shortfall in
interest rate protection, we would be required to pay the excess interest to the
lender whenever a payment is due under the terms of the credit facility.
Our protection under our interest swap agreements may be limited further by
the timing of interest rate calculations between the swaps and our credit
facility. The floating interest rate under our swap agreements is usually
determined three months in advance. However, under our credit facility, our
interest rate may be based on the prime lending rate, which is recalculated
every day. If interest rates climb in the short term, the interest we pay on the
credit facility may increase without any immediate adjustment to the payments we
receive from our counterparties under our swap agreements. Ultimately, the
expense associated with our swaps may be greater than the benefit. If we desire
to terminate them, we may be unable to do so because the terms of our new credit
facility will require us to maintain swaps with at least $100.0 million in
notional amount during the life of the facility.
When we enter into swap agreements, we are subject to a risk called
counterparty credit risk. This term refers to the risk that the counterparty
will not be able to perform its obligations under the swap agreement. We limit
our exposure to counterparty credit risk by entering into swap agreements only
with recognized dealer banks and financial institutions. We expect these
institutions will be able to perform their obligations under our swap
agreements.
Borrowers who enter into swap agreements are also subject to the risk that
the swap agreement may be legally unenforceable. However, we attempt to minimize
this risk by entering into swap agreements governed by state or U.S. law with
large U.S. banks. Currently, none of the counterparties to our existing swaps
has sold any of them to a third party.
Strategic Timber and Strategic Timber II incurred $254,827 and $189,108,
respectively, of net interest expense in 1998 relating to swap agreements.
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BUSINESS AND PROPERTIES
Timber industry terms used in this section are defined in "Glossary of
Selected Timber Industry Terms" beginning on page 144 of this prospectus. In
this section we refer to timber volumes in terms of board feet, which is the
standard for measurement in the western United States, and tons, which is the
standard in the southeastern United States. To aggregate our holdings, we have
in some cases converted board feet or tons to cunits. Each cunit is equal to 100
cubic feet of timber. We convert one thousand board feet of timber to 2.25
cunits, and one ton of timber to 0.3525 cunits.
Where indicated, information contained in this section was provided to us
by Mason, Bruce & Girard, Inc. and Canal Forest Resources, Inc., independent
forest resource consulting firms. We paid these firms for their services.
Reports of Mason, Bruce & Girard and Canal Forest Resources have been filed as
exhibits to the registration statement of which this prospectus is a part.
OVERVIEW
WE OWN AND SELL TIMBER
We acquire, own and manage timberlands and sell timber. We intend to
acquire additional timberlands and capitalize on the growing trend toward
consolidation of timberland ownership.
We currently own approximately 448,000 acres of timberlands in the states
of California, Louisiana, Oregon and Washington. Our timberlands contain a total
of approximately 5.7 million cunits, or approximately 2.54 billion board feet,
of a variety of species of merchantable timber. Merchantable timber is an
inventory classification based on the size, length and volume requirements of a
particular market. Timber is considered merchantable in a particular timber
market when it meets the minimum size and usable volume that is suitable for
sale for commercial uses in that market.
Classifying timber inventory as merchantable does not mean that we plan to
harvest it immediately. Particular timber is harvested in accordance with timber
harvest plans, which contemplate harvests over long periods of time and subject
to limitations imposed by law and prudent forest management. According to Mason,
Bruce & Girard and Canal Forest Resources, approximately 87% of our merchantable
timber is sawtimber. Sawtimber is timber that is of sufficient size and quality
to be manufactured into lumber or plywood. Sawtimber is more valuable than
timber of the same species that can be converted only into pulp, paper products
or other wood products. We can sell the remaining 13% of our merchantable timber
as pulpwood.
Our timberlands contain substantial inventories of premium species and
grades of timber with a variety of end uses. When we refer to "premium" species
of timber, we mean species whose market value is among the highest in the
specific geographic area where it is located. This market value is based upon
the size, quality and end uses of the species. Approximately 4.0 million cunits,
or 70.3% of our total merchantable timber volume, consist of premium softwood
species, such as Douglas-fir, second-growth redwood, southern pine, ponderosa
pine and cedar. Approximately 18.2% of our merchantable timber volume consists
of other softwood species and the remainder consists of hardwood species.
Our timberlands are located near approximately 137 mills, called timber
conversion facilities, that convert the timber we sell into wood products, such
as lumber, plywood, paper and wood pulp. Some of these mills are owned by forest
products companies that also own standing timber. Based on market surveys that
Mason, Bruce & Girard prepared for us and our own assessment of markets in
Louisiana, annual total consumption of timber within the markets that we serve
is over 7.2 billion board feet. Over each of the next five years, we plan to
sell approximately 3% of this amount from our initial timberlands. Based on
these facts, we believe that our timberlands are located in active and
competitive markets for timber, including sawtimber.
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WE FOCUS ON GENERATING CASH
Our revenues will come primarily from the sale of timber. We do not have
the cash operating expenses, working capital needs and capital expenditures
associated with lumber mills, paper mills or other timber conversion facilities.
As timber is harvested under timber cutting contracts, we will record
revenues. Accounting rules require us to reduce recorded income by a non-cash
depletion charge against our investment in the harvested timber. This depletion
charge will materially reduce any income that can be recorded for accounting
purposes from the sales of timber in years immediately following our acquisition
of timberlands. However, this charge will not reduce cash available to us for
distribution or reinvestment. As a result, we believe the cash we generate from
our operations will exceed our earnings for accounting purposes.
We will elect to be taxed as a REIT for federal income tax purposes.
Because most of our net income will be treated as capital gains, the tax rules
that generally require REITs to distribute 95% of their ordinary income to
shareholders will not affect us. We intend to use this flexibility to retain a
substantial part of the cash we generate to acquire additional timberlands.
HOW WE OPERATE AND RECOGNIZE REVENUE
We sell standing timber rather than delivered logs, which are the cut
segments of the tree. We enter into timber cutting contracts with third parties
that require them to harvest and pay for standing timber. These parties include
forest products companies and, less frequently, brokers and loggers.
In selecting timber to be sold for harvesting, we evaluate all of our
timberlands as a whole. We take into account, among other factors, the relative
maturity levels and current productivity of tracts available for harvest, the
strength of local markets and the desirability of reforesting a particular area.
This approach allows us to increase the overall growth rate of our timber and
better balance the age class distribution of our holdings. Once we have
identified specific timber tracts to be offered for harvest, we will either seek
sealed bids from prospective buyers or negotiate a purchase with one or more
buyers. After we have found a suitable buyer, we will enter into a cutting
contract with the buyer.
Under cutting contracts, the buyer, at its expense, is required to cut the
purchased timber and haul the logs to its own conversion facility, or to another
purchaser to whom it is reselling. Our contracts with auction buyers typically
range from three to 18 months in length. We currently have negotiated contracts
which extend for up to six years, and we may enter into longer term contracts in
the future. Contracts with terms of two years or more provide for price
adjustments at least annually and typically require the buyer to cut minimum
amounts of timber each year. Within these limits, the buyer has discretion as to
when it harvests our timber, although buyers typically begin their harvests as
soon as practicable after entering into contracts with us. Title to and risk of
loss of the timber passes from us to the buyer when the timber is cut.
For accounting purposes, we recognize revenue at the time the buyer cuts
and takes title to the timber. Under our cutting contracts, the buyer generally
pays us when it cuts the timber. Many of the contracts require the buyer to pay
us a portion of the expected value of the timber at the inception of the
contract. The aggregate advance payments under our cutting contracts existing at
March 31, 1999 represent approximately 16% of the total expected 1999 annual
payments for harvests under these contracts, and are offset as the buyer
harvests the timber. We do not escrow these advance payments and are free to use
them in our business for any purpose.
We may have to refund some or all of these advance payments in two
circumstances. First, if a casualty, such as fire, storm or disease, destroys so
much of the timber subject to the contract that the remaining balance of the
advance payment cannot be offset by the value of actual harvests, we will refund
this difference. Second, if the buyer breaches its contractual obligation to
harvest the timber, we will offset our damages from the buyer's breach of the
cutting contract against any remaining balance of advance payments and refund
any difference to the buyer. Our damages are sometimes specified as liquidated
damages in our contracts. In other cases, the refunds would be offset against
our actual damages. If our
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damages exceed the remaining balance of advance payments, the buyer will remain
liable to us for this difference.
We expect our revenues will be seasonal. Rain in winter and our fire
prevention measures in spring and summer limit timber harvesting on the
Louisiana property. Similarly, harvesting on the Pacific Northwest properties is
typically interrupted for periods during the winter and spring due to snow and
melting snow, and occasionally in the late summer due to fire prevention
measures. We expect that our financial results in the first and fourth quarters
may be materially affected by winter rain and snow. Our financial results in the
second and third quarters may be materially affected by the risks of fire.
In addition to cutting contracts, we also expect to derive revenues from
several other sources. We will grant hunting, grazing, camping and other rights
of access to approved hunting clubs and individuals. These hunting leases and
other rights will both produce revenues and help us to maintain and protect our
properties. From time to time, we expect to make incidental sales of portions of
our properties that have a higher and better use than the long-term production
of timber.
After a timber tract has been harvested, we reforest the tract as soon as
practicable, generally within the next twelve months. We reforest using
independent contractors working under our supervision. The costs of
reforestation represent the majority of our capital expenditures.
OUR OPERATING COSTS ARE LOW
We have a low-cost operation because we perform few of the "on the ground"
functions required to harvest timber. We sell standing timber and do not cut
timber directly or hire third-party loggers to cut our timber. Instead, buyers
under cutting contracts are responsible for cutting and transporting timber. By
limiting our expenses, we expect to maintain higher operating margins on our
timber sales than if we cut and removed timber ourselves.
Most of our operating costs are fixed and consist of employee salaries and
benefits and the costs of our facilities and supplies. Until recently, we
utilized a third-party forest management firm to manage our Louisiana property.
Currently, our employees manage all of our timberlands. However, we may engage
third-party forest management firms for consulting services. We believe that our
current staffing and facilities are sufficient to manage our current timberland
holdings as well as additional timberlands that we may acquire within the next
few years.
BUSINESS STRATEGY
OUR OBJECTIVE IS TO MAXIMIZE LONG-TERM SHAREHOLDER VALUE
We intend to:
- focus on owning timberlands and selling timber for harvest, not on owning
or operating lumber mills or other timber conversion facilities;
- acquire additional timberlands that will increase our ability to generate
cash and enhance the overall value of our timberlands;
- actively manage our timberlands to enhance timber growth; and
- develop timber selling and reforestation plans to increase the long-term
value of our timberland portfolio.
WE FOCUS ON OWNING AND SELLING TIMBER
We intend to focus on timberland ownership and selling timber for harvest,
which we believe will enable us to:
- avoid the conflicts that frequently arise within the paper and forest
products industry between providing consistent timber supplies to captive
mills and managing a forest for growth in order to increase timberland
value; and
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- increase the value realized from our timber resources by selling our
timber to the highest bidder in each market in which we participate
rather than to captive mills.
WE ACQUIRE TIMBERLANDS TO GENERATE CASH AND ENHANCE LONG-TERM VALUE
As an owner of timberlands and a seller of timber, as opposed to an owner
or operator of timber conversion facilities, we are a natural acquiror of
timberlands from a variety of potential sellers. We believe that U.S. timberland
ownership will continue its recent trend of consolidation. Specifically, we
believe that timberland ownership will continue to shift from forest products
companies that also own mills to companies that solely own and manage
timberlands. Furthermore, we expect to see some small landowners sell their
timberlands to larger organizations that have greater financial resources and
can provide professional management of the timberlands.
We believe that forest products companies frequently view their timberland
assets as a means of assuring supply to, and profitability of, their mills
without considering separately the current value of their timber resources. We
believe that these companies are under increasing pressure to realize the value
of their timberland assets by selling or monetizing them. We believe that we may
be viewed by these companies as a preferred purchaser of their timberlands
because we do not compete with their manufacturing operations.
Smaller private timberland owners who seek to diversify their timberland
ownership and obtain liquidity also present us with acquisition opportunities.
We believe that small timberland owners lack the scale of operations needed to
efficiently manage their timberland assets. Private landowners may be reluctant
to make outright sales of their timberlands, even if they would like additional
liquidity, because sales may trigger taxes or be inconsistent with their estate
plans. These issues can often be compounded by irregular cash flow from smaller
timberland tracts.
According to the most recent U.S. Forest Service estimates, approximately
490 million acres of timberlands in the United States are owned by
non-government owners. The largest non-government owner holds less than 3% of
all U.S. timberlands. We believe this fragmented ownership of timberlands
presents us with a wide variety of potential timberland acquisition candidates.
We intend to take advantage of these acquisition opportunities by:
- retaining a significant portion of our internally generated cash for
timber acquisitions;
- maintaining financial flexibility through a conservative capital
structure with a target debt-to-total market capitalization ratio of
approximately 40%, which we believe will better enable us to fund
acquisitions when opportunities arise;
- using units in our operating partnership as a form of consideration for
acquisitions, an approach that will permit the seller to defer taxes and
achieve liquidity and professional management; and
- accessing capital markets to provide additional funds for acquisitions.
Through acquisitions of timberlands, we intend to broaden and enhance the
value, marketability and diversity of our timber portfolio. We evaluate each
proposed acquisition based on the specific characteristics of the property. Our
evaluation criteria include:
- volume of merchantable and premerchantable timber on the property;
- productivity of the property's soils;
- growth rates of timber on the property;
- regional market supply and demand factors affecting the property;
- the proportion of sawtimber on the property;
- whether the acquisition will enhance the mix of species or diversify the
ages of timber in our timber portfolio; and
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- environmental and endangered species conditions, including restrictions
on harvesting that could limit the amount of timber that can be cut.
We look for properties that present opportunities to increase cash flow and
derive more value from the property than the seller is obtaining. We seek to
derive additional cash flow and value by:
- modifying a property's timber selling plan in ways that may not be
feasible for the seller given the size and composition of the seller's
timber portfolio or the seller's purpose in holding the
timberlands -- for example, as a source of raw material supply for a
given mill;
- targeting high-value uses for our timber -- for example, selling tall,
straight trees to be used for poles rather than for sawtimber or pulp;
- developing an industry brand name based on the size and quality of our
timber portfolio;
- implementing cost saving opportunities available by managing the acquired
timberlands as a component of our total portfolio; and
- leasing tracts for recreation, grazing, hunting and other activities not
related to timber production and selling tracts which are suited for
better and more valuable uses, such as for residential or commercial
development.
Based on the substantial prior timberland acquisition experience of our
management, we believe that we can acquire timberland properties on more
favorable terms through private negotiations rather than through competitive
auctions. Accordingly, we intend to pursue privately negotiated acquisitions as
our principal means of acquiring timberlands.
Our principal focus for acquisitions will be on timberlands located within
developed markets in the continental United States. Developed markets are areas
with a number of independent lumber mills, paper mills or other timber
conversion facilities sufficient to create competition for our timber.
We also intend to explore potential timberland acquisition opportunities in
Latin America and in other active timber growing regions of the world. We
currently intend to limit our ownership of non-U.S. timberlands to no more than
20% of our asset portfolio. We intend to seek non-U.S. timberlands with values
that are depressed relative to those in the United States. Prices of non-U.S.
timberlands may be depressed due to undeveloped or underdeveloped forestry
management plans, markets or infrastructure. Based on the experience of our
management, we believe many timberland acquisition opportunities outside of the
United States can provide higher risk-adjusted returns due to low-cost labor,
land, and energy, fertile soils and favorable climates, in combination with the
introduction of modern forestry practices and improved product marketing.
WE EMPLOY ACTIVE FOREST MANAGEMENT PRACTICES TO ENHANCE TREE GROWTH
Tree growth is a major driver of timberland returns. We employ advanced
forest management practices, also called silviculture, to enhance this growth,
improve the quality of our timber and reduce the time required for a tree to be
ready for harvesting. The application of silvicultural practices such as
choosing seedlings with superior genetic characteristics, fertilizing, pruning,
thinning and controlling pests and diseases, can improve both tree growth rates
and wood quality. We employ professional forest managers who are experts in
applying these silvicultural techniques to our local forests and tree species.
WE DEVELOP HARVEST AND REFORESTATION PLANS THAT INCREASE LONG-TERM
PORTFOLIO VALUE
We believe that good silvicultural practices will produce both financial
and environmental benefits. Our strategy is to design forest management plans to
bring each of our forests into a balanced state. A balanced forest contains a
roughly equal number of acres of trees of each age class from newly planted
seedlings to mature trees. Once a forest reaches a balanced state, we intend to
manage it to generate predictable, consistent and sustainable annual timber
harvests and cash flow. An additional benefit of
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active forest management is that the actively managed forest is more resistant
to the threats of fire, pests and disease than a forest left purely in its
natural state.
We intend to develop operating plans for each of our properties. These
operating plans include site-and species-specific harvest and reforestation
plans. While we establish plans for our portfolio as a whole, we maintain the
flexibility to increase or decrease harvest levels and alter the species mix and
location on each of our timberlands in response to local market conditions.
Finally, to enhance values in the future, we engage in an active reforestation
program, planting species well suited for local soils and markets.
We use a computer system called a geographic information system in the
management of our timberlands. A geographic information system is a computerized
database and mapping system that links physical locations on a map with
associated data. This integrated database can then be used as a decision tool
and a mapping tool in the forest management process. Our geographic information
system data, which we will continue to compile, includes detailed topographical
field maps for our timberlands describing the characteristics, including age,
species, size and other characteristics of our timber.
With the aid of our geographic information system, we will be able to
manage our timberland portfolio actively, track inventory and develop
site-specific harvest plans. We will also be able to monitor other critical
aspects of our timberlands as required, such as the location of roadways or
wildlife nesting areas. We expect to use our geographic information system to
analyze the impact that new legislation may have on our timberlands by modeling
the effect of the legislation on our timberland portfolio. We will also use our
geographic information system to evaluate potential acquisition opportunities.
Many of our competitors and smaller timberland owners do not utilize a
geographic information system, mainly due to the relatively high initial cost
and to the length of time necessary to collect sufficient data to optimize its
use. Thus, we believe our geographic information system will give us an
advantage over our competitors who do not use this system.
OUR COMPETITIVE STRENGTHS
WE HAVE EXPERIENCED MANAGEMENT WITH SIGNIFICANT OWNERSHIP
C. Edward Broom, Christopher J. Broom, Thomas P. Broom, Vladimir Harris and
Joseph E. Rendini founded Strategic Timber in April 1998. These individuals
collectively have substantial experience in acquiring, owning and managing
timberland assets. Since 1985, they have collectively participated in a series
of timberland investments in the United States, Latin America and New Zealand,
as principals, investment managers and investment advisors.
Our founders have hired both former colleagues and advisors with whom they
have worked successfully in the past. These individuals have diverse experience
and expertise in our key areas of timberland acquisition, operation and
management.
Upon completion of this offering, management will beneficially own
1,605,723 shares of common stock and partnership units, representing 7.2% of the
shares of common stock and partnership units that will be outstanding. We
believe that management's equity ownership in Strategic Timber and Strategic
Timber Partners aligns the interests of management and shareholders.
OUR PORTFOLIO OF TIMBERLANDS IS WELL DIVERSIFIED BY GEOGRAPHIC LOCATION,
SPECIES AND END USES
Geographic Location. Our initial portfolio of 448,000 acres of timberlands
is well diversified by geographic region. Approximately 35% of our merchantable
timber is located in Louisiana, 34% in coastal California, 14% in Oregon, 12% in
interior California, and 5% in Washington. We intend to enhance this geographic
diversity through acquisitions by increasing our ownership in less dominant
regions and expanding to new areas.
Species. Our timberlands support a variety of species, including
Douglas-fir, southern pine, second-growth redwood, western pine, hemlock, red
cedar and hardwood. Southern pine and Douglas-fir each account for about
one-quarter of our merchantable timber, and second-growth redwood and ponderosa
pine
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<PAGE> 69
account for approximately 16% and 7% of our merchantable timber, respectively.
Other softwood species account for approximately 15% and hardwood accounts for
approximately 11% of our total merchantable timber portfolio.
End Use Market. We sell timber for a variety of end uses. Our pine
sawtimber in Louisiana and Douglas-fir in the western states is usually
converted into lumber for construction purposes. Our California and Oregon
ponderosa pines are processed into construction lumber, but also are used to
make molding, doors, windows and furniture. Second-growth redwoods produce
highly durable lumber, which is used for decks and patios. Most of our hardwood
inventory is processed into wood pulp and, ultimately, into various paper
products. Because our timber can be used in many applications, we can sell our
trees to a variety of different timber conversion facilities.
WE FOCUS ON OWNING AND MANAGING TIMBERLANDS
We own and manage timberlands but do not own or operate timber conversion
facilities. Paper and forest products companies that have substantial timberland
holdings may view us as a preferred purchaser when considering the disposition
of their timberlands, because we do not directly compete with their
manufacturing operations.
OUR REIT STRUCTURE WILL BENEFIT OUR SHAREHOLDERS
We intend to operate as an umbrella partnership real estate investment
trust, known as an UPREIT, which means we will own timberlands indirectly
through our operating partnership. We believe the UPREIT structure will offer
the following benefits to our shareholders:
- TAX EFFICIENCY -- Our REIT structure, coupled with our focus on
timberland holdings, will provide substantial tax advantages, including:
- a single tax on virtually all, if not all, of our taxable income whether
or not distributed, rather than a tax at both the corporate and
shareholder levels;
- a substantial timber depletion allowance that will reduce our taxable
income, without reducing our cash flow;
- treatment of distributions to our shareholders either as tax-free return
of capital or as capital gain;
- flexibility to retain and reinvest cash primarily for timber
acquisitions, rather than making tax-mandated distributions to
shareholders; and
- generally, no unrelated business taxable income to our tax-exempt
shareholders.
- ATTRACTIVE ACQUISITION CURRENCY -- We may be able to structure timber
acquisitions in a way that will permit a seller to obtain liquidity by
exchanging timberland for operating partnership units without incurring
tax at the time of the disposition. This may enhance our ability to
complete acquisitions on terms that are more favorable to us.
TIMBER INDUSTRY OVERVIEW
TIMBER AS AN ASSET CLASS
We believe that timber represents an attractive asset class for a number of
reasons, including the following:
- REGENERATION -- Timber is a growing and renewable asset, unlike natural
resources such as minerals, oil and natural gas.
- PREDICTABLE GROWTH -- Trees grow predictably and, as they grow, they
become worth more per unit of volume because they have higher value end
uses. For example, solidwood products, which are
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made from larger trees, are a higher value end use for timber as compared
to pulp or paper products, which are typically made from smaller trees.
- HARVEST FLEXIBILITY -- As an independent timberland owner, we have
substantial flexibility to enter into new cutting contracts to generate
additional timber sales when local timber prices are high. When local
timber prices are low, we can avoid entering into new cutting contracts
and let our timber continue to grow.
- FAVORABLE LONG-TERM WORLDWIDE SUPPLY/DEMAND FUNDAMENTALS -- According to
the 1997 State of the World's Forests report prepared by the United
Nations' Food and Agricultural Organization, demand for wood and wood
products has historically been correlated to population growth, economic
development and standards of living, which are forecast to continue to
increase. By contrast, we expect that worldwide timber supplies will be
constrained relative to demand.
- HISTORICAL REAL PRICE APPRECIATION -- Domestic timber prices have, over
the long term, increased at rates in excess of inflation. The U.S. Forest
Service estimates that, from 1967 to 1997, prices for Douglas-fir,
ponderosa pine and loblolly pine increased at average rates of between 7%
and 9% per year, or between 2% and 4% per year after adjusting for
inflation.
PRODUCTS AND MARKETS
We sell the timber harvested from our timberlands for processing as either
sawtimber or pulpwood by facilities located generally in close proximity to our
timberlands. Sawtimber typically is converted into lumber, plywood and other
solidwood products. The harvested timber that is of insufficient size or quality
to be converted into lumber or other solidwood products is sold for conversion
into pulp, paper and engineered wood products. The lumber, pulp, paper and other
wood products are then distributed in domestic and international markets. Timber
markets, while regional in terms of purchasers of timber, are impacted by the
availability and cost of timber from other regions and by global economic
conditions.
All timber that we categorize as merchantable is suitable for sale for some
commercial purpose, but we do not intend to harvest all of our merchantable
timber immediately. Over time, we intend to control the continued growth and
harvest of trees in our forests to manage them responsibly in accordance with
accepted forest practices and regulations. For example, on appropriate sites, we
intend to allow trees that are merchantable for lower value uses, such as pulp,
to grow into higher-value timber, such as sawtimber. We also include trees in
our merchantable timber inventory that may not be immediately available for
harvest under applicable law. Mason, Bruce & Girard and Canal Forest Resources
have confirmed with us that our timber inventory practices are consistent with
industry practice. See "-- Initial Timberland Properties -- Methodology for
Determining Inventories" and "-- Federal and State Regulations."
Based on inventories prepared by Mason, Bruce & Girard and Canal Forest
Resources, approximately 87% of our merchantable timber inventory is in the form
of sawtimber that can be manufactured into solidwood products. The remaining 13%
is timber that we can sell as pulpwood. Our objective is to sell sawtimber
instead of pulpwood. We achieve this goal by allowing our trees to mature into
sawtimber instead of cutting them for sale as pulpwood. However, we may cut and
sell pulpwood as part of our thinning and forest management practices.
TIMBER DEMAND, SUPPLY AND PRICES
Demand. Demand for timber depends upon the markets for wood products,
including lumber, plywood, pulp and engineered wood products. Because these
markets are impacted by changes in domestic and international economic
conditions, demand for these products can experience significant fluctuations.
Regional timber demand can also fluctuate due to changes in operating rates or
the number and size of wood conversion facilities within the region.
Our timber portfolio consists primarily of softwood timber. Douglas-fir,
southern pine, second-growth redwood, ponderosa and sugar pine, hemlock, cedar
and white fir are the most prevalent softwood species on our timberlands.
Currently, approximately 11% of the volume of our merchantable timber consists
of hardwoods.
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<PAGE> 71
A substantial portion of softwood timber is converted into lumber. Demand
for lumber is primarily impacted by the home construction, repair and remodeling
markets and the industrial construction market. Because of the structural
strength and stability of Douglas-fir and southern pine lumber, their most
important use is for construction lumber. Douglas-fir is particularly well-known
for its appearance and hard surface quality. Sugar and ponderosa pines are used
primarily for new construction as well as for decorative purposes such as
molding, doors, windows and furniture. These pines are recognized for their
strength, durable surface and appearance. Second-growth redwood is also
converted into premium-grade lumber used primarily in applications where
appearance and durability are important, such as residential porches and decks.
Second-growth redwood is known for its natural beauty, superior ability to
retain paints and finishes and resistance to decay, insects and chemicals. As a
result, second-growth redwood is not generally used to produce lumber for
construction and its price has historically been less volatile than that of
other premium softwood species.
The most common applications for hardwood sawtimber include furniture,
flooring and moldings. Thus, demand for hardwood sawtimber is generally less
susceptible than softwood timber to fluctuations in construction activity. Most
of the hardwood timber on our initial timberlands is pulpwood, usable for paper
and other commodity applications rather than specialty applications such as
furniture.
Some timber species grown on the U.S. west coast, such as Douglas-fir and
hemlock, have historically experienced significant demand in the Japanese
markets. These products have strength, appearance and stability characteristics
that have historically been highly valued in Japan and, as a result, have
attracted higher prices than would have been realized if sold in the domestic
market.
U.S. log exports have declined steadily over the past eight years,
generally a result of increased competition from European producers, and more
recently the deteriorating economic and financial conditions in Asia. According
to U.S. Forest Service data, log exports from the United States have fallen from
approximately 7.5 million cunits in 1989 to approximately 3.3 million cunits in
1997.
Supply. The Pacific Northwest and the Southeast are the two principal
timber producing regions in the United States.
The supply of logs available for purchase in the Pacific Northwest has been
significantly affected in recent years by reductions in the volume of timber
harvested from public lands. This reduction is primarily a result of increased
governmental policy emphasis toward protection of endangered species, habitat
preservation, conservation and recreation. According to U.S. Forest Service
data, the timber harvested from federal lands in California, Oregon and
Washington in 1997 was approximately 1.4 billion board feet, a decline of 80%
from the approximately 6.7 billion board feet harvested in 1988. We expect that
the amount of timber harvested from federal lands will remain at current levels
or continue to decline. This trend changes the supply emphasis to the private
sector and thus strengthens our position as a private seller of timber. Timber
harvests have declined more in the western United States than in the
southeastern United States because public timberland ownership in the West
represents a substantially greater proportion of the total than it does in the
Southeast.
Timber harvests can fluctuate regionally depending upon factors such as
changes in weather conditions, harvest strategies of local forest products
industry participants and prevailing timber prices. Rising timber prices often
lead to increased harvests on private timberlands. Timber prices are also
affected by lumber prices, which depend upon a number of factors, including the
level of domestic lumber consumption and production, conditions in export
markets and lumber imports from Canada and other countries. U.S. imports of wood
products have historically been limited by freight costs and, since April 1996,
by the five-year United States-Canada lumber trade agreement. However, these
limitations on U.S. imports have been partially mitigated by reduced U.S. lumber
and log exports and increased lumber imports from Canada, Europe and other
regions.
Lumber imports also compete indirectly with timber harvested in the United
States. Because a large portion of logs are converted into lumber, imports of
lumber into the United States reduce the demand for logs at U.S. conversion
facilities. U.S. Forest Service data indicate that lumber imports represented
36% of the United States consumption of softwood lumber in 1997.
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According to U.S. Forest Service data, log imports into the United States
historically have not been significant. Small volumes of logs are imported from
Canada into the states of Washington and Maine for conversion into lumber and
pulp, but the volumes do not materially impact the regional markets. Global log
markets can, however, affect the prices paid for U.S. log exports because U.S.
exporters face strong competition in their key markets.
Prices. Short term timber prices have historically been cyclical as a
result of supply and demand imbalances. However, timber prices have increased at
rates above inflation over the long term. The U.S. Forest Service estimates that
between 1967 and 1997, timber prices for Douglas-fir, ponderosa pine and
loblolly pine timber experienced average annual increases of 7.2%, 8.7% and
7.2%, respectively, compared to an average inflation rate of 5.2%.
The reduction in log supply from public lands that occurred at the
beginning of this decade caused prices for logs to increase significantly,
reaching peak levels during late 1993 and early 1994. Forest industry
publications indicate that, since 1996, exports of Douglas-fir logs and lumber
to Japan have been greatly reduced. These trends likely have reduced prices for
Douglas-fir and some pine species in the Pacific Northwest. However, strong
domestic construction and repair and remodeling markets continue to support
softwood log prices.
The graph below illustrates historical price indices for representative
species of timber sold in the areas in which we currently operate. Mason, Bruce
& Girard and Canal Forest Resources have determined the price indices for
timber. The price indices for timber are based upon average delivered log prices
adjusted to exclude typical logging and transportation costs for timber in those
operating areas. The consumer price index, or CPI, is based on data compiled by
the U.S. Bureau of Labor Statistics.
HISTORICAL PRICE INDICES OF SELECTED TIMBER SPECIES
(1990 = 100)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Coastal - Redwood 100.0 88.0 144.0 223.8 252.7 184.8 163.4 146.6 161.0
Louisiana - Pine Sawtimber 100.0 101.2 126.6 143.1 176.6 203.3 173.8 231.3 227.8
Washington - Douglas-fir 100.0 100.6 146.1 210.1 200.2 206.6 217.4 193.6 141.9
CPI 100.0 103.0 105.9 109.0 111.9 114.7 118.5 120.6 122.9
</TABLE>
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The table below provides estimated average delivered log prices, prices of
standing trees and logging costs for timber as of December 31, 1998, based on
market surveys of similar species conducted by our independent forestry
consultants, Mason, Bruce & Girard on the California, Oregon and Washington
properties, and Canal Forest Resources on the Louisiana property. These prices
reflect current estimated average prices for timber on our timberlands. All
prices are expressed in dollars per thousand board feet, except the price for
Louisiana pine timber, which is in dollars per ton. These prices are lower than
the mill-delivered prices that form the basis for most published timber pricing,
because mill-delivered prices include the costs of cutting timber and
transporting it to the mill. The difference between mill-delivered prices and
standing timber prices will vary based on the terrain and weather on the
property and how far the property is from mills.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-----------------------------------------------
LOGGING DELIVERED
PRICES OF STANDING TREES COSTS LOG PRICES
------------------------ ------- ----------
<S> <C> <C> <C>
CALIFORNIA -- COASTAL FOREST
Second-growth redwood.................................... $468 $282 $750
Douglas-fir.............................................. 228 282 510
CALIFORNIA -- COMMANDER FOREST
Ponderosa pine........................................... 350 250 600
Douglas-fir.............................................. 250 250 500
LOUISIANA
Pine..................................................... 46 -- --
OREGON
Ponderosa pine........................................... 294 167 461
Douglas-fir.............................................. 294 166 460
WASHINGTON
Douglas-fir.............................................. 441 180 621
Western hemlock.......................................... 335 144 479
Cedar.................................................... 745 135 880
</TABLE>
For our California, Oregon and Washington timberlands, Mason, Bruce &
Girard estimated the average standing tree prices by subtracting the logging
costs for timber from the delivered log prices. To compute the delivered log
prices, Mason, Bruce & Girard analyzed log purchases by mills and export yards
in these areas. Mason, Bruce & Girard estimated logging costs based on
tract-specific topography, costs of cutting, loading, hauling, road maintenance
and construction, timber taxes and silvicultural activities. These costs vary in
each area depending on these factors. See "-- Harvest Methods."
For our Louisiana timberlands, Canal Forest Resources estimated the average
standing tree prices by analyzing comparable timber sales and the published
timber prices indices of the Louisiana Department of Agriculture and Forestry,
the Texas Forest Service and Timber-Mart South. Canal Forest Resources also
analyzed prices paid by mills in the market area for the Louisiana timberlands.
In Louisiana, timber is commonly sold as standing trees, without reference to
logging costs. For this reason, the preceding table does not include delivered
log prices and logging costs.
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INITIAL TIMBERLAND PROPERTIES
We have summarized below our initial timber portfolio based on acreage,
predominant species, and local units and cunits of volume.
<TABLE>
<CAPTION>
MERCHANTABLE TIMBER VOLUME
-------------------------------------------------
PROPERTY ACRES PREDOMINANT SPECIES LOCAL UNITS(A) CUNITS(A)
- -------- ------- ------------------- ------------------------------- -----------
<S> <C> <C> <C> <C>
California:
Coastal 79,026 Second-growth 856 million board feet(b) 1,926,697
redwood, Douglas-fir
Commander 43,313 Douglas-fir, white 305 million board feet(b) 686,423
fir, ponderosa pine
Louisiana 82,009 Slash and loblolly 5.6 million tons (c) 1,989,000
pine
Oregon 232,621 Ponderosa pine, 372 million board feet(b)(d) 836,000
Douglas-fir, white
fir
Washington 10,822 Douglas-fir, western 129 million board feet(b) 290,000
hemlock, cedar
------- ---------
Total 447,791 5,728,000
======= =========
</TABLE>
- ---------------
(a) We maintain and track timber inventories in the units used in local
markets. For purposes of summarizing data regarding our portfolio, we
convert local units into one common unit, or cunit. One cunit equals 100
cubic feet. We use conversion rates of 0.3525 cunits per ton for timber on
the Louisiana property and 2.25 cunits per thousand board feet for timber
on the Pacific Northwest properties.
(b) Verified by Mason, Bruce & Girard at the time of purchase of the tracts
that make up the Pacific Northwest properties, as adjusted for harvest and
growth to December 31, 1998.
(c) Verified by Canal Forest Resources in July 1998, as adjusted for harvest
and growth to December 31, 1998.
(d) Includes approximately 15.3 million board feet, or approximately 34,376
cunits of merchantable timber inventory under Oregon timber deeds. Under
these timber deeds, we have the right to sell timber located on lands not
belonging to us. All of the land as to which we have timber deeds is owned
by private individuals. See " -- Initial Timberland Properties -- The
Oregon Timberlands."
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Consistent with industry practice, in determining the amount of
merchantable timber in our inventory, we have included approximately 27,000
acres of timberland that are subject to some level of harvest restrictions.
These restrictions limit and may prevent harvests on these timberlands, as set
forth in the tables below. We have not included timber from these restricted
acres in our timber sales plan to the extent these restrictions prohibit
harvesting. Our estimates of the number of restricted acres are based on
information acquired from prior owners, public sources and limited surveys
performed by ourselves and others. Before we authorize harvesting activities on
any of our properties, we survey the harvest area for the presence of threatened
and endangered species. As we gain additional information regarding the presence
of threatened or endangered species on our timberlands, if regulatory agencies
change the manner in which they apply related restrictions to our timberlands,
or if regulations become more restrictive, the number of our restricted acres
could increase. See "Risk Factors -- Environmental and endangered species
regulations restrict timber harvesting and may otherwise restrict our ability to
conduct our business" and "-- Federal and State Regulations -- Endangered
Species Laws."
The following tables indicate the number of acres on our timberlands, by
property, that are subject to harvest restrictions due to the presence of
waterway buffer zones, unstable soils or wildlife known to be present on or near
the property. The first table shows the number of acres on each property that
cannot be harvested today. The second table shows the number of acres on each
property as to which harvesting is presently restricted, but not prohibited.
<TABLE>
<CAPTION>
HARVESTING CURRENTLY PROHIBITED
--------------------------------------------------------
WATERWAY TOTAL
BUFFER ZONE UNSTABLE SOILS WILDLIFE BY PROPERTY
----------- -------------- -------- -----------
<S> <C> <C> <C> <C>
California -- Coastal........................ 1,708 480 396 2,584
California -- Commander...................... -- 40 155 195
Louisiana.................................... -- -- -- --
Oregon....................................... 2,165 -- 80 2,245
Washington................................... -- -- 20 20
----- --- ----- -----
Totals............................. 3,873 520 651 5,044
===== === ===== =====
</TABLE>
<TABLE>
<CAPTION>
HARVESTING CURRENTLY RESTRICTED
--------------------------------------
WATERWAY TOTAL
BUFFER ZONE WILDLIFE BY PROPERTY
----------- -------- -----------
<S> <C> <C> <C>
California -- Coastal....................................... 4,656 1,074 5,730
California -- Commander..................................... 2,334 541 2,875
Louisiana................................................... 4,486 -- 4,486
Oregon...................................................... 8,231 -- 8,231
Washington.................................................. 977 -- 977
------ ----- ------
Totals............................................ 20,684 1,615 22,299
====== ===== ======
</TABLE>
Waterway buffer zone restrictions include restrictions due to chinook and coho
salmon, and bull and steelhead trout. All wildlife prohibited or restricted
acres for the Coastal and Commander forests are due to the northern spotted owl,
except for 5 acres for a peregrine falcon on the Coastal forest. Wildlife
prohibited acres for the Oregon and Washington timberlands are due to bald
eagles.
TIMBERLAND MANAGEMENT STRATEGY
Our existing timberland holdings complement one another well. This is
exemplified by the fit between the Louisiana property and the Coastal forest in
California. A substantial portion of the Louisiana property contains over-mature
sawtimber. While these trees are expected to command a premium price in the
marketplace due to their size and quality, the overall growth rate of these
stands is below the potential of the land given the fertile soils and site
characteristics. Accordingly, once these slower-growing, mature trees are
harvested and reforestation activities are completed, stand growth on the
Louisiana property will substantially increase. By contrast, the Coastal forest
is relatively immature and is growing at its peak rate. Our operating plan over
the next few years for the two forests calls for substantial harvesting on the
Louisiana property to reinvigorate growth and for less harvesting of the Coastal
forest in order to
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maintain the rapidly growing base of timber there. By operating these properties
as part of an integrated whole, we anticipate that we can enhance the
productivity of our overall portfolio.
Similarly, components of the Commander forest in California and the
Washington property consist of mature, high-value timber that is at its optimal
harvest age. Our timber selling plan for the Commander and Washington properties
calls for removing this low-growth timber and replanting with seedlings selected
for superior genetic characteristics to increase the stands' total growth rates.
The Eastern Oregon properties consist primarily of uneven-aged stands which
contain a significant volume of premerchantable timber. The operating plan for
the Eastern Oregon tract includes decreasing harvest levels over the next five
years to allow the younger trees to mature and to maintain the property's
overall balanced condition.
The table below reflects our approximate planned sales of timber from our
initial timberlands from 1999 through 2003 by region, in local units (million
board feet or thousand tons) and in thousands of cunits. This table shows our
current timber sales plan, which has been reviewed and confirmed by Mason, Bruce
& Girard for the Pacific Northwest properties and by Canal Forest Resources for
our Louisiana property. This timber sales plan is subject to change on account
of market conditions or for other reasons. Timber cutting contracts that we have
and will enter into permit buyers to remove the contracted amount of timber over
the life of the contract. Our ability to recognize income from cutting contracts
will depend upon the buyer's decision to harvest timber under the terms of these
contracts. Because we may not be able to precisely control the timing of timber
sales under multiple year cutting contracts, the volume of timber actually
harvested in any given year may differ from our sales plan. The contracts
provide for specified amounts to be cut in each year of the contract.
TIMBER SALES PLAN
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---------------- ---------------- ---------------- ---------------- ----------------
LOCAL THOUSAND LOCAL THOUSAND LOCAL THOUSAND LOCAL THOUSAND LOCAL THOUSAND
UNITS CUNITS UNITS CUNITS UNITS CUNITS UNITS CUNITS UNITS CUNITS
----- -------- ----- -------- ----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California (million board
feet):
Coastal.................... 36 80 36 80 38 85 38 85 40 90
Commander.................. 31 70 29 65 27 60 27 60 25 55
Louisiana (thousand tons).... 610 215 652 230 695 245 695 245 723 255
Oregon (million board
feet)...................... 49 110 47 105 42 95 40 90 38 85
Washington (million board
feet)...................... 13 30 13 30 11 25 11 25 11 25
--- --- --- --- ---
Total................ 505 510 510 505 510
=== === === === ===
</TABLE>
Due to a substantial amount of mature timber on some of our timberlands,
and consistent with prudent forest management practices, we plan to sell a
volume of timber from our initial timberlands from 1999 to 2008 that is
materially greater than the volume we plan to sell in subsequent periods. We
presently anticipate that the timber sales from our initial timberlands will
average approximately 485,000 cunits per year from 1999 to 2008. We expect
timber sales from these timberlands for the period from 2009 to 2018 to average
approximately 300,000 cunits per year. Under our timber sales plan, we expect
the growth on our initial timberlands to increase from approximately 345,000
cunits in 1999 to approximately 420,000 cunits in 2009 and to average
approximately 460,000 cunits per year in the ten year period beginning in 2009.
We further expect that total timber inventory on these lands will decline from
approximately 6.8 million cunits in 1999 to approximately 6.0 million cunits in
2009, but will increase to approximately 7.6 million cunits in 2018. As part of
our growth strategy, we intend to acquire additional timberlands in order to
augment our current timber sales plan.
To date, we have entered into contracts providing for aggregate 1999 timber
harvests valued at approximately $17.5 million. These include new contracts on
our Louisiana property with six separate buyers -- Boise Cascade Corporation,
Health Timber Company, Inc., Hunt Forest Products, Inc., Louisiana-Pacific
Corp., Nash-Co. Industries Forest Products, Inc. and Temple-Inland Inc. -- and
provide for harvests of up to 300,000 tons of timber in 1999. The 1999 harvests
also include sales of 17.4 million board feet from our Commander forest to
Sierra-Pacific Industries, Inc.
Some of our timberlands may have greater value if used for ranching,
farming or recreational purposes or for residential or commercial development.
We will sell these properties to others when it is in our
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financial interest to do so. We also may exchange lands with significant
environmental and recreational values for lands that are more suitable for
commercial timber production.
THE LOUISIANA PROPERTY
The Louisiana property consists of approximately 82,000 acres located in
southwest Louisiana. According to Canal Forest Resources, over 79% of the
acreage of the Louisiana property contains merchantable timber, with a
comparably high component of mature pine. Mature timber, or timber over 30 years
in age, tends to be sufficiently large, in height and diameter, to be used to
make poles, lumber or veneer, which are the highest value end uses for Southern
pine sawtimber.
Additionally, these timberlands possess characteristics that foster tree
growth, including, among other things:
- relatively flat ground;
- soils that have a high level of nutrients and retain water; and
- a warm climate with substantial rainfall.
We believe that, due to the substantial amount of mature timber on the Louisiana
property, the property is well suited for immediate harvest and replanting to
take advantage of superior growing conditions.
Timber on the Louisiana property is categorized as set forth below, as
verified by Canal Forest Resources as of December 31, 1998:
LOUISIANA PROPERTY
ACREAGE BY TYPE
<TABLE>
<CAPTION>
TYPE ACRES PERCENTAGE
- ---- ------ ----------
<S> <C> <C>
Merchantable timber......................................... 64,820 79.0%
Pre-merchantable timber..................................... 13,754 16.8%
------ ------
Total Timberland Acreage.......................... 78,574 95.8%
Agricultural land........................................... 473 0.6%
Open/non-forested........................................... 2,962 3.6%
------ ------
Total Acreage..................................... 82,009 100.0%
====== ======
</TABLE>
Before our acquisition of this property, it was not actively managed for
commercial timber production. As a result, it now contains a substantial
inventory of mature timber, including approximately 3.8 million tons of pine
sawtimber. This pine sawtimber represents over 67% of the property's
merchantable timber volume, and approximately 83% of the property's merchantable
pine volume. Since most of the timber on this property has been allowed to
remain standing past the age that a commercial timber company would normally
have harvested it, there is now an abundance of mature timber that is ready for
harvest.
Until recently, we have conducted only limited harvesting operations on our
Louisiana property, while preparing the property for active commercial
operations. We conducted a complete timber inventory and detailed mapping of the
property, prepared timber sales plans and initiated commercial marketing
activities for timber to be sold from the property.
Estimated timber volumes on the Louisiana property are as set forth below,
as verified by Canal Forest Resources as of December 31, 1998. Current timber
volumes are less than the amounts shown due to several cutting contracts we
entered into in the first quarter of 1999. See "-- Our Customers."
LOUISIANA PROPERTY
MERCHANTABLE TIMBER BY PRODUCT
<TABLE>
<CAPTION>
TIMBER INVENTORY AMOUNT PERCENTAGE
---------------- --------- ----------
(TONS)
<S> <C> <C>
Pine sawtimber.............................................. 3,803,050 67.4%
Pine pulpwood............................................... 785,631 13.9%
Hardwood sawtimber.......................................... 508,151 9.0%
Hardwood pulpwood........................................... 546,507 9.7%
--------- -----
Total............................................. 5,643,339 100.0%
========= =====
</TABLE>
71
<PAGE> 78
Pine species on the Louisiana property include both slash and loblolly
pine, which are interchangeable for commercial purposes. Canal Forest
Resources's estimate of merchantable timber inventory was determined based on
sampling methods and standards customarily used in the southeastern United
States. See "-- Methodology for Determining Inventories -- The Louisiana
Property."
Timber buyers in southwest Louisiana predominantly seek quality pine
sawtimber used for lumber and plywood. Hardwood sawtimber and both pine and
hardwood pulpwood markets exist, but these markets are less competitive. There
are 34 mills within 170 truck miles of the property that annually consume 13.6
million tons of sawtimber. There are 16 additional mills within 170 truck miles
of the property that annually consume 16.8 million tons of pulpwood. Our planned
1999 timber sales would represent approximately 2% of this consumption amount.
The following map depicts the location of mills near the Louisiana property:
[GRAPHIC DEPICTING LOCATION OF LOUISIANA TIMBERLANDS AND CONVERSION
FACILITIES IN MARKET REGION OF LOUISIANA TIMBERLANDS APPEARS HERE]
We will consider selling or exchanging parcels from the Louisiana property
that may have greater value if not used for timber production. In particular,
the Louisiana property includes over 50 individual parcels of less than 200
acres each, which may have a greater value to neighboring landowners than to us.
The Louisiana property also includes several parcels that are in close proximity
to the Grand Coushatta Casino and Hotel. These parcels may accommodate future
commercial development.
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<PAGE> 79
In December 1998, we sold approximately 6,700 acres of agricultural land
from the Louisiana property that had previously been used for rice farming. See
"Transactions with Related Parties."
We do not own the mineral rights to the Louisiana property. The owners of
the mineral rights operate oil and natural gas wells on the property. We do not
expect the oil and natural gas operations to interfere with timber harvesting or
with our management of the property. See "-- Federal and State Regulations --
Environmental Laws."
THE CALIFORNIA TIMBERLANDS
Our California timberlands consist of two distinct operating areas, the
Coastal forest and the Commander forest, which together contain approximately
122,000 acres.
The Coastal forest is located in Mendocino and Sonoma Counties, California,
and consists of two blocks. Together, they include approximately 79,000 acres of
coastal timberland containing, according to Mason, Bruce & Girard, approximately
856 million board feet of merchantable timber, approximately 743 million board
feet of which consist of softwood species.
According to Mason, Bruce & Girard, there are 22 mills in the North Coast
resource area, the market area for our Coastal forest. These mills consume an
estimated 887 million board feet annually. Our planned timber sales in 1999 from
our Coastal forest would represent 4.0% of this amount. The following map
depicts the location of conversion facilities within this market area:
[GRAPHIC DEPICTING LOCATION OF COASTAL PROPERTY AND CONVERSION
FACILITIES IN MARKET REGION OF COASTAL FOREST APPEARS HERE]
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<PAGE> 80
The Coastal forest contains a blend of species as shown below, as verified
by Mason, Bruce & Girard as of December 31, 1998:
COASTAL FOREST
MERCHANTABLE TIMBER BY SPECIES
<TABLE>
<CAPTION>
SPECIES BOARD FEET PERCENTAGE
------- ----------------- ----------
(IN THOUSANDS)
-----------------
<S> <C> <C>
Second-growth redwood.................................... 398,249 46.5%
Douglas-fir.............................................. 276,826 32.3%
Hardwoods................................................ 113,766 13.3%
Sugar pine............................................... 52,397 6.1%
Whitewoods............................................... 15,072 1.8%
------- ------
Total.......................................... 856,310 100.0%
======= ======
</TABLE>
Mason, Bruce & Girard's estimate of merchantable timber inventory for the
Coastal forest was determined based on sampling methods and standards
customarily used in the Pacific Northwest. See "-- Methodology for Determining
Inventories -- The Pacific Northwest Properties."
The determination of merchantability on the Coastal forest is based on
specifications for sawtimber. We contemplate selling all of the timber from the
Coastal forest other than hardwoods as sawtimber. The current market for
hardwood timber from the Coastal forest is primarily for wood chips. Chipping
generates a lower price per board foot than sale of hardwood sawtimber.
Second-growth redwood timber is the predominant species in our Coastal
forest. Second-growth redwood timber commands a premium price in the market and
experiences a lower degree of price volatility than many other softwood species
due to its durability, specialty applications, distinctive coloring and its
relative scarcity. Second-growth redwood grows exclusively in the climatic
conditions unique to the limited coastal range from central California to
southernmost Oregon due to the soil characteristics, substantial rainfalls and
persistent fog. Approximately 32% of the merchantable inventory on the Coastal
forest consists of Douglas-fir, which also grows well under these same
conditions and has historically commanded a premium in the marketplace due to
its durability, strength and aesthetic characteristics.
The Coastal forest is managed under an "Option A" timber management plan
approved by the California Department of Forestry and Fire Protection in May
1998. Coastal Forestlands, Ltd., the prior owner of the property, with the
assistance of Mason, Bruce & Girard, developed the Option A timber management
plan pursuant to a California regulatory process that establishes long-term
growth and sustainable harvest for a specified timberland. This Option A plan
establishes a decade-by-decade harvesting model for the Coastal forest. Under
the Option A plan, we must file timber harvest plans with respect to specific
tracts from which we propose to sell timber for harvest with the California
Department of Forestry and Fire Protection. The California Department reviews
these timber harvest plans for compliance with our Option A plan, and for other
matters such as erosion control and effects on wildlife, in connection with its
approval process. We intend to manage the property in accordance with the Option
A plan. Thus, we expect to increase substantially harvesting and revenues from
the Coastal forest as compared with recent historical results. See "-- Federal
and State Regulations -- State Forestry Regulations."
Most of the Coastal forest is productive timberland that we intend to
continue to manage for timber production. A portion of the property may be
suitable for use as a vineyard or orchard, and the former owner has the option
to acquire up to 10,000 acres of the property at a price of $2,000 per acre.
Under the option agreement, we would retain rights to the timber growing on any
land we sell, but we would not be entitled to reforest any land sold under the
option or otherwise use it for future timber production. Sale of the full 10,000
acres subject to the option would result in a long-term reduction of
approximately 13% of estimated potential timber volume on the Coastal forest
because of our loss of the right to reforest the acreage sold. The former owner
has agreed that it will not exercise the option except to use the property
acquired as a vineyard or orchard, but that it will not do so if this would
adversely affect our timber operations on the Coastal forest.
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<PAGE> 81
The Commander forest consists of approximately 43,000 acres and is located
in Glenn, Tehama, Lake and Mendocino counties in the coastal range of northern
California. The Commander forest is located entirely within the Mendocino
National Forest. The merchantable timber inventory in the Commander forest is
approximately 45% Douglas-fir and 46% various pine and fir species. We intend to
harvest over-mature timber in order to reinvigorate stand growth in the
Commander forest.
The Commander forest contains a blend of species as shown below, as
verified by Mason, Bruce & Girard as of December 31, 1998. All of the
merchantable timber inventory shown for the Commander forest is sawtimber.
COMMANDER FOREST
MERCHANTABLE TIMBER BY SPECIES
<TABLE>
<CAPTION>
SPECIES BOARD FEET PERCENTAGE
- ------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Douglas-fir................................................. 136,927 44.9%
White fir................................................... 73,756 24.2%
Ponderosa pine.............................................. 40,234 13.2%
Incense cedar............................................... 28,350 9.3%
Sugar pine.................................................. 25,271 8.3%
Other pine.................................................. 539 0.1%
------- ------
Total............................................. 305,077 100.0%
======= ======
</TABLE>
Mason, Bruce & Girard's estimate of merchantable timber inventory for the
Commander forest was determined based on sampling methods and standards
customarily used in the Pacific Northwest. See "-- Methodology for Determining
Inventories -- The Pacific Northwest Properties."
We do not expect to sell any significant parcels from the Commander forest
for higher and better uses. However, because the property contains a number of
tracts of less than 100 acres, there may be opportunities to sell some of these
small tracts to recreational or other users.
According to Mason, Bruce & Girard, there are 20 mills in the northern
interior and Sacramento resource areas of California, which is the market area
for the Company's Commander forest. These mills consume an estimated 1.06
billion board feet of timber annually. Our planned timber sales in 1999 from the
Commander forest would represent 2.9% of this amount.
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<PAGE> 82
[GRAPHIC DEPICTING LOCATION OF COMMANDER FOREST AND CONVERSION
FACILITIES IN MARKET REGION OF COMMANDER FOREST APPEARS HERE]
The Commander forest is currently managed under an annual timber management
plan filed with and approved by the California Department of Forestry and Fire
Protection. We plan to file an "Option A" timber management plan, similar to the
type of plan filed for the Coastal forest, with the California Department of
Forestry and Fire Protection by the end of 1999. See "-- Federal and State
Regulations -- State Forestry Regulations."
THE OREGON TIMBERLANDS
Our Oregon timberlands consist of approximately 233,000 acres located to
the east of the Cascade Mountains in Grant, Morrow, Umatilla, Union and Wheeler
counties. These timberlands also include a 280-acre tract in Columbia County in
southeastern Washington. These timberlands contain approximately 357 million
board feet of merchantable timber, which can be marketed for many different
uses. The predominant species are ponderosa pine and Douglas-fir, representing
approximately 40% and 32% of the total merchantable timber volume, respectively,
on our Oregon timberlands. We intend to harvest selectively and thin the Oregon
timberlands over the next 15 years to allow the substantial inventory of
premerchantable trees to grow into higher value age classes.
76
<PAGE> 83
In addition to the 357 million board feet of timber on land that we own in
eastern Oregon, we also own approximately 15.3 million board feet of
merchantable timber under timber deeds in Oregon and southeastern Washington.
Under our timber deeds, we own timber without owning the land itself. Private
individuals own all of the lands relating to our timber deeds.
The Oregon timberlands, including timber we own under timber deeds, contain
a blend of species as shown below, as verified by Mason, Bruce & Girard as of
December 31, 1998. 99.5% of the merchantable timber inventory shown for the
Oregon timberlands is sawtimber.
OREGON TIMBERLANDS AND TIMBER DEEDS
MERCHANTABLE TIMBER BY SPECIES
<TABLE>
<CAPTION>
SPECIES BOARD FEET PERCENTAGE
- ------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Ponderosa pine.............................................. 148,201 39.9%
Douglas-fir................................................. 119,298 32.1%
White fir................................................... 62,721 16.9%
Western larch............................................... 29,944 8.0%
Lodgepole pine.............................................. 9,766 2.6%
Other....................................................... 1,892 0.5%
------- ------
Total............................................. 371,822 100.0%
======= ======
</TABLE>
Mason, Bruce & Girard's estimate of merchantable timber inventory for our
Oregon timberlands was determined based on sampling methods and standards
customarily used in the Pacific Northwest. See "-- Methodology for Determining
Inventories -- The Pacific Northwest Properties."
Throughout the western United States, harvest levels have been reduced from
public lands over the past ten years. Private owners of timberland have become
the beneficiaries of reduced timber supplies from public lands and the resulting
competitive market for timber. Many mills in eastern Oregon have closed during
the last decade, mostly due to the drastic reduction of timber sales from
federal lands. However, many of the remaining mills have increased capacity
through mill improvements. Mill capacity is adjusting to accommodate the
available supply of eastern Oregon timber. According to Mason, Bruce & Girard,
the current annual log consumption by the 14 mills within the market area of our
Oregon timberlands is estimated to be 492 million board feet. Our planned timber
sales in 1999 from Oregon timberlands would represent 9.9% of this amount.
77
<PAGE> 84
[GRAPHIC DEPICTING LOCATION OF OREGON TIMBERLANDS AND
CONVERSION FACILITIES IN MARKET REGION OF
OREGON TIMBERLANDS APPEARS HERE]
We are currently evaluating our Oregon timberlands to identify parcels that
have a higher and better use than growing timber. We have identified over 15,500
acres from our Oregon timberlands that could be sold, consistent with our
long-term investment strategy of focusing our activities on timber production.
The properties that could be sold include parcels that may be suitable for
grazing, recreational uses or for exchange with the Bureau of Land Management
for timberland.
78
<PAGE> 85
THE WASHINGTON TIMBERLANDS
Our Washington timberlands are located in Lewis and Grays Harbor counties
and consist of approximately 11,000 acres containing approximately 129 million
board feet of merchantable timber. The timber on the Washington timberlands is
in even-aged stands with well-defined harvesting programs in place.
The Washington timberlands contain a blend of species as shown below, as
verified by Mason, Bruce & Girard as of December 31, 1998. 97.3% of the
merchantable timber inventory shown for the Washington timberlands is sawtimber.
WASHINGTON TIMBERLANDS
MERCHANTABLE TIMBER BY SPECIES
<TABLE>
<CAPTION>
SPECIES BOARD FEET PERCENTAGE
- ------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Western hemlock............................................. 56,980 44.2%
Douglas-fir................................................. 30,789 23.9%
Red and incense cedar....................................... 16,066 12.5%
Other conifers.............................................. 13,168 10.2%
Red alder................................................... 8,348 6.5%
Other hardwoods............................................. 3,415 2.7%
------- ------
Total............................................. 128,766 100.0%
======= ======
</TABLE>
Mason, Bruce & Girard's estimate of merchantable timber inventory for our
Washington timberlands was determined based on sampling methods and standards
customarily used in the Pacific Northwest. See "-- Methodology for Determining
Inventories -- The Pacific Northwest Properties."
Historically, a significant amount of logs produced from privately held
timberland in Washington has been sold in the export market, principally due to
the demand for Douglas-fir in Asia, and Japan in particular. The export market
has weakened considerably since early 1997, however, and many logs that would
have previously been exported are now being sold to domestic mills.
According to Mason, Bruce & Girard, there are a total of 31 mills within
the market area served by our Washington timberlands, with a total annual log
consumption of approximately 979 million board feet. Our planned timber sales
from our Washington timberlands in 1999 would represent approximately 1.4% of
this amount. Large industrial timberland owners dominate this market. In
addition to providing a large portion of the annual timber supply, these
companies also generate demand for the resource by operating their own sawmills,
export facilities, and, in some cases, pulp mills.
79
<PAGE> 86
[GRAPHIC DEPICTING LOCATION OF WASHINGTON TIMBERLANDS AND CONVERSION
FACILITIES IN MARKET AREA OF WASHINGTON TIMBERLANDS APPEARS HERE].
METHODOLOGY FOR DETERMINING INVENTORIES
The calculation of merchantable timber inventory involves making a series
of judgments regarding appropriate classification of standing timber. We rely
upon independent forestry consultants and our understanding of local markets to
assist us in reaching these judgments and to permit us to estimate our inventory
using a consistent approach from year to year throughout our operating regions.
The size of the logs that local mills process can vary from year to year based
on changes in lumber prices and processing technology. We do not expect changes
in local size requirements to be so significant as to affect our timber sales
plans.
None of the trees included in our inventory is physically impossible to
harvest, but trees are included in inventory even if they cannot currently be
harvested because of a regulatory restriction or a practical limitation on
immediate access. This is in accordance with industry standards, which recognize
that large timber stands cannot be harvested at once. A tree is included as
merchantable timber if it impacts the amount of timber available for harvest
from the remainder of the property. For instance, some trees in stream buffer
zones may not currently be cut, but they provide shade and regulate stream
temperature and wildlife habitat, which will allow for the harvest of trees at
another location. In some instances, trees may
80
<PAGE> 87
become available for harvest through the change in location of endangered
species or when density of surrounding stands change.
The Pacific Northwest Properties
Mason, Bruce & Girard estimated our merchantable timber inventories on the
Pacific Northwest properties. These estimates of merchantable timber volume were
determined based on sampling methods and standards customarily used in the
Pacific Northwest.
In calculating timber inventory, Mason, Bruce & Girard has confirmed that
it used merchantable timber standards of length and diameter recognized in the
markets of our Pacific Northwest properties. Recognized inventory standards for
merchantable timber require that the minimum diameter of standing trees,
measured inside the tree bark at the top of the cut segment, be at least 5
inches, measured to the nearest whole inch.
The mills in our Pacific Northwest market, except for the Coastal market
area, are currently actively purchasing logs with a 5-inch minimum diameter top,
which is the standard we use for our inventories throughout the region. This is
consistent with our timber sales plan, which does not contemplate sales of
timber from the Coastal forest with less than a 6-inch diameter top. In the
Coastal market area, most mills are currently purchasing logs with a minimum
6-inch diameter top. Mills throughout the Coastal market area have historically
purchased logs with as small as a 5-inch top, and two mills are currently
purchasing logs of that size.
Mason, Bruce & Girard has used the 5-inch minimum diameter top in
estimating merchantable timber inventory for all of our Pacific Northwest
forests. That firm used a 6-inch minimum diameter top when it estimated the
inventory for a prior owner in connection with its 1996 Option A submission to
the California Department of Forestry and Fire Prevention, as this was an
accepted specification used in growth and harvest modelling at the time. If we
used that specification on our Coastal forest, we would show our merchantable
inventory for that forest to be approximately 730 million board feet, instead of
856 million board feet using the 5-inch diameter top standard.
Merchantability length specifications vary in the Washington market from
our other three Pacific Northwest markets, where length merchantability
specifications are similar. In the Washington market, a tree is merchantable and
included in inventory if it will produce at least one log that is 32 feet long
with a 5-inch minimum diameter top. For all other markets, a tree is
merchantable and is included in our inventory if it contains at least one
16-foot log with a minimum 5-inch diameter top. In addition, in each of our
Pacific Northwest markets, volumes for the portion of a tree's trunk above the
merchantable first log will be included if the additional piece beyond the
merchantable first log exceeds a minimum length of 12 feet.
As is the common practice involving transactions of large acreage tracts of
timber with diverse species and locations, Mason, Bruce & Girard did not perform
a complete re-inventory of our Pacific Northwest properties. Instead, Mason,
Bruce & Girard confirmed the timber volumes by sampling or observing portions of
the properties which had previously been inventoried by themselves or by other
qualified forest experts from 1994 through 1998. Each inventory estimate was
adjusted for harvests and growth before inclusion. These sample inventories
(including some re-inventories of the same areas) covered an aggregate of
approximately 276,000 acres in Oregon, 11,000 acres in Washington and 122,000
acres in California. The inventories were established to customary standards.
These standards ranged from plus or minus 5% at a 95% confidence interval to
plus or minus 10% at a 90% confidence interval. This means that, at the 95%
confidence interval, 95 times out of 100, if the property were reinventoried
using the same sampling procedure and specifications, the resulting volumes
would vary by no more than 5%. Similarly, at the 90% confidence interval, 90
times out of 100 the reinventoried volumes would vary by no more than 10%. These
statistical reliability indicators relate to total volume and not to the volume
for individual species.
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<PAGE> 88
No statistical tests were performed to determine the reliability of volume
estimates for each species. These tests would be unusual and, to the knowledge
Mason, Bruce & Girard, have not been done for any industrial forestland
inventory. The species volume estimates are part of the total and reflect the
species only as they appear in the samples. This is customary and knowledgeable
timber analysts recognize these methodologies.
Inventory reductions are calculated periodically using actual harvests on
each property. Growth is added periodically using stand projection systems that
determine growth rates for representative samples of each of the ownership
units. Mason, Bruce & Girard used its proprietary Stand Projection System in our
Washington and Oregon properties. Growth rates on the Coastal property were
determined as part of the Option A process using a growth model accepted in the
industry, called the Cooperative Redwood Yield Project Timber Output Simulator.
For the Commander tract, growth is based on common accepted growth rates typical
of similar California properties.
As is common practice for large acreage commercial timber owners, we plan
to conduct physical re-inventory of about 10% of our properties annually. This
will provide us with a complete re-inventory every 10 years, and a routine
confirmation and adjustments of actual volumes of merchantable timber.
The Louisiana Property
Canal Forest Resources' estimate of merchantable timber volume was
determined using customary sampling methods and standards used in the
southeastern United States. The estimate provides an inventory of timber volume
by tree species and age. The sampling error for this inventory estimate was plus
or minus 5% at a 95% confidence interval. All timber volume estimates were
calculated in tons and included only trees that met the following
specifications:
<TABLE>
<CAPTION>
MINIMUM
DIAMETER MINIMUM
AT 4 1/2' TOP MINIMUM
PRODUCT HEIGHT DIAMETER HEIGHT
- ------- --------- -------- -------
<S> <C> <C> <C>
Pine pulpwood............................................... 4.6" 3" 25'
Pine small sawtimber........................................ 8.6" 6" 16'
Pine sawtimber.............................................. 11.6" 7" 16'
Pine poles.................................................. 11.0" 5" 35'
Hardwood pulpwood........................................... 5.6" 4" 25'
Hardwood sawtimber.......................................... 12.6" 9" 16'
</TABLE>
We classify poles, a premium-priced form of timber, as sawtimber. Minimum
top diameter is measured inside the tree bark at the top of the log cut, to the
nearest whole inch.
Canal Forest Resources completed its initial timber inventory in July 1998.
Canal Forest Resources used 6,323 sample plots on approximately 62,900 acres to
provide the 95% confidence level. To verify that sample plots were accurately
measured, Canal Forest Resources audited 146 check plots, which were distributed
randomly but representative of the sample.
Canal Forest Resources updated its initial inventory estimate to account
for timber sales activity and to include timber growth for the six months
between June 1998 and December 1998. Canal Forest Resources estimated growth for
each individual stand of the property based on specific characteristics of site
quality, age, current forest density and species, using customary growth
projection models.
Acceptance of Our Merchantable Timber
The mills in each of our market areas are capable of processing our
merchantable timber, and we consider them all to be prospective buyers of our
timber. These mills produce particular wood products, such as lumber, paper and
wood fiber board. Similarly, our merchantable timber is used for different
applications, and is sold based on its ultimate end use. For example, we
generally sell timber that can be processed as sawtimber to a sawmill, whereas
we sell pulpwood to a paper mill or another type of mill that can use wood chips
or pulp. A single mill generally does not purchase and process all forms of
82
<PAGE> 89
merchantable timber in its market areas, and generally we would not expect any
single mill in any of our market areas to buy all of the types of timber we are
selling in that market area. Our independent forestry consultants, Mason, Bruce
& Girard and Canal Forest Resources, have confirmed that the demand for logs in
the relevant market areas for our Pacific Northwest and Louisiana properties is
sufficient to accommodate our planned sales and resulting harvest volumes
without adversely affecting the prices we can obtain for our timber in any of
these markets.
HARVEST METHODS
Harvest methods for our timberlands will vary depending upon geography,
topography and soil characteristics. Generally, crawling tractors and wheeled
ground skidders will be used on relatively level terrain. Steep terrain will
generally dictate the use of more expensive cable or tower logging methods. The
Louisiana property, which has comparatively flat terrain, is expected to be
harvested using these ground-based skidder and tractor methods. Portions of the
Coastal and Commander forests have comparatively steep terrain and are expected
to require more cable or tower logging methods. The remaining properties,
containing both level and steep terrain, are expected to be harvested using a
combination of methods.
On the Louisiana property, we intend to thin the productive pine
timberlands, generally twice prior to final harvest. Thinning is employed both
to maintain the optimal stocking density and to improve the quality and health
of the remaining timber. Thinning will be conducted using either mechanical
harvesters or ground crews. We intend to conduct a final harvest of pine
plantations when the timber reaches a mature condition, usually between the ages
of 26 and 34. These management and harvest guidelines are accepted forestry
practice in the southeastern United States and are intended to replicate the
natural ecological lifecycle of the southern pine. Following final harvest, we
will regenerate the site through replanting with appropriate genetically
selected seedlings.
On our Pacific Northwest properties, we will employ a variety of management
and harvest techniques. Consistent with prudent forest management, commonly
accepted forestry practices, and applicable law, harvest practices will include
both partial cutting and clear cutting depending on the specific forest
characteristics. For example, in western Washington, Douglas-fir timber stands
on steeper slopes should be clear-cut and replanted in order to minimize soil
damage and encourage the regeneration of a productive forest. However, in the
ponderosa pine forests of eastern Oregon or California, a multiple stage partial
harvest will encourage natural regeneration of pine, minimize risks (such as
insect infestation) and maintain wildlife habitat.
ACCESS AND LIMITATIONS ON ACCESS
Substantially all of the timberlands in our timberland portfolio are
accessible by a system of established public and private roadways. When
maintenance or new roads are needed, third-party road crews typically conduct
road and bridge construction under the supervision of our personnel or
contracted forest managers. We are also a party to reciprocal road-use and
cost-sharing agreements with private landowners and with governmental agencies.
See "-- Federal and State Regulations -- Other Regulatory Matters."
FEDERAL AND STATE REGULATIONS
BACKGROUND AND APPROACH
Our operations are subject to numerous federal, state and local laws and
regulations, including those relating to the environment, endangered species,
our forestry activities, and health and safety. Endangered species,
environmental and other laws restrict our operations and could impose
significant delays, costs, damages, penalties and liabilities on us. We expect
that endangered species and environmental laws will become more restrictive over
time. Due to the significance of regulation to our business, we plan to
integrate wildlife, habitat and watershed management into our resource
management practices.
Consistent with industry practice, in determining the amount of
merchantable timber in our inventory, we have included approximately 27,000
acres of our timberlands that are subject to harvest restrictions.
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<PAGE> 90
These restrictions limit and may prevent harvests on these timberlands. We have
not included timber from these restricted acres in our timber sales plan, to the
extent that these restrictions prohibit harvesting. We expect environmental,
forestry and wildlife regulations to become more restrictive in the future,
possibly resulting in the withdrawal of a significant number of additional acres
from our timber sales plan.
ENDANGERED SPECIES LAWS
The Federal Endangered Species Act and similar state laws and regulations
protect wildlife species threatened with possible extinction. A number of
species indigenous to the southern and northwestern United States have been, are
and in the future will be, protected under these laws and regulations. These
laws generally prohibit activities that would kill, injure, or harass a
protected species or significantly degrade its habitat. The habitat of a
protected species includes areas in which it lives, nests, shelters, breeds,
forages or feeds or areas that are for some other reason necessary for the
conservation of the protected species.
We have identified a total of approximately 2,300 acres of our timberlands
that are subject to some level of harvest restrictions due to the presence of
threatened and endangered species, excluding fish, on or near those timberlands.
In addition, approximately 20,000 acres of our timberlands, subject to some
level of harvest restrictions to maintain waterway buffer zones, include
restrictions to protect threatened or endangered fish. The table below shows,
based on limited surveys by Mason, Bruce & Girard, Canal Forest Resources and
ourselves, each species found on our timberlands that is presently identified by
federal or appropriate state authorities as threatened or endangered, and the
approximate total number of acres restricted for each property.
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF
PROPERTY SPECIES KNOWN TO BE PRESENT KNOWN RESTRICTED ACRES
- -------- --------------------------- ----------------------
<S> <C> <C>
California -- Coastal Forest................... Coho salmon
American peregrine falcon
Northern spotted owl
7,834
California -- Commander Forest................. Steelhead trout
Bald eagle
American peregrine falcon
Northern spotted owl
3,030
Louisiana...................................... None 0
Oregon......................................... Bull trout
Bald eagle
10,476
Washington..................................... Bald eagle
Coho salmon
Steelhead trout
997
------
Total................................ 22,337
</TABLE>
To the extent required by law, we survey our timberlands for the presence
of endangered or threatened species before we harvest any specific tract of
timberland. A wildlife biologist reviews the survey and determines whether our
harvesting activities will affect any endangered or threatened species. We
believe that we are managing our harvesting operations in the areas affected by
protected species in compliance with applicable federal and state regulations.
We do not believe that the presence of any protected species on our lands will
materially restrict our ability to proceed with our current harvest plans and
other silvicultural activities and operations. Our harvest plans take into
account any potential restrictions for endangered or threatened species of which
we are aware. If we discover endangered or threatened species on a particular
tract, we have the flexibility to adjust our harvest plans in an effort to avoid
any significant reduction in yield. We can choose to sell timber from a
different tract or have the timber cut at a different time of the year to avoid
disturbing the habitat of an endangered or threatened species. We can exercise
this flexibility because we harvest only a small percentage of our timberlands
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each year. Nonetheless, the presence of protected species on or near our
timberlands may significantly affect our operations, including restricting or
prohibiting timber harvesting, road building, access across federal lands and
silvicultural activities on the affected areas of our timberlands.
The detection of a protected species on a tract does not always permanently
remove acreage from harvesting because the protected species may move. If a
protected species moves, its move does not have to be permanent. However, in
some cases, we will be restricted from harvesting acres until the species has
been gone for some specified period of time that varies from species to species.
For example, if a northern spotted owl moves from our restricted acres, we will
not be able to harvest those acres until three years after the last siting. In
addition, harvest restrictions may apply only during limited periods of time,
such as during a species' breeding or mating seasons. In general, during the
mating season of each endangered bird, the size of the restricted area and the
nature of activities restricted is greater than outside of the mating season.
These restrictions apply to us because of the endangered birds found on or near
our timberlands. During the mating season of the northern spotted owl, which
generally occurs between March and August of each year, and the mating season of
the American peregrine falcon, which generally occurs between April and August
of each year, no harvest activity can take place within the related restricted
area.
Protected species may be discovered in significant numbers on or around our
timberlands. These species could be or become present on our properties in
sufficient numbers to restrict our timber sales plan materially. Additionally,
future legislative, administrative or judicial activities related to protected
species may adversely affect us, our ability to continue our operations as
currently conducted or our ability to implement our business strategy.
The states of California, Oregon and Washington have rules and regulations
that regulate our timber harvest activities to protect endangered species. The
California Forest Practice Rules, the California Endangered Species Act, the
Washington Forest Practices Act, the Oregon Forest Practices Act and related
regulations all have specific provisions governing habitat protection for the
northern spotted owl, bald eagle, marbled murrelet, coho salmon, steelhead trout
and other threatened or endangered species. At present, Louisiana has not
adopted any endangered species requirements that affect our Louisiana
operations.
Pacific Northwest Properties. Recent surveys of our Pacific Northwest
properties by Mason, Bruce & Girard identified the presence of the northern
spotted owl, the bald eagle and other endangered or threatened species. We
engaged Mason, Bruce & Girard to provide information about our timberlands to
our lenders. In connection with this process, Mason, Bruce & Girard surveyed the
presence of wildlife on our properties.
In 1990, the U.S. Fish and Wildlife Service listed the northern spotted owl
as a threatened species throughout its range in California, Oregon and
Washington. At the time of the listing, the U.S. Fish and Wildlife Service
issued suggested guidelines to be followed by landowners in order to comply with
the Endangered Species Act's prohibition against harming or harassing owls. The
guidelines recommend several measures, including habitat management and the
restriction of harvest activities in areas within a certain proximity of known
owl activity centers.
The surveys conducted in the first quarter of 1998 showed that there were
approximately 110 northern spotted owl activity centers that affect our
Commander forest, though many of these activity centers are located on adjacent
properties. Although there have been incidental observations of bald eagles,
American peregrine falcons, golden eagles and northern goshawk in the Commander
forest, no nesting or roosting sites have been found. Steelhead trout and fall
chinook salmon have been observed in streams in the Commander forest and it is
likely that streams in that forest will be subject to restrictions for these
species and for coho salmon.
Mason, Bruce & Girard has also conducted surveys as part of our timber
harvest planning process on our Coastal forest. These surveys showed that there
were approximately 12 pairs or single spotted owls on the Longview tract in the
Coastal forest, and that the property is within the range of the bald eagle,
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peregrine falcon and marbled murrelet, though none of these species is currently
known to reside on the property. Streams within the Longview tract support coho
salmon, steelhead trout and chinook salmon. We currently comply with
restrictions to protect and restore the habitat of these fish. The nature and
scope of restrictions to conserve fish populations may increase over time. For
example, the size of buffer zones along streams on our property may have to be
widened and the number of streams subject to buffer requirements may increase.
Road construction and maintenance requirements may also become more burdensome.
A similar survey conducted on our Willits Woods/Williams Ranch tract in the
Coastal forest showed that there were approximately 10 pairs or single spotted
owls and one peregrine falcon nest on the property, and that the property is
within the range of the bald eagle and the marbled murrelet, though none of
these species is currently known to reside on the property. Streams within the
Willits Woods/Williams Ranch tract contain coho salmon and steelhead trout. Some
chinook salmon have also been reported. We comply with the same protective
measures with respect to streams on this tract as with the Longview tract.
Only two federally listed species, the bald eagle and the bull trout, are
known to occur on our Oregon timberlands. Mason, Bruce & Girard noted six
observations of bald eagle and 19 observations of bull trout on the property.
One bald eagle nest was found on our Riffe Lake tract in Washington. The
surveys noted that the range of the marbled murrelet and the northern spotted
owl include our Riffe Lake tract, though none are currently known to reside on
the property. Mason, Bruce & Girard also noted that coho salmon and steelhead
trout are likely present on the property.
Louisiana Property. In connection with our acquisition of the Louisiana
property, we conducted a Phase I environmental site assessment in April 1998.
This Phase I assessment identified red cockaded woodpecker nests that were
apparently abandoned on approximately two acres. The Louisiana property has in
the past been, and may still be, inhabited by the red cockaded woodpecker,
though none is currently known to reside on the property. Although no endangered
species surveys are required prior to harvesting in Louisiana, there are strict
regulations requiring us to halt harvest operations in specific areas where
evidence of endangered species is observed. If we do observe protected species,
we would begin biological studies to determine appropriate responses to
protected species present on the property.
STATE FORESTRY REGULATIONS
In operating our Pacific Northwest properties, we must comply with state
statutes and regulations that regulate forestry operations. These laws address
many growing, harvesting and other activities on forest lands. Among other
requirements, these laws restrict the size and spacing of harvest units and
impose reforestation obligations on the owners of forest lands. State laws and
regulations also limit timber slash burning, operations during fire hazard
periods, logging activities affecting or utilizing water courses or in proximity
to ocean and inland shore lines, water degradation and grading and road
construction activities.
California. Before a private landowner can harvest timber in California,
the California Forest Practices Act and Forest Practice Rules require the
landowner to submit a timber harvest plan to the California Department of
Forestry and Fire Protection for its approval. A timber harvest plan must be
prepared by a registered professional forester and filed on a tract-by-tract
basis within a particular forest. The plan must comply with California's
forestry rules and legal requirements, which are perhaps the most stringent in
the United States. Generally, the timber harvest plan must include, among other
things, a description of:
- how the harvest will be done;
- the silvicultural techniques to be used;
- proposed replanting and reforestation activities;
- the measures that will be taken to prevent erosion and maintain water
quality;
- the measures that will be taken to protect wildlife and plant habitats;
and
- methods of sustaining other forest resources.
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The Forest Practice Rules also require a timber harvest plan to demonstrate
that a forest is being harvested in a manner that will not exceed maximum
sustained production. Maximum sustained production for a forest means that, over
a ten-year period, the owner will harvest an amount of timber in the forest no
greater than the growth of timber in that forest for that period. The Forest
Practice Rules provide three options for demonstrating the ability to achieve
maximum sustained production. These optional methods are called Option A, Option
B and Option C.
Coastal Forest. We manage our Coastal forest under an Option A plan
originally submitted by an unaffiliated prior owner of the Coastal forest. The
landowner files with the timber harvest plan its analysis and plan to achieve
maximum sustained production for a specific forest over a period of time,
generally 10 years. The Option A plan:
- provides a detailed survey of the volume and species of timber in the
forest,
- provides an estimate of the timber that can be harvested in the period
and the long-term sustained yield plan for the forest, and
- addresses the impact of the proposed harvest on the environment and
endangered species.
The Option A plan establishes a decade-by-decade harvesting model for the
Coastal forest. Under the Option A plan, we must file timber harvest plans with
respect to specific tracts from which we propose to sell timber for harvest with
the California Department of Forestry and Fire Protection. The California
Department reviews these timber harvest plans for compliance with the Option A
plan, and for other matters such as erosion control and effects on wildlife, in
connection with its approval process. The Option A plan contemplates the harvest
of up to approximately 40 million board feet of timber from the Coastal forest
per year on average through 2006. An Option A plan is reviewed annually by the
California Department of Forestry and Fire Protection, which may modify the
terms of the plan.
Commander. We operate our Commander forest under Option C. Under Option C,
we have not submitted a comprehensive maximum sustained production plan for the
Commander forest. Instead, we submit to the Department of Forestry and Fire
Protection timber harvest plans for specific tracts within the Commander forest
containing sustained production and environmental impact analyses. We are
required to comply with the restocking requirements under the California
Forestry Practice Rules on the harvested tracts. We intend to submit an Option A
plan for the Commander forest by the end of 1999.
Oregon. Under the Oregon Forest Practices Act, we must notify the Oregon
Department of Forestry no less than 15 days prior to beginning a timber harvest
on our Oregon timberlands. Upon expiration of the 15-day notice period,
harvesting operations may begin. We must submit a written harvest plan if
harvesting operations will be conducted within:
- 100 feet of a large lake or stream,
- 300 feet of a site containing threatened or endangered species, or
- 300 feet of a sensitive bird site
or if a clear-cut will exceed 120 acres or a planned road fill is over 15 feet
deep. The Department of Forestry has 15 days to review such a harvest plan,
which runs concurrently with the 15 day notice period.
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Washington. The Washington Forest Practices Act classifies forestry
practices into four classes. Most commercial harvesting, such as that conducted
on our Washington timberlands, falls within Class III forestry practices. Before
a Class III harvest may be conducted, we must submit an application to the
Washington Department of Natural Resources. The Department of Natural Resources
must act upon the application within 30 days of submission. Class IV forest
practices have a potential for substantial impact on the environment and require
the Department of Natural Resources to determine whether an environmental impact
statement must be submitted. If the Department of Natural Resources requires the
landowner to submit an environmental impact statement, it must act on the
application within 60 days of submission. Harvesting operations on our
Washington timberlands generally will not fall within either Class I or Class II
forest practices, which are applicable to forest practices having no impact or
less than ordinary impact, respectively, on natural resources.
Louisiana. Louisiana does not currently have any statutes or regulations
we believe would materially restrict our forestry operations.
We may acquire timberlands in jurisdictions with forest practices acts that
are considerably more restrictive than the best management practices currently
utilized by many foresters. Many 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 materials such as
herbicides, pesticides, fertilizers and gasoline, and may result in air
emissions, releases to soil or groundwater, or discharges of potentially
hazardous materials into streams and other bodies of water. Accordingly, we must
comply with 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 we expect them to
become increasingly stringent. Although we believe that we are in substantial
compliance with these requirements, these laws and regulations may lead to
significant costs, penalties and liabilities, including those related to claims
for damages to property or natural resources. These laws and regulations could
also impose restrictions on timber harvesting and other silvicultural
activities. We are not aware of any pending legislative, administrative or
judicial action relating to the protection of the environment that we believe
could materially and adversely affect us.
Some environmental statutes, such as the Federal Comprehensive
Environmental Response, Compensation and Liability Act and comparable state
laws, impose strict liability, regardless of the lack of negligence or fault on
the part of the person held liable. Under various laws and regulations, an owner
or operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances released on, from or in its
property, often without regard to whether the owner or operator knew of, or was
responsible for, the release of the substances. The presence of these
substances, or the failure to remediate them properly, may adversely affect the
owner's ability to sell contaminated real estate or to use it as collateral.
The Louisiana property contains active and inactive natural gas and oil
wells and pipelines, which have been and will continue to be operated by third
parties. The operation of natural gas and oil wells involves risks, such as well
blowouts, cratering, explosions, uncontrollable flows of oil or well fluids,
fires, formations with abnormal pressures, pollution, pipeline ruptures and
spills, and releases of toxic gas. The operators of these natural gas and oil
wells and pipelines are primarily responsible for any environmental hazards
associated with these activities. Other past activities on the Louisiana
property are evidenced by an abandoned asphalt plant, an abandoned sawmill and
abandoned landfills. We do not believe that these past activities have caused
any material environmental impacts.
Our operations involve only owning and selling timberlands, Pioneer and
related entities have in the past owned timber processing facilities associated
with the Pacific Northwest properties. In some circumstances, past owners may
incur environmental liability. Additionally, a property connected with our
Oregon timberlands was previously the site of an equipment maintenance
operation. Remedial activities have been conducted on this property, and we
believe that no material contamination remains at the site.
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A company affiliated with the sellers of Pioneer has agreed to indemnify us
against environmental liabilities arising out of the Pacific Northwest
properties relating to conditions that existed at the time of the acquisition.
We may acquire timberlands subject to potential environmental or other
liabilities. We are not aware of any activities or any conditions on our initial
timberlands that would likely result in material liability for remediation or
other environmental costs. However, we may not know about material environmental
conditions on our lands that may have been created by us, a prior owner or
operator of our land or an adjacent landowner. In addition, our operations could
result in material liabilities, fines, costs and restrictions under current or
future environmental laws and regulations.
The Federal Clean Air Act and Clean Water Act, and their state equivalents,
control our on-site preparation activities such as slash burning and regulatory
programs designed to reduce runoff discharged into bodies of water. For example,
the U.S. Environmental Protection Agency and its state counterparts have
designated bodies of water as "water quality impaired," triggering a requirement
to establish Total Maximum Daily Loads, or TMDLs, for those bodies of water. The
TMDL process could result in additional limitations on harvesting activities in
some or all of the states where we operate. Our California timberlands are in
watersheds that have been designated as water quality impaired. As the TMDL
process is completed for these watersheds, we must take precautions to prevent
erosion, and we may need to monitor water quality during our harvesting
operations. California regulators analyze the impact of TMDLs on our properties
there, and Mason, Bruce & Girard has estimated that 24,400 acres of our
California timberlands may be affected. We expect that this will increase the
time required to obtain approval of our timber harvest plans in California
because the state will consider TMDL issues such as runoff generated by
harvesting activities on our properties when deciding whether to approve a
particular timber harvest plan. We will also factor TMDL planning into our
timber harvest plans. Because the TMDL regulatory process is still being
developed, we cannot yet determine the full extent to which this will restrict
our ability to sell timber from our California timberlands in accordance with
our timber sales plan, but we do not expect it to have a material effect.
In addition, our business is 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 or beyond a protected
wetlands area may be limited, and we may be required to pay for the protection
of wetland areas. Alternatively, we may have to stop harvesting in wetland
areas. Based on existing governmental surveys and supplemental data that
identify wetland areas, we have identified approximately 4,500 acres of wetlands
on our Louisiana property. Consistent with local forestry practice, we are
harvesting timber in these wetland areas only to a limited extent.
OTHER REGULATORY MATTERS
Our 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 used in forestry practices. We must also
comply with the federal Occupational Safety and Health Act and comparable state
statutes relating to the health and safety of employees. We believe that we are
in compliance with OSHA regulations, including general industry standards,
permissible exposure levels for toxic chemicals and record-keeping requirements.
A portion of our Pacific Northwest properties consists of sections of land
that are intermingled with or adjacent to sections of federal land managed by
the U.S. Forest Service and the Bureau of Land Management. Removal of trees from
those portions of the Pacific Northwest properties requires trucks to carry logs
across logging and general purpose roads. In many cases, access is only, or most
economically, achieved through a road or roads built across adjacent federal
land and available to us pursuant to a reciprocal right-of-way agreement.
Recent litigation not involving us before the U.S. Court of Appeals for the
Ninth Circuit held that the Bureau of Land Management was not required to
consult with the U.S. Forest and Wildlife Service, the agency that administers
the Endangered Species Act, prior to approving a private landowner's proposal
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to build an access road across federal land pursuant to an existing reciprocal
right-of-way entered into prior to the enactment of the Endangered Species Act.
The Court found that the Bureau of Land Management did not have discretion to
disapprove a road segment due to endangered species concerns. However, future
federal law or regulation requiring the Bureau of Land Management to consult
with the U.S. Forest and Wildlife Service in connection with a reciprocal
right-of-way could prevent us from harvesting the affected portion of the
Pacific Northwest properties.
To the extent that we acquire new timberlands that require access through
federal lands, we may need to enter into new reciprocal right-of-way agreements
with the Bureau of Land Management or other federal agencies which would require
consultation with the U.S. Forest and Wildlife Service. In addition, the Bureau
of Land Management previously attempted to revise regulations governing
reciprocal right-of-way agreements. These regulations attempted to expand the
Bureau of Land Management's consideration of environmental and cultural factors
in granting, issuing or renewing rights-of-way, provide the Bureau of Land
Management with regulatory authority to object to the location of roads because
of potential effects on threatened or endangered species and allow for the
abandonment of rights-of-way under certain circumstances. Future attempts to so
revise the applicable regulations, if successful, could affect our ability to
harvest timber activities on the Pacific Northwest properties.
OUR CUSTOMERS
We currently are in the process of building a customer base for timber from
the Louisiana property that will enable us to meet our planned timber sales
program. We have entered into and will continue to enter into cutting contracts
with respect to the Louisiana property in the ordinary course of our business.
We plan to offer timber for sale to major industrial companies, and to develop
marketing relationships with timber brokers and independent logging companies in
the southeastern United States.
Our eastern Oregon timberlands have historically been a raw material
supplier for two previously affiliated sawmills located nearby. Although it is
expected that these two mills will continue to be major purchasers of timber
from these lands, we have initiated a marketing program to diversify our
customer base within the region.
Until mid-1998, our western Washington timberlands had been managed as part
of a much larger industrial land base, with the bulk of the harvested timber
being converted at affiliated facilities. In the future, we intend to take
advantage of the diverse market for timber in the region. These potential new
markets include many large industrial timber companies as well as brokers and
exporters.
Historically, the previous owner of our Commander forest dealt exclusively
with the most prominent lumber producer in northern California with respect to
sales of timber from that forest. We intend to develop relationships with other
wood users in the region. In the redwood region of northern California, we
anticipate doing business with a diverse group of potential timber customers.
Currently, we are in the process of building a customer base for timber from our
Coastal forest.
To date, we have entered into contracts providing for aggregate 1999 timber
harvests valued at approximately $17.5 million. These include new contracts on
our Louisiana property with six separate buyers -- Boise Cascade Corporation,
Heath Timber Company, Inc., Hunt Forest Products, Inc., Louisiana-Pacific Corp.,
Nash-Co. Industries Forest Products, Inc. and Temple-Inland Inc. -- and provide
for harvests of up to 300,000 tons of timber in 1999. The 1999 harvests also
include sales of 17.4 million board feet from our Commander forest to
Sierra-Pacific Industries, Inc. We expect to sell more timber in the Pacific
Northwest as the effects of winter weather subside.
Even though the number of our customers is currently relatively small
compared to the market, we do not believe that we are dependent on any
particular customer due to the number of timber buyers in each market area in
which we operate.
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COMPETITION
COMPETITION IN TIMBER SALES
Due to transportation costs, domestic timber conversion facilities tend to
purchase raw materials within relatively confined geographic areas. Currently in
the United States, we and our competitors all benefit from the relatively close
proximity of numerous conversion facilities. Additional competitive factors
within a market area generally will include species, quality, and consistency in
meeting customers' specifications and delivery requirements.
Within the United States, we compete with numerous private timber owners.
In addition, we compete with the U.S. Forest Service and other governmental or
public agencies with timber holdings. 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.
Internationally, we expect competitive situations and factors similar to
those in the United States. Where we seek to develop the timber resource in a
growing locality, it may also experience competition for or limitations on
labor, energy, skilled professionals or other resources. Relatively new markets
and markets which are not yet fully developed for a particular product may
experience sluggish sales due to a lack of market competition, as there may be a
limited or undeveloped pool of buyers for a particular product.
Global price fluctuations may adversely affect demand for particular
species, grades, or products or could make substitute species, products or
materials economically competitive. Price fluctuations could also bring certain
supplies of standing timber to market which have until now been unprofitable to
harvest. We believe, however, that our current diversified portfolio and our
global investment strategy will dampen the negative effects of depressed markets
in any given region.
COMPETITION FOR TIMBERLAND PROPERTIES
Competition for high-quality timberland within the United States and in
certain other countries has intensified, often requiring a flexible approach to
identification, negotiation, and completion of successful acquisitions. We
believe that our competitive strengths will enhance our success in acquisitions
despite the greater financial resources of certain of our competitors. See "Risk
Factors -- We may not be able to achieve our intended growth."
INSURANCE COVERAGE
Certain types of losses, such as damage to our 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, we do not carry insurance for these losses. See "Risk
Factors -- Losses of timber from fire and other causes are not insured."
LEGAL PROCEEDINGS
Although we may, from time to time, be involved in litigation and claims
arising out of our operations in the normal course of business, we are not
currently a party to any material legal proceedings.
EMPLOYEES
Upon the closing of the formation transactions described in "Structure and
Formation of Strategic Timber," our employees will include the persons currently
employed by Strategic Timber Operating Co. and Strategic Timber Two Operating
Co. As of April 1, 1999, these entities employed 33 salaried full-time
employees. Of these employees, eight are part of senior management, 17 are in
forestry operations and eight hold administrative and clerical positions.
All of our senior management are located at our headquarters office in New
London, New Hampshire.
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None of our employees are represented by unions or covered by any
collective bargaining agreements. We have not experienced a work stoppage and
our management believes that we maintain good relations with our employees.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
This section summarizes our current investment objectives and policies,
disposition and financing policies and policies with respect to other
activities. Our Board of Directors established these policies, and it may amend
or revise them from time to time without a shareholder vote. However, we cannot
affirmatively take any action intended to terminate Strategic Timber's
qualification as a REIT without the approval of the holders of a majority of our
outstanding common stock.
INVESTMENT POLICIES
Our investment objective is to maximize the total return from our entire
portfolio consistent with our long-term policy of increasing sustainable yield.
We will seek to accomplish our objective primarily through managing our initial
portfolio of timberlands and acquiring additional timberlands.
Our initial portfolio of timberlands includes a total of approximately
448,000 acres in California, Louisiana, Oregon and Washington. We intend to
acquire additional timberlands in these states, elsewhere within the United
States and abroad. Our current policy, however, is to limit investments outside
the United States to no more than 20% of the total value of our assets.
We will focus on long-term ownership of timberlands. However, we may
purchase or lease properties for long- or short-term investment. We will finance
our investments as described below under "-- Financing Policies." We may cause
our operating partnership to hold or sell any or all of its initial portfolio
when circumstances warrant, subject to the restrictions on sale in the
partnership agreement. We 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 our equity interest in those properties. To enhance the
value of timberlands located in undeveloped or underdeveloped markets, we may
invest in limited conversion, transport or export facilities to stimulate the
growth and competition of local timber markets or provide access to export
markets.
While we intend to emphasize equity investments in timberlands, we may, in
our sole discretion, invest in forest products-related mortgages, partnerships
and other interests in timberlands. We may invest in securities of companies
engaged in timberland activities, subject to the gross income and asset tests
necessary for REIT qualification. We may acquire securities or assets of other
timber owning companies when consistent with our investment policies.
There are currently no other limitations on
- the percentage of our assets that we may invest in any one property,
venture or type of security,
- the number of properties in which we may invest or
- the concentration of our investments in a single geographic region.
Our Board of Directors may establish other limitations, and other policies, as
it deems appropriate from time to time.
FINANCING POLICIES
We intend to target a ratio of debt to total market capitalization,
assuming the exchange of all partnership units for common stock, of
approximately 40%. Our Board of Directors may, however, reconsider this policy
from time to time and reduce or increase this ratio accordingly. Assuming an
initial offering price of $20 per share, following the completion of this
offering and the use of net proceeds from this offering, we will have
approximately $266.8 million of indebtedness, or $220.5 million if the
underwriters exercise in full their over-allotment option. This will constitute
approximately 37.5% of our total market capitalization after giving effect to
this offering, or 30.8% if the underwriters exercise in full their
over-allotment option. Before this offering, we have financed our activities
primarily through bank loans and equity investments. See "Structure and
Formation of Strategic Timber."
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Generally, we will determine all of our 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, we may raise funds through additional equity
offerings, debt financings, retention of cash we generate from our operations or
a combination of these methods.
If the Board of Directors determines to raise additional equity capital, it
has the authority, without your approval, to issue additional shares of
authorized common stock or preferred stock on terms it deems appropriate,
including in exchange for property. Our then-existing shareholders will have no
preemptive right to purchase any of these shares. If the Board of Directors
determines to raise additional equity capital, Strategic Timber will contribute
funds raised to Strategic Timber Partners in return for additional partnership
units. In addition, Strategic Timber may issue additional shares of common stock
in redemption of partnership units on the exercise of the limited partners'
exchange rights under the partnership agreement. See "The Partnership
Agreement."
The Board of Directors, through its control of Strategic Timber Operating
Co., also has the authority to cause Strategic Timber Partners to issue
additional partnership units in any manner as it deems appropriate, including in
exchange for property. See "The Partnership Agreement -- Issuance of Additional
Limited Partnership Interests; Additional Capital Contributions." Strategic
Timber may also purchase shares of its common stock, subject to restrictions
under Georgia law applicable to shareholder distributions. If a holder of
partnership units surrenders its units for exchange, Strategic Timber may, at
its discretion, cause Strategic Timber Partners to redeem those partnership
units for cash rather than common stock. See "The Partnership Agreement."
We anticipate that borrowings will be made through Strategic Timber
Partners. Strategic Timber also may incur indebtedness and lend borrowed funds
to Strategic Timber Partners on the same or similar terms and conditions on
which Strategic Timber borrowed the funds. Debt may be in the form of purchase
money obligations to sellers of timberlands to Strategic Timber Partners,
publicly or privately placed debt instruments, or financing from banks,
institutional investors or other lenders. Any of this debt may be unsecured or
may be secured by mortgages or other interests in the assets of Strategic
Timber, Strategic Timber Partners or any newly created property-owning
partnership. Any number or amount of mortgages may be placed on a particular
property. 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.
WORKING CAPITAL RESERVES
We will maintain working capital reserves in amounts that our Board of
Directors determines to be adequate to meet normal contingencies in connection
with the operation of our business.
CONFLICT OF INTEREST POLICIES
EMPLOYMENT AGREEMENTS
C. Edward Broom serves on the Board of Directors, or the equivalent
management body, of several privately held timber investment funds arising from
his previous employment with Resource Investments, Inc. Only one of these funds
has committed funds that have not yet been invested. This fund could compete
with us in acquiring timberlands. Because this fund's investment policies are to
invest exclusively outside the United States and typically to make larger
investments than we plan to make, we do not expect conflicts to arise. In his
employment agreement, Mr. Broom has agreed that if we wish to bid on a property
and any fund with which he is affiliated is either the seller of the property or
also wishes to bid on the property, he will not participate in the transaction
on behalf of the fund. Mr. Broom may not compete against us during the term of
his employment and for a period of one year thereafter in North America, Central
America and South America, Mr. Broom may not solicit purchasers of our timber or
prospective sellers of timberlands with which he had contact during the term of
his employment for a
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period of one year thereafter. Mr. Broom has also agreed to spend no more than
5% of his time devoted to his interests in these timber funds.
We also have an employment and non-competition agreement with each of
Messrs. Christopher J. Broom, Thomas P. Broom, Kenneth L. Chute, Nicholas C.
Brunet, Vladimir Harris and Joseph E. Rendini effective as of the consummation
of this offering. Each of these employment agreements prohibits the employee
from competing against us during the term of his employment and for a period of
one year thereafter in North America, Central America and South America. It also
prohibits the employee from soliciting purchasers of our timber or prospective
sellers of timberlands with which he had contact during the term of his
employment for a period of one year thereafter. See "Management -- Employment
and Non-Competition Agreements."
OTHER POLICIES GOVERNING COMPETING WITH STRATEGIC TIMBER
Under Georgia law, each of our directors and executive officers must carry
out his duties in a manner he believes in good faith to be in the best interests
of Strategic Timber, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances. In addition, under Georgia
law, a transaction between Strategic Timber and any of our directors or between
Strategic Timber and a corporation, firm or other entity in which one of our
directors has a significant interest may not be challenged on the basis of the
director's conflicting interest if the transaction is fair to Strategic Timber.
This type of transaction also could not be challenged on the basis of the
director's conflict of interest if, after the director discloses the material
facts concerning his or her interest and the transaction, a majority of our
disinterested directors or a majority of our shareholders approves the
transaction. For shareholder approval, shares held or controlled by a director
with a conflicting interest would not count.
Our policies restrict all employees from investing in timberlands, directly
or indirectly, for their own accounts. This policy does not apply to timberlands
owned by employees at the time they became our employees. Our non-employee
directors may only invest in timberlands, directly or indirectly, if the
director first offers the opportunity to us on the same terms and conditions
available to the director. The Audit Committee of the Board of Directors
administers this policy, and can make exceptions.
Our Articles of Incorporation and Bylaws do not further restrict our
directors, officers, shareholders or affiliates from having an interest in
investments that we acquire or sell, or acting for their own accounts in
investing in timberlands or engaging in other businesses in which we engage.
THE PARTNERSHIP AGREEMENT
The partnership agreement gives Strategic Timber Operating Co., as general
partner, full and exclusive responsibility to manage and control the business of
Strategic Timber Partners, subject to limited exceptions described under "The
Partnership Agreement." The limited partners in Strategic Timber Partners have
agreed that Strategic Timber Operating Co. is not required to consider the
separate interests of the limited partners, including tax consequences to the
limited partners, in conducting the partnership's business. Strategic Timber
owns all of the equity interests in Strategic Timber Operating Co.
REPORTS TO SHAREHOLDERS
We intend to send you annual reports containing audited consolidated
financial statements and an independent public accounting firm's opinion on the
financial statements. We also intend to send you quarterly reports for the first
three quarters of each fiscal year containing unaudited financial information.
See "Where You Can Find More Information."
OTHER POLICIES
We intend to operate in a manner that will permit Strategic Timber to
qualify for taxation as a REIT under the Internal Revenue Code. We could decide
not to operate to qualify as a REIT if the Board of Directors decides that,
because of changes in economic circumstances or tax rules, it is no longer in
Strategic Timber's best interests to qualify as a REIT, and a majority of our
shareholders approves this
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decision. We also intend to operate in a manner that will not subject Strategic
Timber to regulation under the Investment Company Act of 1940, as amended. We
have not invested and do not intend to invest in the securities of other
issuers, other than Strategic Timber Partners and Strategic Timber Operating Co.
and other than in connection with timberland acquisitions, for the purpose of
exercising control over those issuers. We have not traded, underwritten or sold
securities of other issuers. We do not intend to underwrite securities of other
issuers or trade actively in loans or other investments.
We may make investments other than those described above, although we
currently do not intend to do so. We may repurchase or otherwise reacquire
common stock or any other securities we may issue. We have no present intention
to repurchase any of our common stock. If we do repurchase shares, we will only
do so in accordance with applicable federal and state laws and the requirements
for qualifying as a REIT under the Internal Revenue Code and the Treasury
Regulations. We have not issued common stock or any other securities in exchange
for property except in connection with our formation transactions. We also have
not reacquired any of our common stock or any other securities. See "Structure
and Formation of Strategic Timber." We may make loans to third parties,
including our officers and directors.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our Board of Directors will be expanded effective immediately upon
completion of this offering to include the director nominees named below, each
of whom has been nominated for election and has consented to serve. We believe
that an independent Board of Directors, whose interests are aligned with those
of the shareholders, is essential to the creation of long-term shareholder
value. Upon completion of this offering, four of seven of our directors will not
be employed by, or otherwise affiliated with, Strategic Timber.
In connection with the expansion of the Board of Directors, and upon
completion of this offering, the Board of Directors will be divided into three
classes. The initial terms of the first, second and third classes will expire in
2000, 2001 and 2002, respectively. Beginning in 2000, directors of each class
will be chosen for three-year terms upon the expiration of their current terms
and each year one class of directors will be elected by the shareholders. We
believe that classification of the Board of Directors will help to assure the
continuity and stability of our business strategies and policies as determined
by the Board of Directors. Holders of common stock will have no right to
cumulative voting in the election of directors. Consequently, at each annual
meeting of shareholders, the holders of a plurality of shares of common stock
will be able to elect all of the successors of the class of directors whose term
expires at that meeting.
Information concerning our current directors, director nominees and
executive officers is set forth below.
<TABLE>
<CAPTION>
TERM EXPIRES
NAME AGE POSITION (DIRECTORS ONLY)
- ---- --- -------- ----------------
<S> <C> <C> <C>
C. Edward Broom............. 70 President, Chief Executive Officer and Chairman of 2002
the Board of Directors
Christopher J. Broom........ 38 Executive Vice President, Chief Investment Officer 2001
and Director
Thomas P. Broom............. 39 Executive Vice President, Chief Operating Officer and 2000
Director
Kenneth L. Chute............ 54 Senior Vice President and Chief Financial Officer
Nicholas C. Brunet.......... 36 Senior Vice President and Director of Forest
Operations
Vladimir Harris............. 42 Senior Vice President and Director of Acquisitions
Joseph E. Rendini........... 44 Secretary, General Counsel and Vice President
T. Yates Exley.............. 38 Vice President -- Strategy and Development
Starling W. Childs, II...... 45 Director+ 2000
Jay S. Lucas................ 44 Director+ 2001
Hanns A. Pielenz............ 59 Director+ 2002
Richard P. Urfer............ 62 Director+ 2002
</TABLE>
- ---------------
+ Each of these individuals has agreed to serve as a director upon being elected
to the Board of Directors. Each of these individuals has been elected as a
director effective upon completion of this offering.
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
C. Edward Broom has been the President and Chief Executive Officer of
Strategic Timber since its inception and Chairman of the Board of Directors
since January 1999. Mr. Broom is responsible for our overall corporate strategy
and direction. Mr. Broom was a co-founder of Resource Investments, Inc., a
timberland investment advisory firm, and served as its Chairman and Chief
Executive Officer from its
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founding in 1983 until the firm was acquired by the Union Bank of Switzerland in
1995. Mr. Broom organized Resource Investments Advisors, Inc. in June 1995 after
Resource Investments, Inc. was acquired by the Union Bank of Switzerland, and
has served as the President, Chief Executive Officer and controlling shareholder
of Resource Investments Advisors since that time. Resource Investments Advisors
is a timberland investment management firm that performs some of the same
services previously offered by Resource Investments, Inc. In 1997, Mr. Broom
co-founded Strategic Timber Investments LLC, which was created as a new
timberland investment management firm and succeeded to a portion of the business
of Resource Investments Advisors, but was subsequently dissolved when Strategic
Timber was formed. Mr. Broom currently serves on the board of directors or
management committee of each of Resource Investments, Inc.'s joint ventures.
Christopher J. Broom has served as Executive Vice President and Chief
Investment Officer of Strategic Timber since its inception and a Director since
January 1999. Mr. Broom has primary responsibility for the development of
investment opportunities, capital development, and investor relations. From 1997
to 1998, Mr. Broom served as Executive Vice President and Director of Marketing
and Product Development for Strategic Timber Investments, which he co-founded.
From 1995 to 1997, he served as a Director of UBS Resource Investments, Inc.,
the successor to Resource Investments, Inc. after its acquisition by the Union
Bank of Switzerland, and had overall responsibility for new product development
and marketing of the firm's timberland investment services to institutional
investors. Mr. Broom previously served Resource Investments, Inc. as Senior Vice
President of New Product Development, Client Services and Marketing and
Principal from 1988 to 1995.
Thomas P. Broom has served as Executive Vice President and Chief Operating
Officer and a Director of Strategic Timber since its inception. Mr. Broom has
primary responsibility for management and administration of our timberland
portfolio. From 1997 to 1998, Mr. Broom served as Executive Vice President and
Director of Operations and Finance for Strategic Timber Investments, which he
co-founded. From 1995 to 1997, he served as Director of Finance and
Administration and Fund Manager of UBS Resource Investments, and had
responsibility for its administrative matters, including accounting, insurance,
auditing, personnel and facilities management. Mr. Broom previously served as
Vice President of Administration of Resource Investments, Inc. from 1992 to
1995. During that time, Mr. Broom also served as the fund manager of Resource
Investments, Inc.'s Tasman Chile Ltd. joint venture and was responsible for new
investment activities for Resource Investments, Inc. in South America.
Kenneth L. Chute has served as Senior Vice President and Chief Financial
Officer of Strategic Timber since January 1999, and is responsible for our
financial, accounting, treasury and tax functions, credit facilities,
information systems, and human resources. Mr. Chute has over 20 years experience
in financial management, auditing, accounting systems, mergers, acquisitions,
and disposals. From 1979 to 1998, he served as Chief Financial Officer and Vice
President of Finance and Administration for Sprague Energy Corp., a diversified
energy company located in Portsmouth, New Hampshire. He began his career as an
auditor at Arthur Andersen, LLP. Mr. Chute is a Certified Public Accountant and
is a member of the American Institute of CPAs, the New Hampshire Society of
CPAs, the Institute of Management Accountants and the Financial Executives
Institute.
Nicholas C. Brunet has served as Senior Vice President and Director of
Forest Operations of Strategic Timber since June 1998, and is responsible for
forestry operations of our timberland holdings. From 1996 until the time he
joined us, Mr. Brunet served as Area Manager for Green Crow Corporation, a land
investment and log brokerage firm located in Port Angeles, Washington. From 1995
to 1996, Mr. Brunet served as a Vice President of UBS Resource Investments,
where he was Fund Manager for U.S. timberlands. From 1990 to 1995, Mr. Brunet
served in the same capacity for Resource Investments, Inc., UBS Resource
Investments' predecessor.
Vladimir Harris has served as Senior Vice President and Director of
Acquisitions of Strategic Timber since its inception. Mr. Harris has primary
responsibility for timberland acquisitions. From February to April 1998, Mr.
Harris served as Senior Vice President and Chief Investment Officer of Strategic
Timber Investments. From June 1988 through January 1998, he was an officer and a
Managing Director of
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Baldwin & Clarke Corporate Finance, Inc. and Baldwin & Clarke Capital Markets,
Inc., which are affiliated financial advisory and investment banking firms based
in Bedford, New Hampshire. In these capacities, he specialized in mergers and
acquisitions and served as a consultant to UBS Resource Investments from 1995 to
1997, and to Resource Investments, Inc., UBS Resource Investments' predecessor,
from 1990 to 1995.
Joseph E. Rendini has served as Secretary, General Counsel and Vice
President of Strategic Timber since its inception. From 1997 to 1998, Mr.
Rendini served as Vice President and General Counsel of Strategic Timber
Investments. From 1994 to 1997, Mr. Rendini engaged in a private civil
litigation practice in Boston, Massachusetts. From 1993 through 1994, Mr.
Rendini served as Managing Attorney for United States Fidelity + Guaranty
Insurance Company for eastern Massachusetts. Prior to joining USF+G, Mr. Rendini
engaged in a private civil litigation practice in Boston, Massachusetts and New
York, New York.
T. Yates Exley has served as Vice President -- Strategy and Development of
Strategic Timber since October 1998. Mr. Exley is responsible for the
development and structure of acquisition vehicles and investment partnerships.
Mr. Exley served as Executive Vice President of Pioneer from 1997 to 1998. From
1989 to 1997, he was a Senior Vice President at Dillon, Read & Co., Inc.,
located in San Francisco, California, where he headed that firm's West Coast
forest practice business and worked on a wide range of financings, acquisitions,
and divestitures within the forest and paper product sector.
DIRECTORS WHO HAVE AGREED TO SERVE AS OF THE COMPLETION OF THIS OFFERING
Starling W. Childs, II will become a director of Strategic Timber upon the
completion of this offering. Since 1997, Mr. Childs has served as a Partner and
sales representative for Optimum Yield, Incorporated, a distributor of forestry
and agricultural soil additives and fertilizers. Since 1988, Mr. Childs has
served as the Chairman of the Board of S. W. Childs Management Corporation, a
privately-held brokerage firm located in New York, New York, and served as a
director of that firm from 1978 to 1988. Since 1988, Mr. Childs has also served
as the Principal of Ecological and Environmental Consulting Services, Inc., an
environmental, ecological and forest resource consulting firm located in Lyme,
Connecticut.
Jay S. Lucas will become a director of Strategic Timber upon the completion
of this offering. Since 1991, Mr. Lucas has served as the President and Managing
Director of The Lucas Group, a corporate strategy consulting firm located in New
London, New Hampshire that he founded in 1991. From 1982 to 1990, Mr. Lucas was
a Vice President and partner at Bain & Company, a leading international
corporate strategy consulting firm based in Boston, Massachusetts. Mr. Lucas
currently serves as a director of Wolverine (Massachusetts) Corporation, an
international manufacturer of industrial ovens, and MIJA Industries, Inc., the
leading manufacturer of pressure gauges for the fire protection industry.
Hanns A. Pielenz will become a director of Strategic Timber upon the
completion of this offering. Since 1968, Mr. Pielenz has been the Chief
Executive Officer and Chairman of Amann Group, a textile manufacturing company
based in Germany. Mr. Pielenz also serves as a director of Interglas A.G., a
German fiberglass manufacturer. Mr. Pielenz is a resident and citizen of
Germany.
Richard P. Urfer will become a director of Strategic Timber upon the
completion of this offering. Since 1997, Mr. Urfer has served as the Chief
Executive Officer of BW Capital Markets, Inc., the U.S. affiliate of
Baden-Wurttembergische Bank AG, the largest privately held commercial bank in
the State of Baden-Wurttemberg, Germany. From 1995 to 1997, Mr. Urfer served as
an Executive Vice President of Resource Investments Advisors. In 1987, Mr. Urfer
founded R.P. Urfer & Co., Inc., a corporate finance consulting firm located in
Morristown, New Jersey, and served as its Managing Director until 1995. Mr.
Urfer currently is a director of Anesta Corp., a pharmaceutical company located
in Salt Lake City, Utah, and BW Capital Markets, Inc.
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MANAGEMENT RELATIONSHIPS
C. Edward Broom, our President, Chief Executive Officer and Chairman of the
Board of Directors, is the father of both Christopher J. Broom, our Executive
Vice President, Chief Investment Officer and a Director, and Thomas P. Broom,
our Executive Vice President, Chief Operating Officer and a Director.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
Promptly following the completion of this offering, our Board of Directors
will establish an Audit Committee that will at all times consist of three
independent directors. The Audit Committee will make recommendations concerning
the engagement of independent public accountants, review with the independent
public accountants the plans and results of the audit engagement, approve
professional services provided by the independent public accountants, review the
independence of the independent public accountants, consider the range of audit
and non-audit fees and review the adequacy of our internal accounting controls.
The initial members of the Audit Committee will be Messrs. Childs, Lucas and
Pielenz.
EXECUTIVE COMMITTEE
Promptly following the completion of this offering, our Board of Directors
will establish an Executive Committee. The Executive Committee will set and
execute corporate strategy and policy, and will generally exercise all other
powers of the Board of Directors except as prohibited by law. The initial
members of the Executive Committee will be Messrs. C. Edward Broom, Christopher
J. Broom and Thomas P. Broom.
COMPENSATION COMMITTEE
Promptly following the completion of this offering, our Board of Directors
will establish a Compensation Committee that will at all times consist of at
least two independent directors. The Compensation Committee will review and make
recommendations to the full Board of Directors concerning proposals by
management with respect to compensation, bonuses, employment agreements and
other benefits and policies respecting such matters for our executive officers.
The Compensation Committee will also administer our stock incentive plan and
other benefit plans. The initial members of the Compensation Committee will be
Messrs. Lucas and Urfer.
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EXECUTIVE COMPENSATION
The following table shows total compensation paid in 1998 and compensation
expected to be paid in 1999 by Strategic Timber to C. Edward Broom, our
President and Chief Executive Officer, and our other most highly compensated
executive officers. Kenneth L. Chute, our Senior Vice President and Chief
Financial Officer, was not with us in 1998, but is included because we expect
him to be one of the four most highly compensated executive officers in 1999.
Because Strategic Timber was formed in April 1998, no compensation was paid in
any prior completed year and the amounts indicated below for 1998 reflect
compensation for a partial year. Salaries for 1999 are current annual base
salaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)
- --------------------------- ---- --------- -------- ------------
<S> <C> <C> <C> <C>
C. Edward Broom...................................... 1998 $168,750(1) -- --
President and Chief Executive Officer 1999 225,000 (2) 150,000(3)
Christopher J. Broom................................. 1998 $131,250(1) -- --
Executive Vice President and Chief Investment
Officer 1999 175,000 (2) 150,000(3)
Thomas P. Broom...................................... 1998 $131,250(1) -- --
Executive Vice President and Chief Operating
Officer 1999 175,000 (2) 150,000(3)
Kenneth L. Chute..................................... 1998 -- -- --
Senior Vice President and Chief Financial Officer 1999 $150,000 (2) 137,500(3)
Vladimir Harris...................................... 1998 $101,250(1) -- --
Senior Vice President and Director of Acquisitions 1999 135,000 (2) 137,500(3)
</TABLE>
- ---------------
(1) Salaries for 1998 include the following amounts that were earned but not
paid in 1998: C. Edward Broom, $18,750; Christopher J. Broom, $56,250;
Thomas P. Broom, $62,250; and Vladimir Harris, $33,750. We expect to pay
these amounts prior to the completion of this offering.
(2) Bonuses for 1999 will be determined by the Board of Directors in its sole
discretion, upon recommendation from the Compensation Committee.
(3) We will grant these options to purchase common stock at the completion of
this offering. The exercise price of all of these options will be the
initial public offering price. One-third of the options granted will vest on
each of the first, second and third anniversaries of the completion of this
offering. We did not grant any stock options or stock appreciation rights
during 1998, and we do not anticipate granting any stock appreciation rights
during 1999.
COMPENSATION OF DIRECTORS
We will pay our directors who are not employees fees for their services as
directors. Each non-employee director will receive an annual retainer of
$12,000. In addition, each non-employee director will receive a fee of $1,000
for each meeting of the Board of Directors attended in person, $500 for each
such meeting attended by telephone, and $500 for each committee meeting
attended. Each non-employee director will also be reimbursed for all expenses
incurred in connection with attending Board of Directors and committee meetings
in person. Upon the completion of this offering, each non-employee director will
receive options to purchase 10,000 shares of common stock at an exercise price
equal to the initial public offering price. These options will vest over a
three-year period, with the first vesting to occur on the first anniversary of
the completion of this offering. Any future issuance of stock options to
non-employee directors will be in accordance with the terms of our stock
incentive plan.
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1999 INCENTIVE PLAN
Prior to the completion of this offering, the Board of Directors will
adopt, and the shareholders of Strategic Timber will approve, the 1999 Strategic
Timber Trust Omnibus Incentive Plan.
Under the 1999 Incentive Plan, we may grant to employees and non-employee
directors stock options, stock appreciation rights, restricted stock and other
stock-based awards, as well as cash-based annual and long-term incentive awards.
We believe that the 1999 Incentive Plan will form an important part of our
overall compensation program. The 1999 Incentive Plan will support our ongoing
efforts to attract and retain talented employees and directors and will give us
the ability to provide employees with incentives that are directly linked to our
profitability and increases in shareholder value.
Eligibility. All employees of Strategic Timber, its subsidiaries and its
affiliates as well as non-employee directors of Strategic Timber, its
subsidiaries, and its affiliates, will be eligible to receive awards under the
1999 Incentive Plan. For convenience, both employees and non-employee directors
eligible to receive awards under the 1999 Incentive Plan are referred to as
employees.
Administration. The 1999 Incentive Plan will be administered by the
Compensation Committee. The Compensation Committee will make recommendations to
the full Board of Directors as to the individuals to whom awards will be granted
and the terms of the awards. The Compensation Committee can delegate its
authority under the 1999 Incentive Plan to our officers, subject to approval by
the Board of Directors, with respect to employees who are not executive
officers. The Board of Directors will determine the terms of any awards to
members of the Compensation Committee under the 1999 Incentive Plan.
Shares Reserved. We may issue up to 2,224,000 shares of common stock under
the 1999 Incentive Plan, representing, upon the completion of this offering,
approximately 10% of the outstanding shares of common stock and partnership
units. The shares of common stock subject to any award that terminates, expires
or is cashed out without payment being made in the form of common stock will
again be available for distribution under the 1999 Incentive Plan.
Options to purchase an aggregate of 1,115,000 shares of common stock will
be granted to some of our executive officers, directors and employees as of the
completion of this offering, at an exercise price equal to the initial public
offering price. These options will vest over a three-year period, with the first
vesting to occur on the first anniversary of the completion of this offering.
Messrs. C. Edward, Christopher J. and Thomas P. Broom will each receive options
to purchase 150,000 shares of common stock, Messrs. Chute and Harris will each
receive options to purchase 137,500 shares of common stock, and Messrs. Brunet
and Rendini will each receive options to purchase 75,000 shares of common stock.
Cash-Based Annual and Long-Term Incentive Awards. Cash-based annual and
long-term incentive awards may be granted under the 1999 Incentive Plan. These
awards will be earned only if corporate, business unit or individual performance
objectives over performance cycles established by or under the direction of the
Compensation Committee are met. The performance objectives may vary from
participant to participant, group to group and period to period. Performance
objectives for awards will be based upon criteria established by the
Compensation Committee. No annual incentive award paid to a participant with
respect to a performance cycle may exceed $1,000,000, and no long-term incentive
award paid to a participant may exceed $1,000,000 times the number of years in
the performance cycle.
Stock-Based Awards. The 1999 Incentive Plan will permit the granting of
incentive stock options, which qualify for special tax treatment, and
nonqualified stock options. The exercise price for incentive stock options will
not be less than the fair market value of common stock on the date of grant, as
determined under the 1999 Incentive Plan. The 1999 Incentive Plan permits the
Compensation Committee to cancel an option upon exercise by the holder and pay
the holder, in cash or common stock, the difference between the fair market
value of the shares covered by the option and the exercise price.
We may also grant stock appreciation rights either singly or in combination
with underlying stock options. Stock appreciation rights entitle the holder upon
exercise to receive an amount in any combination of cash or common stock, as
determined by the Compensation Committee, equal in value to the excess of
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the fair market value of the shares covered by the right over the grant price.
The Compensation Committee will determine the grant price and other terms of
stock appreciation rights.
We may also award shares of restricted common stock. The restricted stock
vests and becomes transferable upon the satisfaction of conditions set forth in
the applicable award agreement. Restricted stock awards may be subject to
forfeiture if, for example, the recipient's employment terminates before the
award vests. Except as specified at the time of grant, holders of restricted
stock will have voting rights and the right to receive dividends on their
restricted shares.
The 1999 Incentive Plan also provides for other awards that are denominated
in, valued by reference to, or otherwise based on or related to common stock.
These awards may include performance shares and restricted stock units that
entitle the recipient to receive, upon satisfaction of performance goals or
other conditions, a specified number of shares of common stock or the cash
equivalent.
Under the 1999 Incentive Plan, the total number of shares of restricted
common stock and other shares of common stock subject to or underlying incentive
stock options, nonqualified stock options, stock appreciation rights and other
stock-based awards granted to any plan participant may not exceed 25% of the
total shares of common stock that may be issued under the 1999 Incentive Plan.
Change in Control Provisions. The 1999 Incentive Plan provides that, in the
event of a significant change in our ownership or Board of Directors, the Board
of Directors may:
- make all stock options and stock appreciation rights immediately
exercisable,
- remove the restrictions applicable to outstanding restricted stock and
other stock-based awards,
- cash out the value of outstanding stock options, stock appreciation
rights, restricted stock and other stock-based awards on the basis of the
highest price paid or offered during the preceding 60-day period, and
- vest all outstanding incentive awards and pay out these awards on a
prorated basis, based on the maximum award opportunity of the awards and
the number of months elapsed compared with the total number of months in
the performance cycle.
Adjustments for Share Dividends, Mergers and Similar Events. The Board of
Directors will make appropriate adjustments in outstanding awards under the 1999
Incentive Plan to reflect common stock dividends, splits and similar events. In
the event of a merger, liquidation, sale of the business or similar event, the
Board of Directors, in its discretion, may provide for substitution or
adjustment of outstanding awards, or may terminate all awards with payment of
cash or in-kind consideration.
Amendments and Termination. The Board of Directors may at any time amend or
discontinue the 1999 Incentive Plan. The Compensation Committee may at any time
amend outstanding awards for the purpose of satisfying changes in law or for any
other lawful purpose. However, no action may be taken that materially and
adversely affects any rights under an outstanding award without the holder's
consent. Further, amendments to the 1999 Incentive Plan may be subject to
approval by our shareholders if and to the extent required by the Internal
Revenue Code to preserve the qualified status of incentive stock options or to
preserve tax deductibility of compensation earned under options.
EMPLOYMENT AND NON-COMPETITION AGREEMENTS
We have employment agreements with each of Messrs. C. Edward Broom,
Christopher J. Broom, Thomas P. Broom, Kenneth L. Chute, Nicholas C. Brunet,
Vladimir Harris and Joseph E. Rendini effective as of the consummation of this
offering.
The employment agreement with C. Edward Broom provides for his employment
as President and Chief Executive Officer of Strategic Timber for a period of
four years and automatically renews for successive one-year periods. Mr. Broom's
employment agreement provides for an initial annual base salary of $225,000. Mr.
Broom's employment agreement contains provisions relating to his involvement in
several privately held timber investment funds. If we wish to bid on a property
and any fund with which
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Mr. Broom is affiliated is the seller of the property or also wishes to bid on
the property, Mr. Broom will not participate in the transaction on behalf of
that fund. In addition, Mr. Broom has agreed to spend no more than 5% of his
time devoted to his interests in these timber funds. The employment agreement
otherwise prohibits Mr. Broom from competing against us during the term of his
employment under the agreement and for a period of one year thereafter in North
America, Central America and South America, and from soliciting purchasers of
our timber or prospective sellers of timberlands with which he had contact
during the term of his employment for a period of one year thereafter. The
employment agreement may be terminated by mutual agreement, voluntarily by Mr.
Broom or by us without cause upon six months' prior written notice during the
first two years of the employment term and upon ninety days' notice thereafter,
and immediately by us for cause or upon the death or disability of Mr. Broom.
Mr. Broom or his heirs are entitled to one year's compensation if Mr. Broom
terminates his employment for good reason, or we terminate without cause.
Each of Messrs. Christopher J. Broom, Thomas P. Broom, Chute, Brunet,
Harris and Rendini have entered into employment agreements with us on
substantially similar terms. Each employment agreement provides for an initial
minimum annual base salary for each executive officer as follows: Mr.
Christopher J. Broom, $175,000; Mr. Thomas P. Broom, $175,000; Mr. Chute,
$150,000; Mr. Brunet, $90,000; Mr. Harris, $135,000; and Mr. Rendini, $100,000.
The employment agreement with each executive provides for his employment as an
officer of Strategic Timber for a period of four years and automatically renews
for successive one-year periods. Each employment agreement prohibits the
executive from competing against us during the term of his employment under the
agreement and for a period of one year thereafter in North America, Central
America and South America, and from soliciting purchasers of our timber or
prospective sellers of timberlands with which he had contact during the term of
his employment for a period of one year thereafter. The employment agreement may
be terminated by mutual agreement, voluntarily by the executive or by us without
cause upon six months' prior written notice during the first two years of the
employment term and upon ninety days' notice thereafter, and immediately by us
for cause or upon the death or disability of the executive. Each executive or
his heirs are entitled to one year's compensation if the executive terminates
his employment for good reason, or we terminate without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, we did not have a compensation committee. Thomas P. Broom, who
was our sole director from inception until January 1999 and who is our Executive
Vice President and Chief Operating Officer, previously determined compensation
of executive officers. C. Edward Broom, our President and Chief Executive
Officer, and Christopher J. Broom, our Executive Vice President and Chief
Investment Officer, assisted Thomas P. Broom in determining executive officer
compensation for 1998.
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TRANSACTIONS WITH RELATED PARTIES
In December 1998, we concluded a transaction with our President and Chief
Executive Officer, C. Edward Broom, in which Mr. Broom purchased for $3.0
million approximately 6,700 acres of agricultural land in Louisiana that we had
leased to third parties principally for rice farming. This property was included
in the purchase of the Louisiana property without any separate determination of
cost. We determined that this property was ancillary to our ongoing business of
timber production. We sold this property to provide a source of cash to make
payments of our bank debt. Mr. Broom and other members of senior management
determined this purchase price to produce the necessary funds to make these
payments. The purchase price does not necessarily reflect the price we might
have been able to obtain if the property had been fully prepared for sale and
exposed to the market for a sufficient period of time to produce the highest
price. To protect our economic interest in the property, Mr. Broom has agreed
that we may repurchase the property at any time before December 31, 2000, at the
price paid by Mr. Broom plus a pro-rata annual increase at the rate of 8%,
compounded annually.
In December 1998, we sold some of our eastern Oregon timber to Kinzua
Resources, LLC, a sawmill company controlled by Gregory M. Demers, a beneficial
owner of more than 5% of our common stock, for $5.6 million. We executed timber
deeds conveying approximately 19.3 million board feet of timber, consisting of a
variety of species. Kinzua Resources has regularly acquired and used wood from
the eastern Oregon timberlands in the past, and we anticipate that we will
continue to sell timber from these lands to Kinzua in the ordinary course of
business in the future.
Hanns A. Pielenz, who has agreed to serve as a director on or before the
completion of this offering, owns a 50% interest in each of Louisiana Timber and
Mach One. In April 1998, Louisiana Timber contributed to Strategic Timber
Partners a contract to acquire the Louisiana property in exchange for
partnership units, which the parties valued at $50.0 million. In October 1998,
Mach One invested $10.0 million cash in exchange for an interest in Strategic
Timber Partners II, in connection with our acquisition of Pioneer. As of the
completion of the offering, Louisiana Timber will receive partnership units and
cash valued at $48.2 million, and Mach One will receive partnership units and
cash valued at $12.0 million, in each case assuming an offering price of $20 per
share of common stock.
Before the completion of this offering, we will pay approximately $760,000
to Broom Resource Investments, LLC. This amount includes reimbursement of
approximately $320,000 in expenses paid on behalf of Strategic Timber and
$440,000 in fees due to BRI in connection with our acquisition of the Louisiana
property. BRI's fees relate to the services it performed before the formation of
Strategic Timber in acquiring from Louisiana Timber the contract to purchase the
Louisiana property. BRI is owned by Messrs. C. Edward Broom, Christopher J.
Broom and Thomas P. Broom, who are executive officers and directors of Strategic
Timber.
We rent our headquarters office in New London, New Hampshire, from Broom
Properties, LLC, a company controlled by Messrs. C. Edward and Thomas P. Broom.
We rent this space for $5,250 per month under a two year lease entered into in
January 1999. In 1998, payments to Broom Properties, LLC for this space totaled
$40,000.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of common stock and partnership units exchangeable for common stock by
our directors and prospective directors, our most highly compensated executive
officers, all of our directors, prospective directors and executive officers as
a group and each person who is known to be the beneficial owner of more than 5%
of the outstanding shares of common stock. This table assumes that all of the
formation transactions and this offering have been completed and that the
underwriters do not exercise their over-allotment option and gives effect to a
36.59-for-1 stock split, which will occur prior to completion of this offering.
The second column in the table below assumes that the identified person and no
other person redeems all partnership units the identified person beneficially
owns for shares of common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK PERCENTAGE PERCENTAGE
AND PARTNERSHIP OF ALL SHARES OF ALL SHARES OF
UNITS BENEFICIALLY OF COMMON COMMON STOCK AND
NAME AND ADDRESS OF OWNER OWNED STOCK PARTNERSHIP UNITS
------------------------- ------------------ ------------- --------------------
<S> <C> <C> <C>
Hanns A. Pielenz............................... 1,863,084 9.7% 8.4%
740 Manatee Cove
Vero Beach, FL 32963
Larry J. Woodard............................... 1,863,084 9.7% 8.4%
1089 Lighthouse Two
Hilton Head Island, SC 29928
Gregory M. Demers.............................. 1,660,333 8.8% 7.5%
25310 Jeans Road
Veneta, OR 97487
C. Edward Broom................................ 408,329 2.3% 1.8%
Christopher J. Broom........................... 408,329 2.3% 1.8%
Thomas P. Broom................................ 408,329 2.3% 1.8%
Kenneth L. Chute............................... -- -- --
Vladimir Harris................................ 90,740 * *
Jay S. Lucas................................... -- -- --
Starling W. Childs, II......................... -- -- --
Richard P. Urfer............................... -- -- --
All directors, prospective directors and
executive officers as a group (12 persons)... 3,468,807 17.2% 15.6%
</TABLE>
- ---------------
* Less than 1%
Unless otherwise indicated, the address of each person listed in the table
above is 5 North Pleasant Street, New London, New Hampshire 03257. Shares and
units shown as owned by Hanns A. Pielenz and Larry J. Woodard include 1,762,974
partnership units held of record by Louisiana Timber and 100,110 partnership
units held of record by Mach One. Hanns A. Pielenz, a prospective director, and
Larry J. Woodard each may be deemed to beneficially own the partnership units
held by Louisiana Timber and Mach One.
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DESCRIPTION OF CAPITAL STOCK
The description of our capital stock set forth below and elsewhere in this
prospectus does not purport to be complete and is qualified in its entirety by
reference to our Amended and Restated Articles of Incorporation and Amended and
Restated Bylaws, each of which will be adopted shortly before completion of this
offering. Copies of the Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws are exhibits to the registration statement of which
this prospectus is a part.
GENERAL
Under the Articles of Incorporation, the Board of Directors has the
authority to issue up to 200,000,000 shares of common stock, par value $.01 per
share, and 50,000,000 shares of preferred stock, par value $.01 per share. Upon
completion of this offering, 17,271,770 shares of common stock will be issued
and outstanding and no shares of preferred stock will be issued or outstanding.
19,761,770 shares will be issued and outstanding if the underwriters'
over-allotment option is exercised in full.
COMMON STOCK
Holders of common stock are entitled to one vote per share on all matters
to be voted on by shareholders and are not entitled to cumulative voting in the
election of directors. Generally, matters to be approved by shareholders must be
voted for by holders of a majority of the shares of common stock represented in
person or by proxy at a meeting, subject to any contractual or other rights of
security holders, such as any special rights of holders of preferred stock, none
of which is currently outstanding. A plurality of the shares of common stock is
needed to elect directors. For certain other matters affecting or relating to
voting rights of holders of shares of common stock, including election of
directors and supermajority voting requirements, see "Material Provisions of
Georgia Law and Strategic Timber's Articles of Incorporation and Bylaws That May
Have an Anti-Takeover Effect."
Subject to any preferential rights granted by the Board of Directors in
connection with the future issuance of preferred stock, holders of shares of
common stock are entitled to share ratably in any dividends and distributions
Strategic Timber declares and pays and in any distribution to shareholders upon
dissolution of Strategic Timber.
Holders of common stock have no preemptive or other subscription or
conversion rights, and there are no redemption or sinking fund provisions with
respect to these shares. As discussed below, if shares of common stock are
converted into shares of excess stock, the rights attributable to the shares
will be substantially limited.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
PREFERRED STOCK
The Board of Directors has the authority, without further shareholder vote,
to issue preferred stock in one or more series and to fix its rights,
preferences and limitations, including dividend rights, conversion rights,
sinking fund provisions, voting rights, rights to elect a specified number of
directors, terms and rights of redemption and liquidation preferences. These
rights and preferences could include the right to receive specified dividend
payments and payments on liquidation prior to any payments being made to the
holders of common stock. The Board of Directors could authorize the issuance of
preferred stock with terms and conditions that could discourage a takeover or
other transaction that holders of common stock might believe to be in their best
interests. See "Material Provisions of Georgia Law and Strategic Timber's
Articles of Incorporation and Bylaws That May Have an Anti-Takeover
Effect -- Preferred Stock." As of the date of this prospectus, no shares of
preferred stock are outstanding and we have no current plans to issue any
preferred stock.
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RESTRICTIONS ON OWNERSHIP AND TRANSFER OF SHARES
To qualify as a REIT under the Internal Revenue Code, among other things,
not more than 50% in value of our outstanding capital stock may be owned,
directly or indirectly, by five or fewer persons during the last half of a
taxable year. This "five or fewer" requirement does not apply during the first
year for which we elect to be treated as a REIT. Also, shares of our 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 "Federal Income Tax
Consequences."
To protect us from losing our status as a REIT and to protect us from a
concentration of ownership among our shareholders, the Articles of
Incorporation, subject to certain exceptions, provide that no person may
beneficially own more than 9.8% of the lesser of the aggregate number or the
value of the outstanding shares of common stock or any series of preferred
stock. Under the Articles of Incorporation, a person generally beneficially owns
shares for this purpose if the person would be treated as an owner of common
stock or preferred stock either directly or indirectly under section 542(a)(2)
of the Internal Revenue Code, taking into account, for this purpose, applicable
constructive ownership rules. When two or more persons act as a partnership or
similar group for the purpose of acquiring, holding or disposing of securities,
the group is considered a single person under the Articles of Incorporation. The
Board of Directors may waive the ownership limit as to any person upon receipt
of a ruling from the IRS, an opinion of counsel or other evidence acceptable to
the Board that ownership by that person will not cause Strategic Timber to lose
its REIT status.
Any transfer of shares of common stock or preferred stock is void, and the
intended transferee will acquire no rights to the shares of capital stock, if
the transfer would do any of the following:
- cause any person to beneficially own shares of common stock or preferred
stock in excess of the ownership limit not otherwise permitted as
provided above;
- result in the shares of common stock or preferred stock being
beneficially owned by fewer than 100 persons;
- result in Strategic Timber being "closely held" within the meaning of
section 856(h) of the Internal Revenue Code;
- result in Strategic Timber constructively owning 10% or more of the
ownership interests in a tenant of Strategic Timber within the meaning of
section 856(d)(2)(B) of the Internal Revenue Code;
- result in Strategic Timber failing to qualify as a "domestically
controlled REIT" within the meaning of section 897(h)(4)(B) of the
Internal Revenue Code; or
- otherwise cause Strategic Timber to fail to qualify as a REIT.
These restrictions on transferability and ownership will not apply if the Board
of Directors adopts a resolution recommending that Strategic Timber terminate
its status as a REIT, and the resolution is approved by the holders of a
majority of the outstanding shares of common stock.
If any attempted transfer of common stock or preferred stock or other event
resulting in an increase in any holder's percentage interest in common stock or
preferred stock would cause a purported transferee or holder to be in violation
of any of the restrictions described in the previous paragraph, then the
purported transferee or holder will not acquire, or will cease to own, the
shares in excess of the highest number of shares that could be held in
compliance with these restrictions. The excess stock will be converted
automatically into an equal number of shares of stock and transferred
automatically, by operation of law, to a trust, the beneficiary of which will be
a qualified charitable organization selected by Strategic Timber.
As soon as practical after the transfer of shares to the trust, the trustee
of the trust will be required to sell the excess stock to a person or entity who
could own the shares without violating the ownership restrictions. In the case
of excess stock resulting from a transfer for value, the trustee must distribute
to the prohibited owner the lesser of the price paid by the prohibited owner for
the shares or the sales
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proceeds received by the trust for the shares. In the case of excess stock
resulting from any event other than a transfer for value, the trustee will be
required to sell the excess stock to a qualified person and distribute to the
prohibited owner the lesser of the market price of the excess stock or the sales
proceeds received by the trust for the excess stock. Once shares become excess
stock, they lose their voting rights until they are held in compliance with the
ownership limit in the Articles of Incorporation, subject to any voting rights
that may be afforded by Georgia law.
Excess stock held in trust is deemed to be offered for sale to Strategic
Timber at the lesser of the price per share in the transaction that created the
excess stock, or the market price. Strategic Timber has the right to accept the
offer for 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 our capital stock is required to provide a written
statement to us containing ownership information by January 31 of each year. In
addition, upon our request, each record and beneficial owner of common stock or
preferred stock is required to disclose to us in writing information we consider
necessary to determine our status as a REIT and to ensure compliance with the
ownership restrictions in the Articles of Incorporation.
The ownership restrictions described above could have the effect of
delaying, deferring or preventing a change of control in which holders of common
stock might receive a premium for their shares over the then prevailing market
price. For additional matters that could have the effect of delaying, deferring
or preventing a change of control, see "Material Provisions of Georgia Law and
Strategic Timber's Articles of Incorporation and Bylaws That May Have an
Anti-Takeover Effect."
NASDAQ NATIONAL MARKET LISTING
Prior to the date of this prospectus, there has been no public trading
market for the common stock. We have applied to have the common stock included
for quotation on the Nasdaq National Market under the symbol "STTR."
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MATERIAL PROVISIONS OF GEORGIA LAW AND STRATEGIC TIMBER'S ARTICLES OF
INCORPORATION AND BYLAWS THAT MAY HAVE AN ANTI-TAKEOVER EFFECT
This section discusses the material provisions of our Articles of
Incorporation and Bylaws, and of Georgia law, that may have an anti-takeover
effect. This section summarizes portions of the Georgia Business Corporation
Code and the Articles of Incorporation and Bylaws and is not a complete
description of any of them. Copies of the Articles of Incorporation and Bylaws
have been filed as exhibits to the registration statement of which this
prospectus is a part.
Certain provisions of the Georgia Business Corporation Code and the
Articles of Incorporation and Bylaws, summarized in the following paragraphs,
may discourage a takeover attempt that you might consider to be in your best
interest. This could include a takeover that would result in payment of a
premium over the market price of shares.
OWNERSHIP LIMIT
The Articles of Incorporation contain restrictions on the number of shares
of capital stock that individual shareholders can own. These restrictions are
intended to ensure that shareholders do not acquire significant shareholdings in
a manner that could jeopardize Strategic Timber's ability to remain qualified as
a REIT for tax purposes. Transfers that would disqualify Strategic Timber from
REIT status are treated as void. These restrictions and the consequences of
violating them are discussed above under "Description of Capital
Stock -- Restrictions on Ownership and Transfer of Shares."
BUSINESS COMBINATION PROVISIONS OF GEORGIA LAW
Our Bylaws subject us to provisions of the Georgia Business Corporation
Code restricting our ability to engage in business combination transactions with
significant shareholders. These provisions prohibit business combinations
between a corporation and any person who has acquired beneficial ownership of
10% or more of the voting stock of the corporation. The prohibition applies for
a period of five years from the date the shareholder acquired the 10% interest.
The prohibitions do not apply if:
- prior to the time the shareholder acquired the 10% interest, the Board of
Directors of the corporation approved either the business combination or
the transaction that resulted in the person becoming an interested
shareholder.
- the shareholder became the beneficial owner of at least 90% of the
outstanding shares of voting stock of the corporation in the same
transaction in which the interested shareholder acquired the 10%
interest. In computing the percentage of shares owned by the interested
shareholder, shares owned by persons who are directors or officers, their
affiliates or associates and by subsidiaries of the corporation and
employee stock plans are excluded.
- the shareholder, subsequent to acquiring the 10% interest, became the
beneficial owner of at least 90% of the voting stock of the corporation
and the business combination was approved by holders of a majority of the
voting stock entitled to vote, excluding voting stock beneficially owned
by the shareholder or by persons who are directors or officers, their
affiliates or associates and by subsidiaries of the corporation and
employee stock plans. In computing the percentage of shares owned by the
interested shareholder, shares owned by persons who are directors or
officers, their affiliates or associates and by subsidiaries of the
corporation and employee stock plans are excluded.
Our Bylaws also subject us to "fair price" provisions of the Georgia
Business Corporation Code that further restrict business combination
transactions with 10% shareholders. These provisions require the consideration
paid for stock acquired in the business combination to meet specified tests,
which are designed to ensure that shareholders receive at least fair market
value for their shares in the business
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combination. A business combination with a 10% shareholder does not need to meet
these tests if either of the following apply:
- The continuing directors unanimously approve the business combination,
provided there are at least three continuing directors. A continuing
director is any member of the Board of Directors who is not an affiliate
or associate of a 10% shareholder or any of its affiliates, and who was a
director prior to the date the 10% shareholder first acquired the 10%
interest, or a successor to such a director in certain circumstances.
- Two-thirds of the continuing directors recommend the business combination
and a majority of the voting stock entitled to vote approves the business
combination. For purposes of this vote, voting stock beneficially owned
by the interested shareholder is excluded.
THE BOARD OF DIRECTORS
Our Board of Directors is divided into three classes of directors serving
staggered three-year terms. The term of office of the first class of directors
will expire at the 2000 annual meeting of shareholders; the term of the second
class of directors will expire at the 2001 annual meeting of shareholders; and
the term of the third class of directors will expire at the 2002 annual meeting
of shareholders. At each annual meeting of shareholders, the class of directors
to be elected at the meeting will be elected for a three-year term, and the
directors in the other two classes will continue in office. Because shareholders
will have no right to cumulative voting for the election of directors, at each
annual meeting of shareholders the holders of a plurality of the shares of
common stock will be able to elect all of the successors to the class of
directors whose term expires at that meeting. Classification of the Board of
Directors expands the time required to change the composition of a majority of
directors, which may discourage an acquisition proposal. The Articles of
Incorporation provide that the number of directors shall be fixed by resolution
of the Board of Directors, but shall not be less than three unless the Articles
of Incorporation are amended to delete the classification of the Board of
Directors.
The Articles of Incorporation also provide that, except for any directors
who may be elected by holders of preferred stock, directors may be removed only
for cause by the affirmative vote of shareholders holding at least a majority of
the votes entitled to be cast by all shareholders in the election of directors.
Vacancies on the Board of Directors, however occurring, may be filled only by a
majority vote of the remaining directors. Directors elected by the Board of
Directors to fill vacancies continue until the next election of the class for
which they have been chosen, except for directors elected to fill vacancies
resulting from an increase in the number of directors, who continue until the
next election of directors by the shareholders. A vote of shareholders holding
at least two-thirds of all the votes entitled to be cast is required to amend or
repeal these classified board and director removal provisions. These provisions
make it more difficult and time-consuming to change majority control of the
Board of Directors and make it more difficult for shareholders to remove
incumbent directors and fill the vacancies with their own nominees. These
provisions may reduce our vulnerability to an unsolicited takeover proposal or
the removal of incumbent management.
SPECIAL MEETINGS OF SHAREHOLDERS; CONSENTS
The Bylaws provide that special meetings of shareholders may be called only
by the Chairman of the Board of Directors, the President, a majority of the
Board of Directors or holders of outstanding stock having not less than 75% of
the votes entitled to be cast by all of the outstanding shares of our capital
stock. Also, shareholders may act without a meeting only by unanimous written
consent, which makes shareholder action without a meeting highly unlikely. These
provisions make it more difficult for the shareholders to take action without
the sanction of our management.
PREFERRED STOCK
Under the Articles of Incorporation, the Board of Directors has the power,
without a shareholder vote, to establish the preferences and rights of one or
more series of preferred stock and to issue these shares.
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The Board of Directors can grant the holders of any series of preferred stock
preferences, powers and rights, voting or otherwise, that have priority over the
rights of holders of common stock. The issuance of preferred stock could
discourage a change in control or acquisition of Strategic Timber. As of the
date of this prospectus, no shares of preferred stock are outstanding, and we
have no current plans to issue any preferred stock.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws contain provisions requiring shareholders to notify us in
advance of their nominations of candidates for election to the Board of
Directors who are not nominated by the Board of Directors, and their proposals
for business to be conducted at the annual meeting of shareholders. Without
compliance with these provisions, any nominations or business proposed by
shareholders without approval by the Board of Directors cannot be considered by
the shareholders at a meeting.
SUPERMAJORITY VOTE REQUIREMENTS
Under the Articles of Incorporation and the Bylaws, some matters require
approval by a two-thirds vote, rather than merely a majority vote. A vote of
two-thirds of shareholders is required to amend the provisions of the Articles
of Incorporation and the Bylaws concerning classification of the Board of
Directors and removal and replacement of directors. A vote of two-thirds of
shareholders is required to amend the Articles of Incorporation to permit
shareholders to act by majority written consent rather than unanimous written
consent. Approval by two-thirds of the continuing directors and a majority of
shareholders, excluding certain persons, is required to amend the Bylaws to
eliminate the applicability of the provisions of the Georgia Business
Corporation Code restricting business combinations between Strategic Timber and
significant shareholders.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
The Articles of Incorporation cannot be amended without the affirmative
vote of at least a majority of the shares of outstanding capital stock entitled
to vote, voting together as a group. Some provisions of the Articles of
Incorporation cannot be amended without the approval of the holders of
two-thirds of the shares of outstanding capital stock entitled to vote, voting
together as a single class. The Bylaws can generally be amended by the Board of
Directors or a majority of the shares cast at a shareholders meeting. Some
bylaws may be amended only by the shareholders, and some of those may only be
amended by a vote of greater than a majority of shares entitled to vote. See
" -- Supermajority Vote Requirements."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our officers and directors are indemnified against liabilities in
accordance with Georgia Business Corporation Code, the Articles of
Incorporation, the Bylaws and the indemnification agreements described below.
GEORGIA BUSINESS CORPORATION CODE
Section 14-2-851 of the Georgia Code empowers a corporation to indemnify a
director, including a former director and including a director who is or was
serving another entity at the request of the corporation against liability
arising from official acts if the director acted in good faith and reasonably
believed that his or her conduct was in the best interests of the corporation.
For all other acts, the corporation may indemnify a director who acted in good
faith and reasonably believed that the conduct was not opposed to the best
interests of the corporation. The corporation may indemnify a director with
respect to criminal proceedings if the director acted in good faith and had no
reasonable cause to believe the conduct was unlawful. A corporation may not
indemnify a director adjudged liable for conduct involving receipt of an
improper personal benefit.
In addition, section 14-2-856 of the Georgia Business Corporation Code
permits the articles of incorporation, bylaws, a contract, or resolution
approved by the shareholders to authorize the corporation to
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indemnify a director against claims to which the director was a party, including
claims by the corporation or shareholder derivative actions. However, the
corporation may not indemnify the director for liability to the corporation for
any appropriation of a corporate opportunity, intentional misconduct or knowing
violation of law, unlawful distributions or receipt of an improper benefit.
Section 14-2-852 of the Georgia Business Corporation Code provides for
mandatory indemnification against reasonable expenses incurred by a director who
is wholly successful in defending an action to which the director was a party
due to his or her status as a director. Section 14-2-854 allows a court, upon
application by a director, to order indemnification and advance of expenses if
it determines that the director is entitled to indemnification under the Georgia
Business Corporation Code or if it determines that indemnification is fair and
reasonable even if the director has failed to meet the statutory standard of
conduct under section 14-2-851. However, the court may not order indemnification
in excess of reasonable expenses for liability to the corporation or for receipt
of an improper benefit.
Section 14-2-857 of the Georgia Business Corporation Code permits a
corporation to indemnify an officer, including a former officer and including an
officer who is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, to the same extent as a director. A corporation may indemnify an
officer who is not a director to a further extent by means of articles of
incorporation, bylaw, board resolution, or contract. However, the corporation
may not indemnify an officer for liability arising from conduct involving
appropriation of a corporate opportunity, intentional misconduct or knowing
violation of law, unlawful distributions, or receipt of an improper personal
benefit. An officer who is not a director is also entitled to mandatory
indemnification and may apply for court-ordered indemnification.
Section 14-2-858 of the Georgia Business Corporation Code permits a
corporation to purchase and maintain insurance on behalf of directors and
officers against liability incurred by them in their capacities or arising out
of their status as directors and officers of the corporation, regardless of
whether the corporation would have the power to indemnify or advance expenses to
the director or officer for the same liability under the Georgia Business
Corporation Code.
ARTICLES OF INCORPORATION
Article V of the Articles of Incorporation exculpates our directors from
personal liability for money damages to us or our shareholders to the fullest
extent permitted by the Georgia Business Corporation Code, as it may be amended
from time to time. Currently, the directors are exculpated from all liability to
us or our shareholders except for liability arising from conduct involving
appropriation of a corporate opportunity, intentional misconduct or knowing
violation of law, unlawful distributions, or receipt of an improper personal
benefit. The Articles of Incorporation also provide that any repeal or
modification of Article V of the Articles of Incorporation by the shareholders
will not reduce any right or protection of a director existing at the time of
the repeal or modification.
BYLAWS
Article VI of the Bylaws requires Strategic Timber to indemnify to the
fullest extent permitted under the Georgia Business Corporation Code any person
who is or was a director or an officer, including a director or an officer who
is or was serving another entity at our request.
Repeal or modification of Article VI of the Bylaws or of any relevant
provisions of the Georgia Business Corporation Code does not reduce the rights
to indemnification under the Bylaws with respect to any previous occurrences.
The indemnification and advancement of expenses provided by the Bylaws are not
exclusive of any other rights permitted by applicable law to which a person
seeking indemnification or advancement of expenses may be entitled. All rights
to indemnification under Article VI of the Bylaws continue as to a person who
has ceased to be a director or officer.
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INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with each of our
directors and executive officers prior to completion of this offering, and
intend to enter into similar agreements with prospective directors upon
completion of this offering. The indemnification agreements require us to
indemnify directors and executive officers to the fullest extent permitted by
law and advance to the directors and executive officers all related expenses,
subject to reimbursement if it is subsequently determined that indemnification
is not permitted. Under these agreements, we must also indemnify and advance all
expenses incurred by directors and executive officers seeking to enforce their
rights under the indemnification agreements. Although the form of
indemnification agreement offers essentially the same scope of coverage afforded
by the Georgia Code and the Articles of Incorporation and the Bylaws, it
provides greater assurance to directors and executive officers that
indemnification will be available, because, as a contract, it cannot be modified
unilaterally in the future by the Board of Directors or the shareholders to
eliminate the rights it provides.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling Strategic
Timber, we have been informed that in the opinion of the SEC this type of
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
INSURANCE POLICIES
We intend to purchase a policy of insurance providing reimbursement of
indemnification payments to officers and directors and reimbursement of
liabilities incurred by directors and officers in their capacities as such, to
the extent that they are not otherwise indemnified by Strategic Timber.
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SHARES AVAILABLE FOR FUTURE SALE
GENERAL
Before this offering, there has been no public market for our common stock,
and we have no way of knowing what the trading price will be after the offering.
As described below, only the shares sold in the offering will be available for
sale shortly after the offering due to contractual and legal restrictions on
resale of the shares and partnership units outstanding prior to the offering.
Nevertheless, sales of substantial amounts of common stock in the public market
after the restrictions lapse could cause the prevailing market price of the
common stock to drop. Limited partners of Strategic Timber Partners may be
entitled under certain circumstances to exchange partnership units for shares of
common stock. This could result in a large number of common shares eligible for
immediate resale in the public market. See "The Partnership
Agreement -- Redemption of Partnership Units."
Upon completion of this offering, we will have 17,271,770 outstanding
shares of common stock. We will have 19,761,770 shares of common stock issued
and outstanding if the underwriters exercise their over-allotment option in
full. The shares of common stock being sold in the offering will be freely
tradeable by persons other than our affiliates without restriction or
registration under the Securities Act, subject to the limitations on ownership
in our Articles of Incorporation. See "Description of Capital
Stock -- Restrictions on Ownership and Transfer of Shares." Under the rules of
the Securities Act, an "affiliate" is a person that controls, is controlled by,
or is under common control with Strategic Timber. Determining who is an
affiliate is subjective based on determining "control," but each of our
directors and executive officers would generally be considered an affiliate of
Strategic Timber. We sold the remaining outstanding shares in private
transactions, and these shares are eligible for public sale if registered under
the Securities Act or sold in accordance with Securities Act Rule 144.
Holders of our common stock and partnership units have agreed, subject to
limited exceptions, that for a period of one year from the completion of this
offering, they will not, without the prior written consent of Salomon Smith
Barney Inc., dispose of or hedge any shares of common stock or any partnership
units or any securities convertible into, or exercisable or exchangeable for,
common stock or partnership units.
On and after the first anniversary of the completion of this offering,
Strategic Timber Partners will be obligated to exchange each partnership unit at
the request of the holder for, at our option, either one share of common stock
or cash equal to the fair market value of one share of common stock at the time
of the exchange. See "The Partnership Agreement -- Redemption of Partnership
Units."
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of privately placed shares from
Strategic Timber or any of its affiliates, the holder is entitled to sell within
any three-month period a number of shares that does not exceed the greater of 1%
of the then outstanding common stock or the average weekly trading volume of the
common stock during the four calendar weeks immediately preceding the date on
which notice of the sale is filed with the SEC. Sales under Rule 144 are subject
to other requirements, in particular that they be made through stock brokers,
that a notice of sale be filed by the selling shareholder, and that Strategic
Timber have filed with the SEC all of its required public company reports at the
time of the sale.
If two years have elapsed since the date of acquisition of privately placed
shares from Strategic Timber or from any affiliate of Strategic Timber, and the
acquiror or subsequent holder thereof is deemed not to have been an affiliate of
Strategic Timber at any time during the three months immediately preceding a
sale, such person is entitled to sell these shares in the public market under
Rule 144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements of Rule 144.
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REGISTRATION RIGHTS
We intend to issue options to purchase approximately 1,115,000 shares of
common stock to executive officers, directors and employees upon completion of
this offering, and have reserved additional shares for future issuance under the
1999 Incentive Plan. We intend to file one or more registration statements under
the Securities Act to register the shares of common stock reserved for issuance
under the 1999 Incentive Plan. These registration statements will become
effective immediately upon filing. Commencing one year after this offering, we
will also be obligated to file one or more registration statements under the
Securities Act to register the shares of common stock issuable upon redemption
of partnership units for shares of common stock. See "Management -- 1999
Incentive Plan" and "The Partnership Agreement -- Redemption of Partnership
Units."
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THE PARTNERSHIP AGREEMENT
This summary of Strategic Timber Partners' limited partnership agreement
describes the material provisions of that agreement as it will be in effect
immediately after completion of this offering. This summary and the other
descriptions of provisions of the partnership agreement included in this
prospectus are qualified in their entirety by reference to the partnership
agreement, which is filed as an exhibit to the registration statement of which
this prospectus is a part.
The following provisions of the partnership agreement are summarized
elsewhere in the prospectus:
- With regard to our management, see "Management."
- With regard to formation, see "Structure and Formation of Strategic
Timber."
- With regard to tax allocations and other tax issues, see "Federal Income
Tax Consequences."
Upon consummation of this offering, Strategic Timber will hold
approximately 76.7% of the limited partnership units in Strategic Timber
Partners.
POWERS OF STRATEGIC TIMBER OPERATING CO., AS GENERAL PARTNER
Under the partnership agreement, Strategic Timber Operating Co., a wholly
owned subsidiary of Strategic Timber, is the sole general partner of Strategic
Timber Partners. Strategic Timber Operating Co. generally will have full and
exclusive responsibility and discretion in the management, operation and control
of Strategic Timber Partners. These powers include the ability to cause
Strategic Timber Partners to enter into major transactions, such as cutting
contracts, acquisitions and dispositions of timberland. No limited partner may
take part in the operation, management or control of the business of Strategic
Timber Partners.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a unit from a holder and
executes and delivers a transfer application, grants to the general partner a
power of attorney to execute and file documents required for the qualification,
continuance or dissolution of Strategic Timber Partners. The power of attorney
also grants the authority for the amendment of, and to make consents and waivers
under the partnership agreement, as well as other matters incidental to the
management of the partnership.
TRANSFER OF THE GENERAL PARTNER'S AND STRATEGIC TIMBER'S INTERESTS
Under the partnership agreement, the limited partners cannot remove
Strategic Timber Operating Co. as the general partner of Strategic Timber
Partners. Strategic Timber may not transfer, including in connection with
mergers and other business combinations involving Strategic Timber, any of its
partnership units unless:
- a majority of the units held by the partners, including Strategic Timber,
approve the transaction, or
- substantially all of the assets of the other entity are contributed to
Strategic Timber Partners.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Generally, the partnership agreement may be amended by Strategic Timber
Operating Co., as general partner. Some amendments that would adversely affect a
limited partner's rights must be approved by each partner that would be
adversely affected. These include amendments that would
- convert a limited partner's interest into a general partner's interest,
- modify the limited liability of a limited partner,
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- alter the interest of any partner in profits or losses or the right to
receive distributions other than as a result of dilution to account for
additional capital contributions being made by a new or existing partner,
or
- alter or modify the redemption right described below.
TRANSFER OF PARTNERSHIP UNITS; SUBSTITUTE LIMITED PARTNERS
The partnership agreement provides that the limited partners, other than
Strategic Timber, generally may transfer the economic interests in a partnership
unit without the consent of any other person. However, a transferee may be
substituted as a limited partner only if Strategic Timber Operating Co. consents
and the transferee agrees to be bound by the terms and conditions of the
partnership agreement. In addition, limited partners may not transfer units in
any event until the one-year anniversary of the offering or in violation of
regulatory and other restrictions set forth in the partnership agreement. In
addition, limited partners may not transfer partnership units in violation of
regulatory and other restrictions set forth in the partnership agreement.
REDEMPTION OF PARTNERSHIP UNITS
On and after the first anniversary of the completion of this offering, at
the request of a holder of partnership units, Strategic Timber Partners will be
obligated to redeem each partnership unit for cash equal to the fair market
value of one share of common stock at the time of the redemption. However, at
its option, Strategic Timber can assume Strategic Timber Partners' obligation
and elect to acquire any partnership unit presented for redemption for either
one share of common stock or an amount of cash of the same value. With each
acquisition of partnership units, Strategic Timber's percentage ownership
interest in the partnership will increase.
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS; ADDITIONAL CAPITAL
CONTRIBUTIONS
Generally, Strategic Timber Operating Co., is authorized, without the
consent of the limited partners, to cause Strategic Timber Partners to issue
additional partnership units to Strategic Timber, to the limited partners or to
other persons on terms and conditions determined by Strategic Timber Operating
Co.
For additional partnership units to be issued to Strategic Timber by
Strategic Timber Partners:
- Strategic Timber must issue additional shares of common stock and
contribute to Strategic Timber Partners the entire net proceeds received
by Strategic Timber from the issuance, or
- Strategic Timber Partners must issue additional partnership units to all
partners in proportion to their respective interests in Strategic Timber
Partners.
In addition, Strategic Timber Operating Co., as the general partner, may cause
Strategic Timber Partners to issue to Strategic Timber additional partnership
units in different series or classes, which may be senior to the partnership
units, in conjunction with an offering of securities of Strategic Timber having
substantially similar rights, if the net proceeds of the offering are
contributed to Strategic Timber Partners. Consideration for additional
partnership units may be cash or other assets, including timber assets. No
limited partner has preemptive, preferential or similar rights with respect to
additional capital contributions to Strategic Timber Partners or the issuance or
sale of any partnership units.
Other than as described above with respect to Strategic Timber, no limited
partner is required to make any additional capital contributions to Strategic
Timber Partners.
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OTHER COVENANTS
The partnership agreement provides that Strategic Timber Partners cannot
effect any transaction that would
- adversely affect the ability of Strategic Timber to qualify as a REIT
under the Internal Revenue Code,
- subject Strategic Timber to federal income taxes, other than for capital
gains that it has elected to retain, or
- violate any law or regulation applicable to Strategic Timber or Strategic
Timber Partners.
EXCULPATION AND INDEMNIFICATION OF STRATEGIC TIMBER AND STRATEGIC TIMBER
OPERATING CO.
The partnership agreement generally provides that neither Strategic Timber
Operating Co., as general partner of Strategic Timber Partners, nor Strategic
Timber will have liability for monetary damages to Strategic Timber Partners or
any limited partner for losses sustained or liabilities incurred as a result of
any act or omission taken or permitted by Strategic Timber Operating Co. in
connection with the partnership's business that is determined by Strategic
Timber Operating Co., in good faith, to be in, or not against, Strategic Timber
Partners' best interest, unless the act or omission constitutes intentional
misconduct, or a knowing violation of law or the partnership agreement. In
addition, Strategic Timber Operating Co. and Strategic Timber are not liable for
any misconduct or negligence on the part of their agents, provided that the
agents were appointed by Strategic Timber Operating Co. in good faith. By
executing the partnership agreement, the limited partners have agreed that, in
fulfilling the fiduciary duties owed by Strategic Timber Operating Co. to the
limited partners, Strategic Timber Operating Co. is not required to consider the
separate interests of the limited partners, including tax consequences to them.
The partnership agreement provides for indemnification of Strategic Timber,
Strategic Timber Operating Co., and the directors and officers of Strategic
Timber, as well as any other persons Strategic Timber Operating Co., as general
partner, may designate. Strategic Timber Partners shall indemnify any of these
indemnitees against any losses, claims, damages, liabilities, judgments, fines,
settlements and expenses arising from the operations of the partnership or
Strategic Timber unless it is established that:
- the act or omission of the indemnified person was material to the matter
giving rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty;
- the indemnified person actually received an improper personal benefit in
money, property or services; or
- in the case of any criminal proceeding, the indemnified person had
reasonable cause to believe that the act or omission was unlawful.
This indemnification is limited to the assets of Strategic Timber Partners
and no partner in the partnership is personally liable for such indemnification.
Strategic Timber Partners may reimburse reasonable expenses incurred by any
indemnitee in defense of an action relating to the operations of the
partnership, if the partnership receives certain written affirmations and
undertakings from the indemnitee. Strategic Timber Partners may purchase and
maintain insurance on behalf of indemnitees against liabilities incurred by them
in connection with the partnership's activities, regardless of whether the
partnership would have the power to indemnify the indemnitee for the same
liability under the partnership agreement.
CASH DISTRIBUTIONS
Strategic Timber Operating Co. will determine the timing and amount of cash
distributions made by Strategic Timber Partners. When authorized by Strategic
Timber Operating Co., cash will be distributed among the partners in proportion
to their ownership interests.
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TAX MATTERS
Strategic Timber Operating Co. will be the tax matters partner of the
partnership and, as such, will generally have the authority to make tax
elections under the Internal Revenue Code on behalf of the partnership. See
"Federal Income Tax Consequences -- Tax Aspects of Strategic Timber's Ownership
of Interests in Strategic Timber Partners."
TERM
Under the partnership agreement, Strategic Timber Partners will continue as
a limited partnership until December 31, 2099 or until sooner dissolved under
the terms of the partnership agreement.
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FEDERAL INCOME TAX CONSEQUENCES
This section is a summary of the federal income tax consequences that may
be relevant to our shareholders. As described under the heading "Legal
Opinions," this section is the opinion of our counsel, Sutherland Asbill &
Brennan LLP. In a private letter ruling issued to us, the IRS has confirmed the
opinion of counsel on several issues. These issues and the IRS ruling are
described below. The IRS ruling is filed as an exhibit to the registration
statement of which this prospectus is a part.
This section is based on the Internal Revenue Code, as it is currently in
effect, existing, temporary, and currently proposed Treasury Regulations
thereunder, the legislative history of the Internal Revenue Code, existing
administrative interpretations and practices of the IRS, and judicial decisions.
All of these authorities are subject to change either prospectively or
retroactively, and any changes in them may adversely affect the tax consequences
described below.
The discussion below does not address all federal income tax matters
affecting us or our shareholders. It does not address the tax consequences that
may be relevant to particular shareholders that are subject to special treatment
under the federal income tax laws, such as dealers in securities, banks,
insurance companies, tax-exempt organizations or non-United States persons. Tax
consequences to tax-exempt organizations and non-U.S. persons are discussed only
to a limited extent under the headings "-- Taxation of Tax-Exempt Shareholders
of Strategic Timber" and "-- Taxation of Non-U.S. Shareholders of Strategic
Timber." The discussion also does not address any consequences arising under the
laws of any state, locality or foreign jurisdiction except to the extent
discussed under the heading "Other Taxes".
We urge prospective purchasers of shares of common stock to consult their
own tax advisors regarding the specific tax consequences to them of the
ownership and disposition of these shares in light of their specific tax and
investment situations, the specific federal, state, local, and foreign tax laws
applicable to them, and the potential changes in applicable tax laws.
LEGAL OPINIONS
Sutherland Asbill & Brennan LLP has acted as our counsel in connection with
this offering and our election to be taxed as a REIT. Except where indicated,
statements as to matters of federal income tax law and legal conclusions
contained in this section are the opinion of Sutherland Asbill & Brennan LLP.
However, none of the statements in this section concerning any consequences
arising under the laws of any state, locality or foreign jurisdiction
constitutes an opinion of our counsel. Investors should be aware that an opinion
of counsel represents only that counsel's best legal judgment and does not bind
the IRS or any court. Thus, the IRS could challenge the statements and opinions
in this section, and if this happens a court could reject the statements or
opinions.
Based on the accuracy of representations we have made to them and subject
to the qualifications set forth in the more detailed discussion that follows,
Sutherland Asbill & Brennan LLP is of the opinion that, beginning with our
taxable year ending December 31, 1998, we will be organized in conformity with
the requirements for qualification as a REIT, and our proposed method of
operation will enable us to meet the requirements for qualification and taxation
as a REIT.
Sutherland Asbill & Brennan LLP's opinion is based on various assumptions
and is conditioned upon representations we have made as to factual matters,
including representations regarding the organization, business, properties,
operations, and future conduct of the businesses of Strategic Timber, Strategic
Timber Partners and Strategic Timber Operating Co. Furthermore, qualification
and taxation as a REIT depend upon our ability to meet the various qualification
tests discussed below on an ongoing basis through actual annual operating
results, distribution levels, and diversity of share ownership. Sutherland
Asbill & Brennan LLP will not review these results on a continuing basis and
cannot provide any assurance that the actual results of our operations for any
particular taxable year will satisfy the qualification tests.
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We have received a private letter ruling from the IRS confirming the
opinion of Sutherland Asbill & Brennan LLP that:
- timberlands and the timber thereon constitute real estate assets
within the meaning of the asset tests for REIT qualification described
in section 856(c)(4) of the Internal Revenue Code. See "-- Taxation of
Strategic Timber -- Asset Tests."
- income we receive from timber cutting agreements satisfying the
requirements of section 631(b) of the Code will qualify as gain from
the sale or other disposition of real property which is not property
held primarily for sale to customers in the ordinary course of a trade
or business within the meaning of the gross income tests for REIT
qualification described in section 856(c)(2) and (3) of the Internal
Revenue Code. See "-- Taxation of Strategic Timber -- Income Tests."
- income from section 631(b) timber cutting agreements will not be
considered income derived from a prohibited transaction as described
in section 857(b)(6) of the Internal Revenue Code.
The opinion of Sutherland Asbill & Brennan LLP contained in this section
addresses a number of tax issues that were not a part of the private letter
ruling received from the IRS. As noted, an opinion of counsel represents only
that counsel's best legal judgment and does not bind the IRS or any court. The
IRS could challenge the statements and opinions in this section, and if that
happens a court could reject the statements or opinions.
TAXATION OF STRATEGIC TIMBER
GENERAL
We will elect to be taxed as a REIT beginning with our taxable year ending
December 31, 1998. We believe that we will be organized and will operate in such
a manner as to qualify and remain qualified to be taxed as a REIT. We cannot
assure you, however, that we will operate in a manner so as to qualify, or
remain qualified, as a REIT.
As a REIT, we generally will not be subject to federal income taxes on that
portion of our ordinary income or capital gain that we currently distribute to
shareholders. The Internal Revenue Code generally allows a REIT to deduct
dividends paid to its shareholders. This deduction for dividends paid
substantially eliminates the "double taxation" of earnings at the corporation
and distributions to the shareholders that generally results from investment in
a regular "C" corporation. However, we will be subject to federal income tax as
follows:
- We will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains, although, as
explained below, our shareholders will be entitled to tax credits for
their shares of the tax we pay with respect to undistributed net capital
gains.
- If we have net income from the sale or other disposition of "foreclosure
property" that is held primarily for sale to customers in the ordinary
course of our trade or business or other nonqualifying income from
foreclosure property, we will be subject to tax at the highest corporate
rate on such income.
- If we have net income from prohibited transactions, that income will be
subject to a 100% tax. Prohibited transactions are, in general, sales or
other dispositions of property, other than foreclosure property, held
primarily for sale to customers in the ordinary course of a trade or
business.
- If we fail to satisfy the 75% gross income test or the 95% gross income
test (described below), but nonetheless maintain our qualification as a
REIT, we will be subject to a 100% tax on an amount equal to the gross
income attributable to the greater of the amount by which we fail the 75%
or the 95% gross income test, multiplied by a fraction intended to
reflect our profitability.
- If we fail to distribute during each calendar year at least the sum of
- 85% of our REIT ordinary income for that year,
- 95% of our REIT capital gain net income for that year, other than
capital gain income we elect to retain and pay taxes on and
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- any undistributed taxable income from prior periods, other than
capital gains from such years which we elected to retain and pay taxes
on,
then we will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.
- Under certain circumstances, we may be subject to the "alternative
minimum tax" on certain items of tax preference.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, we must elect to be taxed as a REIT. We also must
meet the requirements discussed below relating to our organization, sources of
income, nature of assets, and distributions.
Organizational Requirements
In order to qualify as a REIT, we must satisfy the following organizational
requirements:
(1) we must be a corporation, trust, or association that is managed by
one or more trustees or directors;
(2) our beneficial ownership must be evidenced by transferable shares
or by transferable certificates of beneficial interest;
(3) we must be taxable as a domestic corporation but for sections 856
through 859 of the Internal Revenue Code;
(4) we must not be a financial institution or an insurance company;
(5) our beneficial ownership must be held by 100 or more persons; and
(6) during the last half of each taxable year no more than 50% in
value of our outstanding stock may be owned directly or indirectly, through
the application of attribution rules, by five or fewer individuals (as
defined in the Internal Revenue Code to include certain entities).
We must meet requirements (1) through (4) during the entire taxable year.
We must meet requirement (5) 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. Requirements (5) and (6) will not apply to us until our taxable
year ending December 31, 1999.
In the opinion of Sutherland Asbill & Brennan LLP, we have satisfied
requirements (1) through (4) above for the taxable year ended December 31, 1998,
and, with respect to requirement (5), 100 or more persons have held the
beneficial ownership of our stock since December 31, 1998. We further believe
that we will have issued in this offering sufficient common stock with
sufficient diversity of ownership to allow us to satisfy requirement (6) above
(and continue to satisfy requirement (5) above) for our taxable year ending
December 31, 1999. In addition, our Articles of Incorporation provide
restrictions intended to assist us in continuing to satisfy the share ownership
requirements described in (5) and (6) above regarding the transfer and ownership
of common stock. These ownership and transfer restrictions are described in
"Description of Capital Stock -- Restrictions on Ownership and Transfer of
Shares." However, because of the absence of authority on this issue, there is no
assurance that the operation of these Articles of Incorporation provisions will,
as a matter of law, prevent a concentration of ownership of stock in excess of
the ownership limits described in requirements (5) and (6) above. If we fail to
satisfy these requirements, our status as a REIT will terminate; however, if we
comply with the rules contained in the applicable Treasury Regulations requiring
us to attempt to ascertain the actual ownership of our shares, and we do not
know, and would not have known through the exercise of reasonable diligence,
whether we failed to meet the requirement set forth in condition (6) above, we
will be treated as having met such requirement. See "-- Taxation of Strategic
Timber -- Failure of the Company to Qualify as a REIT." In rendering its opinion
that we are organized in a manner that permits us to qualify as a REIT,
Sutherland Asbill & Brennan LLP is relying on our representations that the
ownership of our stock (without regard to the "excess stock" provisions of the
Articles of Incorporation) satisfies the stock ownership requirements set forth
in requirement (6) above.
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There are a few additional organizational requirements that we must satisfy
in order to be treated as a REIT. Our taxable year must be the calendar year.
Also, we must maintain required records and request on an annual basis certain
information from our shareholders designed to disclose the actual ownership of
our outstanding stock. A REIT's failure to comply with these record-keeping
requirements would result in a monetary fine imposed on that REIT, unless it is
shown that the failure was due to reasonable cause and not to willful neglect.
We intend to comply with all of these requirements.
Income Tests
In order to maintain qualification as a REIT, we must satisfy two gross
income requirements each year. First, at least 75% of our gross income for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property or from certain types of temporary
investments. Types of qualifying income include "rents from real property" and
"gain from the sale or other disposition of real property" other than property
held primarily for sale to customers in the ordinary course of a trade or
business. Second, at least 95% of our gross income 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 these
items. For purposes of these tests, "gross income" does not include gross income
from any "prohibited transaction," a term defined in section 857(b)(6) of the
Internal Revenue Code. A transaction can be a prohibited transaction only if it
involves the sale or other disposition of property held primarily for sale to
customers in the ordinary course of a trade or business.
In applying the gross income tests and the asset tests to a REIT that 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 is the same in the hands of the REIT for purposes of section 856 of
the Internal Revenue Code, including satisfying the gross income tests and the
asset tests. Thus, our proportionate share of the assets and items of income of
Strategic Timber Partners will be treated as assets and items of income of
Strategic Timber for purposes of applying the requirements described in this
summary. For this reason, references in this summary to our income and assets
include our proportionate share of the income and assets of Strategic Timber
Partners. A summary of the rules governing the federal income taxation of
partnerships and their partners is provided below in "-- Tax Aspects of
Strategic Timber's Ownership of Interests in Strategic Timber Partners."
The fact that we own 100% of the outstanding stock of Strategic Timber
Operating Co., makes it a "qualified REIT subsidiary." A qualified REIT
subsidiary is not treated as a separate corporation for federal income tax
purposes, and all assets, liabilities, and items of income, deduction, and
credit of a qualified REIT subsidiary are treated as assets, liabilities, and
items of Strategic Timber for all purposes of the Internal Revenue Code,
including the REIT qualification tests. For this reason, references in this
summary to the income and assets of Strategic Timber include the income and
assets of Strategic Timber Operating Co. and any other qualified REIT
subsidiary.
We plan to dispose of standing timber by granting purchasers cutting rights
to timber by contracts that satisfy the requirements of section 631(b) of the
Internal Revenue Code. Section 631(b) generally treats a timber owner's gain or
loss on a disposal of timber as though it were gain or loss on the sale of such
timber if the owner has held the timber for more than one year and disposes of
it under a contract pursuant to which the owner retains an economic interest in
the timber. Advance payments received under a section 631(b) contract are
taxable in the year received, even though the timber to be cut under the
contract might be cut in a later year. If we refund advance payments subsequent
to the filing of the tax return for the year such advance payments were
received, we will be required to amend that tax return and may be required to
issue revised statements (Forms 1099 and 2439) to our shareholders, which may
necessitate the filing of amended tax returns by the shareholders.
In the opinion of Sutherland Asbill & Brennan LLP, any gain we recognize
under timber cutting agreements that satisfy the requirements of section 631(b)
will be treated as gain from the sale or other disposition of real property that
is not property held primarily for sale to customers in the ordinary course
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of business within the meaning of the 75% gross income test and the 95% gross
income test. As noted above, we have received a private letter ruling from the
IRS confirming this opinion.
It is also the opinion of Sutherland Asbill & Brennan LLP that the income
we receive from timber cutting agreements that do not satisfy the requirements
of section 631(b) of the Internal Revenue Code solely because we have not held
the timber disposed of for more than one year will qualify as "rents from real
property" within the meaning of the two gross income tests, provided that those
timber cutting agreements also meet the requirements set forth in the following
paragraph.
Rents we receive will qualify as "rents from real property" in satisfying
the gross income requirements for a REIT 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 person 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
that person. 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 who is adequately
compensated and from whom the REIT derives no revenue (subject to a 1% de
minimis exception).
We anticipate that our only rental income of a material amount from sources
other than timber cutting agreements will be from certain real property leases,
including hunting leases. We represented to Sutherland Asbill & Brennan LLP
that:
- each lease that produced qualifying rents that was not reviewed is
substantially identical in all material respects to the terms of a
particular lease reviewed;
- neither we nor any actual or constructive owner of 10% or more of our
common stock owns 10% or more of any lessee; and
- specific amounts of our 1998 gross income were derived from specific
sources.
In determining that we satisfied the gross income tests for the period ending
December 31, 1998, Sutherland Asbill & Brennan LLP reviewed available lease
documents, determined which leases would produce qualifying "rents from real
property" and which would not, and relied on our representations.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we will fail to qualify as a REIT for that year unless we are
entitled to relief under the Internal Revenue Code. These relief provisions will
generally be available if our failure to meet the gross income tests was due to
reasonable cause and not due to willful neglect, we attach a schedule of the
sources of our income to our federal income tax return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. We
have represented that we will exercise ordinary business care and prudence in
attempting to satisfy the gross income tests and will attach a schedule of the
sources of our income to our tax return each year. It is not possible, however,
to state whether in all circumstances we would be entitled to the benefit of the
relief provisions. Furthermore, as discussed above in "-- Taxation of Strategic
Timber -- General," even if the relief provisions apply, a 100% tax would be
imposed on an amount equal to the gross income attributable to the greater of
the amount by which we failed the 75% test or the 95% test, multiplied by a
fraction intended to reflect our profitability.
Any net income we realize from the sale or other disposition of property
held primarily for sale to customers in the ordinary course of a trade or
business will be treated as income from a "prohibited transaction" and will be
subject to a 100% penalty tax. Such prohibited transaction income may also have
an adverse effect upon our ability to satisfy the income tests for qualification
as a REIT. Under existing law, whether property is held primarily for sale to
customers in the ordinary course of a trade or business
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is a question of fact that depends on all the facts and circumstances with
respect to the particular transaction. In the opinion of Sutherland Asbill &
Brennan LLP, income derived from timber cutting agreements that satisfy the
requirements of section 631(b) of the Internal Revenue Code will be treated as
income realized from the disposition of property used in our trade or business
and not as income realized from the sale or other disposition of property held
primarily for sale to customers in the ordinary course of our trade or business.
The IRS has confirmed this conclusion in the private letter ruling we received.
Strategic Timber Partners intends to hold timberlands and other properties
for investment with a view to long-term appreciation, to engage in the business
of acquiring, developing, owning and operating timberlands and other properties
and to make such occasional sales of timberlands (as opposed to dispositions of
standing timber) or other properties, including "higher and better use" parcels,
as are consistent with its investment objectives. The IRS could contend that one
or more of such sales is a prohibited transaction and subject to the 100%
penalty tax. In general, the determination of whether property is held primarily
for sale to customers in the ordinary course of its trade of business depends on
all the facts and circumstances surrounding such property's sale. Therefore, it
is not possible for Sutherland Asbill & Brennan LLP to opine whether any future
sale of timberlands or other properties, other than a sale of timber meeting the
requirements of section 631(b), might be a prohibited transaction.
We intend to satisfy the gross income tests in 1999 and subsequent years.
However, there can be no assurance that we will in fact satisfy these
requirements every year.
Asset Tests
At the close of each calendar quarter, we must satisfy three tests relating
to our assets. First, at least 75% of the value of our total assets must be
represented by real estate assets, cash, cash items and government securities.
Second, not more than 25% of our 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 us may
not exceed 5% of the value of our total assets, and we may not own more than 10%
of any one issuer's outstanding voting securities. This final rule, however,
does not apply to our interests in Strategic Timber Partners, any other
partnership, any qualified REIT subsidiary, or any other disregarded entity.
In the opinion of Sutherland Asbill & Brennan LLP, timberlands and the
timber thereon constitute real estate assets within the meaning of the asset
tests. The ruling received from the IRS confirms this conclusion. We met the 75%
asset test during 1998 and anticipate that we will always meet this test.
If we should fail to satisfy the asset tests at the end of a calendar
quarter, we would lose our REIT status unless we satisfied all of the asset
tests at the close of the preceding calendar quarter and, in addition, the
discrepancy between the value of our 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. If the condition described
in the second clause of the preceding sentence were not satisfied, we could
still avoid disqualification by eliminating that discrepancy within 30 days
after the close of the quarter in which it arose.
Distribution Requirements
In order to qualify as a REIT, we must distribute dividends, other than
capital gain dividends to our shareholders in an amount at least equal to 95% of
our "REIT taxable income" (computed without regard to the dividends paid
deduction and by excluding our net capital gain), plus 95% of any after-tax net
income from foreclosure property, less the sum of certain items of non-cash
income. We generally must pay these dividends in the taxable year to which they
relate. However, we may pay a dividend in the following taxable year if we
declare the dividend before timely filing our tax return for the taxable year to
which the dividend relates and we pay the dividend on or before the first
regular dividend payment date after the declaration. We intend to make timely
distributions sufficient to satisfy these distribution requirements.
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In the event that we distribute or are treated as having distributed at
least 95%, but less than 100%, of our so adjusted "REIT taxable income," we will
be subject to tax on the income not distributed at ordinary corporate tax rates.
We will also be subject to tax at capital gain rates on any of our net capital
gain that we do not distribute or are not treated as having distributed. If we
fail to distribute during each calendar year at least the sum of (1) 85% of our
REIT ordinary income for such year, (2) 95% of our REIT capital gain income for
such year, other than capital gain income which we elect to retain and pay tax
on as provided below, and (3) any undistributed taxable income from prior
periods, other than capital gains from such years which we elected to retain and
pay tax on, we would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
The Internal Revenue Code allows us to elect to retain rather than
distribute all or part of our net capital gains. There are several effects of
such an election. First, we are required to pay the tax on such gains at regular
corporate tax rates. Second, our shareholders are required to include their
proportionate share of the undistributed net capital gain in income. However,
the shareholders will receive a credit for their share of the tax we paid, which
may result in a tax refund to them. Third, the basis of a shareholder's stock
would be increased by the amount of the undistributed net capital gains included
in income by the shareholder minus the amount of capital gains tax we paid on
the shareholder's behalf. In order for a shareholder to receive the credit or
the refund for the taxes we paid on the shareholder's behalf, the shareholder
must file the necessary forms with the IRS.
At any given time, it is possible that we may not have sufficient cash or
other liquid assets to meet the distribution requirements. This may result from
timing or other differences between:
- the actual receipt of income and actual payment of deductible
expenses;
- the inclusion of such income and deduction of such expenses in
arriving at our taxable income; or
- our percentage interest in the Strategic Timber Partners' cash flow
and our share of taxable income arising upon a disposition of property
contributed to Strategic Timber Partners where the fair market value
of such property exceeds its tax basis.
If such differences occur, we may, in order to meet the distribution
requirements, find it necessary to arrange for borrowings, equity issuances or
asset sales, or to pay dividends in the form of taxable stock dividends, or to
elect to retain and pay taxes on a portion of our net capital gains.
Under certain circumstances, we may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to
shareholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, we would be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends. It is our intention to meet all distribution requirements for the
year in which such requirements arise, so we do not anticipate paying deficiency
dividends.
FAILURE TO QUALIFY AS A REIT
If we fail to qualify to be taxed as a REIT in any taxable year and if the
relief provisions do not apply, we will be subject to tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. We could not deduct distributions to our shareholders in any year in
which we failed to qualify as a REIT. This would significantly reduce the cash
we have available to distribute to our shareholders and would likely reduce the
value of our common stock. In addition, if we failed to qualify as a REIT, all
distributions to our shareholders would be taxable as ordinary income, to the
extent of our current and accumulated earnings and profits. If that happened,
subject to certain limitations of the Internal Revenue Code, corporate
shareholders might be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, we also would be
disqualified from being taxed as a REIT for the next four taxable years. It is
not possible to state whether in all circumstances we would be entitled to that
statutory relief.
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TAXATION OF TAXABLE U.S. SHAREHOLDERS
We are using the term "U.S. shareholder" to mean a holder of our common
stock who, for United States federal income tax purposes, is:
- an individual who is a citizen or resident of the United States;
- an entity that is a corporation or partnership for United States federal
income tax purposes and that 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;
- any estate whose income is includible in gross income for United States
federal income tax purposes regardless of its source; or
- a domestic trust. A domestic trust is any trust whose administration is
subject to the primary supervision of a court within the United States,
and as to which one or more United States fiduciaries have the authority
to control all substantial decisions although certain trusts classified
for United States federal income tax purposes as a United States person
prior to August 20, 1996 may, under regulations not yet published, elect
to retain their classification as a domestic trust.
DISTRIBUTIONS BY STRATEGIC TIMBER
So long as we qualify as a REIT, distributions we make out of our current
or accumulated earnings and profits that are not designated as capital gain
dividends will constitute dividends taxable to our taxable U.S. shareholders as
ordinary income. U.S. shareholders that are corporations will not be eligible
for the dividends received deduction with respect to such dividends.
Distributions we properly designate as capital gain dividends will, to the
extent that they do not exceed our actual net capital gain for the taxable year,
be taxable to taxable U.S. shareholders as long-term capital gains without
regard to the period for which a U.S. shareholder has held our common stock.
U.S. shareholders that are corporations may, however, be required to treat
up to 20% of specified capital gain dividends as ordinary income pursuant to
section 291(d) of the Internal Revenue 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 maximum long-term capital gain rate
applicable to individuals is 20%.
If we elect to retain and reinvest some or all of our capital gains rather
than distributing them, we will pay tax on these gains at the corporate tax
rate, which is now 35%. You will be deemed to have received a capital gain
dividend equal to your proportionate share of the gain we retained, which you
will need to report in your own return. You will, however, be entitled to a tax
credit on your proportionate share of the tax we paid on the gain. The maximum
capital tax rate applicable to U.S. individuals on this gain is 20% and,
depending upon your income, may be less. The difference between the tax we paid
on your behalf at the 35% corporate rate and the tax you actually owe on this
gain may be used to offset your liability for tax on other items of income, and
if your total tax payments exceed your liability, you will be entitled to a tax
refund. Tax-exempt organizations who are shareholders will be entitled to a
refund of the entire amount of tax we paid on their behalf. Each year, we will
report the amount of any retained capital gains to you on IRS Forms 2439, which
are similar to a Form 1099, and you may claim the tax credit on your own income
tax return, or on Form 990-T in the case of exempt organizations. Your tax basis
in the common stock you own will be increased by the amount of the deemed
capital gain dividend, less your proportionate share of the tax we paid on your
behalf.
To the extent that we make distributions in excess of our current and
accumulated earnings and profits, such distributions will be treated first as a
tax-free return of capital to each U.S. shareholder. A distribution treated as a
return of capital reduces the adjusted basis that the U.S. shareholder 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. shareholder's adjusted basis
in its common stock taxable as capital gains, provided that
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the common stock has been held as a capital asset. We will be treated as having
sufficient earnings and profits to treat as a dividend any distribution up to
the amount required to be distributed in order to avoid imposition of the 4%
excise tax discussed under "-- Taxation of Strategic Timber -- General" and
"-- Taxation of Strategic Timber -- Requirements for
Qualification -- Distribution Requirements." As a result, shareholders may be
required to treat as taxable dividends specified distributions that would
otherwise result in tax-free returns of capital. Moreover, any "deficiency
dividend" will be treated as a "dividend," either an ordinary dividend or a
capital gain dividend, regardless of our earnings and profits. Dividends
declared in October, November, or December of any year and payable to a
shareholder of record on a specified date in any such month shall be treated as
both paid by us and received by the shareholder on December 31 of that year,
provided that we actually pay the dividend on or before January 31 of the
following calendar year. Shareholders may not include in their own income tax
returns any net operating losses or net capital losses we may incur. We will
notify each shareholder after the close of our taxable year as to the portions
of the distributions attributable to that year which constitute ordinary income,
capital gain or a return of capital.
Income from distributions we pay and gain arising from the sale or exchange
by a U.S. shareholder of our common stock will not be treated as passive
activity income and, as a result, U.S. shareholders generally will not be able
to apply any "passive activity losses" against such income or gain. Dividends we
pay 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 our 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 taxable disposition of our common stock, a U.S.
shareholder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between the amount of cash and the fair market
value of any property received on such sale or other disposition, and the
shareholder's adjusted basis in the common stock for tax purposes. This gain or
loss will be capital gain or loss if the common stock has been held as a capital
asset and will be long-term gain or loss if the common stock has been held for
more than one year. In general, any loss recognized by a U.S. shareholder upon
the sale or other taxable disposition of common stock that has been held for six
months or less for tax purposes will be treated as a long-term capital loss to
the extent of distributions received by the U.S. shareholder from us which were
required to be treated as long-term capital gains.
WITHHOLDING ON DISTRIBUTIONS
We will report to our U.S. shareholders and to the IRS the amount of
dividends paid during each calendar year and the amount of any tax withheld.
Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless the
shareholder is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or 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. shareholder that does not provide us with the correct
taxpayer identification number may also be subject to penalties imposed by the
IRS. Any amount paid as backup withholding will be creditable against the
shareholder's federal income tax liability. In addition, we may be required to
withhold a portion of capital gain distributions to any shareholder who fails to
certify his non-foreign status to us. See "--Taxation of Non-U.S. Shareholders
of Strategic Timber."
TAXATION OF TAX-EXEMPT SHAREHOLDERS OF STRATEGIC TIMBER
Dividends that we pay a tax-exempt shareholder, other than tax-exempt
shareholders that fall within the special categories described below, will not
be unrelated business taxable income, or "UBTI," unless the tax-exempt
shareholder has held its common stock as "debt financed property" within the
meaning of the Internal Revenue Code or has otherwise used its common stock in
an unrelated trade or business.
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Similarly, a tax-exempt shareholder's income from the sale of common stock will
not constitute UBTI unless the tax-exempt shareholder has held the common stock
as "debt financed property" within the meaning of the Internal Revenue Code or
has used the common stock in an unrelated trade or business.
Dividends we pay tax-exempt shareholders that are social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts, and
qualified group legal services plans exempt from federal income taxation under
Internal Revenue Code sections 501(c)(7), (9), (17) and (20), respectively, will
constitute UBTI unless the organization is able properly to deduct amounts set
aside or placed in reserve for purposes authorized by the Internal Revenue Code
so as to offset this dividend income. Prospective shareholders falling in to one
of these categories should consult their own tax advisors concerning these set
aside and reserve requirements.
In addition, in some circumstances a pension trust that owns more than 10%
of our stock may be required to treat a percentage of the dividends received
from us as UBTI. This percentage is the gross income we derived from an
unrelated trade or business (determined as if we were a pension trust) divided
by our gross income for the year in which the dividends are paid. The rule will
apply to a pension trust holding more than 10% of our stock only if:
- the percentage is at least 5%;
- in order for us to meet the 100 shareholder requirement to qualify as
a REIT, it is necessary for us to treat the beneficiaries of the
pension trust as holding our shares held by the trust in proportion to
their actuarial interests in the pension trust; and
- either one pension trust owns more than 25% of the value of our stock,
or a group of pension trusts individually holding more than 10% of the
value of our stock collectively owns more than 50% of the value of our
stock.
Based on the anticipated ownership of the shares of our common stock immediately
after this offering, and as a result of the limitations on transfer and
ownership of this common stock contained in the Articles of Incorporation, we do
not expect this rule to apply to any tax-exempt shareholders of our stock. In
addition, we intend to conduct our business in such a way that we would not be
treated as deriving gross income from an unrelated trade or business, even if
this rule were to apply.
TAXATION OF NON-U.S. SHAREHOLDERS OF STRATEGIC TIMBER
The rules governing United States federal income taxation of the ownership
and disposition of common stock by persons that are considered to be non-U.S.
shareholders for tax purposes are complex, and we will not attempt in this
discussion to provide more than a brief summary of these rules. 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. shareholder in light of its particular circumstances.
DISTRIBUTIONS BY STRATEGIC TIMBER
Under the Foreign Investment in Real Property Tax Act, which is commonly
referred to as "FIRPTA," distributions to a non-U.S. shareholder that are
attributable to gain from sales or exchanges of United States real property
interests will be treated by the non-U.S. shareholders as income effectively
connected with a United States trade or business. Gain from dispositions of
timber that we have owned for more than one year growing on timberlands within
the United States will come within this category. Non-U.S. shareholders would
generally be taxed at the same rates applicable to domestic shareholders on this
gain, subject to a special alternative minimum tax in the case of nonresident
alien individuals. Also, this gain may be subject to a 30% branch profits tax in
the hands of a non-U.S. shareholder that is a corporation. Unless a tax treaty
between the United States and the country of residence of the non-U.S.
shareholder reduces the withholding rate for REIT dividends, we are generally
required to withhold 35% of any capital gain distribution. That amount is
creditable against the non-U.S. shareholder's United States federal income tax
liability and is refundable if the amount withheld exceeds the non-U.S.
shareholders'
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actual U.S. income tax liability. To obtain a refund, the non-U.S. shareholder
must file a U.S. income tax return. This 35% withholding tax rate on capital
gain dividends is higher than the maximum rate on long-term capital gains of
individuals of 20%.
Distributions we pay to a non-U.S. shareholder that are neither
attributable to gain from our sale or exchange of United States real property
interests nor designated by us as capital gains dividends will be treated as
ordinary income to the extent that they are made out of our current or
accumulated earnings and profits. These distributions 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. shareholder.
For dividends paid prior to January 1, 2000, we are permitted by the tax
rules to rely on a shareholder's address in determining whether the dividend is
subject to withholding on the basis of being paid to a non-U.S. person. If a
non-U.S. shareholder is relying on a tax treaty to claim a lower withholding
rate, we will ask the shareholder to provide an appropriately executed Form 1001
to document this claim.
Recently finalized United States Treasury Regulations applicable to
dividends paid after December 31, 1999 set forth presumptions which we may
generally rely upon to determine whether, in the absence of certain
documentation, a shareholder should be treated as a non-U.S. shareholder for
purposes of the withholding tax on non-capital gain dividends. The presumptions
would not apply for purposes of granting a reduced rate of withholding under a
treaty to a non-U.S. shareholder. To obtain a reduced rate of withholding under
a treaty, a non-U.S. shareholder will be required either to provide us with a
Form W-8 certifying such non-U.S. shareholder's entitlement to benefits under a
treaty together with, in certain circumstances, additional information, or
satisfy certain other applicable treaty certification requirements. The new
regulations also provide special rules to determine whether, for purposes of
determining the applicability of a tax treaty, dividends paid to a non-U.S.
shareholder that is an entity should be treated as paid to the entity or to
those persons or entities holding an interest in the entity.
The 30% withholding tax applicable to non-capital gain dividends will not
apply if the dividends are treated as effectively connected with the conduct by
the non-U.S. shareholder of a United States trade or business, or,
alternatively, where an income tax treaty applies if the non-U.S. shareholder
files the appropriate IRS forms with us. In general, a foreign shareholder 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 our current or accumulated earnings and profits
will not be taxable to a non-U.S. shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's common stock, but will reduce the
adjusted basis of the shareholder's common stock. To the extent that such
distributions exceed the adjusted basis of a non-U.S. shareholder's common
stock, they will give rise to gain from the sale or exchange of the
shareholder's common stock. The tax treatment of this gain is the same as if the
non-U.S. shareholder had sold our stock, which is described below.
SALE OF COMMON STOCK
Gain recognized by a non-U.S. shareholder on the sale or exchange of common
stock generally will not be subject to United States taxation unless the shares
constitute a "United States real property interest" within the meaning of
FIRPTA. Our common stock will not constitute a "United States real property
interest" so long as we are a "domestically controlled REIT." We will meet this
definition if, at all times during a specified testing period, less than 50% in
value of our stock is held directly or indirectly by non-U.S. shareholders. We
believe that after this offering we 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 we will
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continue to meet this definition. Even if we meet this definition, gain from the
sale or exchange of common stock not otherwise subject to FIRPTA will be taxable
to a non-U.S. shareholder if:
- the non-U.S. shareholder 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% United States withholding tax on the
amount of the gain, or
- the non-U.S. shareholder's investment in common stock is effectively
connected with its U.S. trade or business, in which case the non-U.S.
shareholder will be subject to the same treatment as U.S. shareholders
with respect to this gain.
If we do not qualify as, or cease to be a "domestically controlled REIT,"
the determination of whether gain arising from the sale or exchange by a
non-U.S. shareholder of common stock would be subject to United States taxation
under FIRPTA as a sale of a "United States real property interest" will depend
on whether the common stock is "regularly traded" for tax purposes on an
established securities market and on the size of the selling non-U.S.
shareholder's interest in Strategic Timber. In general, if the common stock is
"regularly traded" on an established securities market during the quarter in
which the non-U.S. shareholder sells his or her stock and the selling non-U.S.
shareholder holds, directly or indirectly, 5% or less of our common stock during
the five-year period ending on the date of disposition, then the sale will not
be subject to United States taxation under FIRPTA. If gain on the sale or
exchange of common stock were subject to taxation under FIRPTA, the non-U.S.
shareholder would be subject to regular United States income tax with respect to
this gain in the same manner as a U.S. shareholder (subject to any applicable
alternative minimum tax, as computed in the case of nonresident alien
individuals and foreign corporations 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 IRS 10% of the
purchase price.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
We must report annually to the IRS and to each non-U.S. shareholder the
amount of dividends paid to, and the tax withheld with respect to, the
shareholder, 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. shareholder 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:
- if distributions are paid on or prior to December 31, 1999 to a non-U.S.
shareholders at an address outside the United States (provided that we do
not have actual knowledge that the payee is a United States person),
- if such distributions are subject to the 30% (or lower treaty rate)
withholding tax discussed above,
- if the distribution is a capital gains distribution, or
- if the distribution is attributable to gain we realized from the sale or
exchange by Strategic Timber of United States real property interests.
For distributions paid after December 31, 1999, the new regulations provide
certain presumptions and other rules under which non-U.S. shareholders 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
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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:
- is a United States person;
- derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States;
- is a U.S. "controlled foreign corporation" for United States tax
purposes; or
- effective after December 31, 1999, 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. shareholder and certain other conditions are met, or
the shareholder 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
shareholder certifies under penalty of perjury that the shareholder is a
non-U.S. shareholder, or otherwise establishes an exemption.
The backup withholding tax is not an additional tax and may be credited
against a non-U.S. shareholder'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 IRS.
TAX ASPECTS OF STRATEGIC TIMBER'S OWNERSHIP OF INTERESTS IN STRATEGIC TIMBER
PARTNERS
GENERAL
All of our assets will be held through Strategic Timber Partners. In
general, partnerships are "pass-through" entities which are not subject to
federal income tax. Instead, 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 on these items, without regard to whether the
partners receive a distribution from the partnership. We will include in our
income our proportionate share of these partnership items of Strategic Timber
Partners for purposes of the various REIT income tests and in the computation of
our REIT taxable income. Moreover, for purposes of the REIT asset tests, we will
include our proportionate share of assets held through Strategic Timber
Partners.
Our interest in Strategic Timber Partners may involve special tax
considerations. Those considerations include:
- the allocation of items of income and expense, which could affect the
computation of our taxable income;
- the treatment of Strategic Timber Partners as a partnership for federal
income tax purposes; and
- the taking of actions by Strategic Timber Partners which could adversely
affect our qualification as a REIT.
ENTITY CLASSIFICATION
An organization formed as a partnership will be treated as a partnership
for federal income tax purposes if:
- it is not expressly classified as a corporation under section
301.7701-2(b)(1) through (8) of the Treasury Regulations;
- it does not elect to be classified as an association taxable as a
corporation; and
- 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
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partnership's gross income is "qualifying income" within the meaning of section
7704(c)(2) of the Code. "Qualifying income" includes interest, dividends, real
property rents, gains from the disposition of real property, and certain income
or gains from the exploitation of natural resources, including timber. We expect
that more than 90% of the gross income of Strategic Timber Partners each year
will be "qualifying income."
We, Strategic Timber Partners, and Strategic Timber Operating Co., the sole
general partner of Strategic Timber Partners, have represented to Sutherland
Asbill & Brennan LLP that Strategic Timber Partners will timely file a federal
income tax return for its initial taxable year ending December 31, 1998, and
will not elect to be treated as a corporation for federal income tax purposes.
Sutherland Asbill & Brennan LLP is of the opinion that Strategic Timber Partners
will be treated as a partnership for federal income tax purposes.
If for any reason Strategic Timber Partners were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, we would not be
able to satisfy the income and asset requirements for REIT status. See
"-- Taxation of Strategic Timber -- Requirements for Qualification -- Income
Tests" and "-- Requirements for Qualification -- Asset Tests." In addition, any
change in Strategic Timber Partners' status for tax purposes might be treated as
a taxable event, in which case we might incur a tax liability without any
related cash distribution. See "-- Taxation of Strategic Timber -- Requirements
for Qualification -- Distribution Requirements." Further, items of income and
deduction of Strategic Timber Partners would not pass through to its partners,
and its partners would be treated as shareholders for tax purposes.
Consequently, Strategic Timber Partners 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 Strategic Timber
Partners' taxable income.
PARTNERSHIP ALLOCATIONS
Although a partnership agreement will generally determine the allocation of
income and loss among partners, those allocations will be disregarded for tax
purposes if they do not comply with the provisions of section 704(b) of the
Internal Revenue Code and applicable Treasury Regulations. Generally, section
704(b) and the Treasury Regulations 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. In the opinion of Sutherland Asbill &
Brennan LLP, the allocation of taxable income and loss contained in the
partnership agreement of Strategic Timber Partners complies with the
requirements of section 704(b) of the Internal Revenue Code and the applicable
Treasury Regulations.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES
Pursuant to section 704(c) of the Internal Revenue 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, commonly called a "Book-Tax
Difference." Section 704(c) allocations are solely for federal income tax
purposes and do not affect the partners' capital accounts or other economic or
legal arrangements among the partners.
All of the current timber assets of Strategic Timber Partners have a
Book-Tax Difference. When those assets are disposed of, including as a result of
timber dispositions pursuant to a timber cutting agreement, the Book-Tax
Difference will be accounted for by income allocations to the respective
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contributing partners. These income allocations will eliminate the Book-Tax
Difference over the life of the partnership. Treasury Regulations under section
704(c) provide partnerships with a choice of several methods of accounting for
Book-Tax Differences. We have determined to use the "remedial method" for
accounting for Book-Tax Differences with respect to the properties owned by
Strategic Timber Partners at the time of this offering.
BASIS IN PARTNERSHIP INTEREST
Our adjusted tax basis in our interest in Strategic Timber Partners
generally will be equal to the amount of cash and the basis of any other
property we contribute to Strategic Timber Partners, will be increased by our
allocable share of the partnership's income and indebtedness and will be
reduced, but not below zero, by our allocable share of losses incurred by
Strategic Timber Partners, by the amount of cash distributed to us by Strategic
Timber Partners, and by constructive distributions resulting from a reduction in
our share of Strategic Timber Partners' indebtedness.
If our distributive share of Strategic Timber Partners' losses exceeds the
adjusted tax basis of our partnership interest, the recognition of such excess
loss will be deferred until such time as we have adjusted tax basis in our
partnership units against which to deduct the loss. To the extent that the
distributions from Strategic Timber Partners, or any decrease in our share of
the indebtedness of Strategic Timber Partners (such decreases being considered a
cash distribution to the partners), exceeds our adjusted tax basis, such excess
distributions constitute taxable income to us. This taxable income will normally
be characterized as capital gain, and if our 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.
OTHER TAXES
We, any of our subsidiaries, Strategic Timber Partners or our shareholders
may be subject to foreign, state and local tax in various countries, states and
localities, including those countries, states and localities in which we, it or
they transact business, own property, or reside. The state, local or foreign tax
treatment of any of these parties in such jurisdictions may differ from the
federal income tax treatment described above.
Qualification as a REIT under the laws of the individual states will
depend, among other things, on the state's conformity with federal tax law. For
example, one change made by the Taxpayer Relief Act of 1997, which eliminated
percentage limitations on the amount of income a REIT can have from the
disposition of assets held for less than four years is critical to the federal
income tax treatment described in this prospectus. If a state's tax laws do not
conform to this change, our status as a REIT under that state's tax laws would
be doubtful.
Louisiana and Oregon conform to this change and otherwise generally follow
the federal tax treatment of REITs. New Hampshire does not conform to the
federal tax treatment of REITs. Accordingly, the New Hampshire Business Profits
Tax will apply to us. The Business Profits Tax is a 7% tax on net business
profits with no deduction for dividends distributed to shareholders. The
Business Profits Tax is subject to apportionment based on a three-factor
formula, so we will not be required to pay the tax on the full amount of our
income, but only on that portion that is attributed to New Hampshire through
application of the apportionment formula.
We will be subject to a Business and Occupation tax in Washington, which is
a tax on gross receipts. However, receipts from the sale of standing timber are
exempt from this Washington tax.
Some states in which we are not engaged in business do not conform to the
federal tax treatment of REITs. Since we do not do business in those states, we
would generally not be subject to taxation by any of those states. However, cash
distributions out of our earnings and profits to shareholders in those states
would likely be characterized as ordinary income rather than capital gains for
purposes of computing their state tax liability. This difference will generally
be relevant only in those states where capital gains are taxed at preferential
rates, or if a shareholder has a net capital loss carryforward available for
state tax purposes.
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The state tax treatment of net capital gains we retain will depend on the
state tax laws of the states in which both we and our shareholders are subject
to tax. It is possible, therefore, that we may pay some state income taxes with
respect to our undistributed net capital gains that produce no usable state tax
credit for our shareholders. For example, although California otherwise
generally conforms to the federal treatment of REITs, it has not adopted the
provisions dealing with the treatment of retained capital gains. As a result, we
will pay California taxes on our retained capital gains, but shareholders will
not receive a credit for the taxes paid by us against their California tax
liability, if any.
Prospective investors are urged to consult their own tax advisors regarding
the effect of foreign, state and local tax laws upon an investment in our common
stock. Again, none of the statements in this discussion concerning matters of
foreign, state or local tax law constitutes an opinion of counsel.
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ERISA CONSIDERATIONS
GENERAL
This section summarizes some important issues under the Employee Retirement
Income Security Act of 1974, as amended, or ERISA, and the prohibited
transaction provisions of section 4975 of the Internal Revenue Code that you
should consider before purchasing our common stock. Even if you are not an
employee benefit plan, another tax-qualified retirement plan, or an individual
retirement account, or IRA, you should review "-- Status of Strategic Timber and
Strategic Timber Partners under ERISA." This section does not deal with all
aspects of ERISA or section 4975 of the Internal Revenue Code that may be
relevant to you in light of your particular circumstances, especially if you
are:
- a plan subject to Title I of ERISA;
- other retirement plan or IRA subject to the prohibited transaction
provisions of section 4975 of the Internal Revenue Code; or
- a governmental plan or church plan that is exempt from ERISA and section
4975 of the Internal Revenue Code but that may be subject to state law
requirements.
This section is based on current provisions of ERISA and the Internal
Revenue Code, existing and currently proposed regulations under ERISA and the
Internal Revenue Code, the legislative history of ERISA and the Internal Revenue
Code, existing administrative rulings of the Department of Labor and reported
judicial decisions. Legislative, judicial or administrative changes may affect
the accuracy of any statements in this section, even with respect to
transactions entered into or contemplated prior to the effective date of such
changes.
IF YOU ARE 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, YOU SHOULD CONSULT YOUR OWN LEGAL
ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975
OF THE INTERNAL REVENUE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE,
OWNERSHIP OR SALE OF THE COMMON STOCK BY A PLAN OR AN IRA.
If you are a fiduciary of a pension, profit-sharing, or other employee
benefit plan, or an ERISA plan, that is subject to Title I of ERISA, you should
consider carefully whether an investment in the common stock is consistent with
your fiduciary responsibilities under ERISA. In particular, the fiduciary
requirements of Part 4 of Title I of ERISA require an ERISA plan's investments
to be:
- prudent and in the best interests of the ERISA plan, its participants,
and its beneficiaries,
- diversified in order to minimize the risk of large losses, unless it is
clearly prudent not to do so, and
- 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, you should consider whether the investment is reasonably
designed, as a part of the ERISA plan's portfolio, 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. You also should take into account
the nature of our business, our management, our brief operating history, the
fact that certain investment properties may not have been identified yet, the
possibility of the recognition of unrelated business taxable income, and any
other facts and circumstances that may be relevant to an investment.
If you are a fiduciary of an IRA or of a qualified retirement plan that is
not subject to Title I of ERISA because it is a governmental or church plan or
because it does not cover common law employees, you should consider that these
plans may only make investments that are authorized by the appropriate governing
documents and under applicable state law. We refer to these plans as non-ERISA
plans.
If you are a fiduciary of an ERISA plan or are making the investment
decision for an IRA or other non-ERISA plan, you should consider the application
of the prohibited transaction provisions of ERISA
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and the Internal Revenue Code in making your 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 Internal Revenue Code section 4975 is
subject to an initial 15% excise tax on the amount involved in any prohibited
transaction involving the assets of the plan or IRA, and an additional excise
tax equal to 100% of the amount involved if any prohibited transaction is not
corrected within the appropriate period. If an IRA is maintained on behalf of a
disqualified person who engages in a prohibited transaction, the IRA will lose
its tax-exempt status and its assets will be deemed to have been distributed to
the disqualified person or his or her beneficiary in a taxable distribution on
account of the prohibited transaction, and no excise tax will be imposed. In
addition, if you are a fiduciary and you permit an ERISA plan to engage in a
transaction that you know or should know is a prohibited transaction, you may be
liable to the ERISA plan for any loss the ERISA plan incurs as a result of the
transaction or for any profits you earn in the transaction.
STATUS OF STRATEGIC TIMBER AND STRATEGIC TIMBER PARTNERS UNDER ERISA
This section discusses principles you should apply to determine whether the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and the Internal Revenue Code apply to an entity because one or more
investors in the equity interests in the entity is:
- an ERISA plan or
- a non-ERISA plan or IRA subject to section 4975 of the Internal Revenue
Code.
If you are an ERISA Plan fiduciary, you 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 the occurrence of, or fails to remedy a known
breach by another fiduciary.
If our assets are deemed to be "plan assets" under ERISA,
- the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving our assets,
- persons who exercise any authority over our assets, or who provide
investment advice to us, would be considered fiduciaries of each ERISA
plan that acquires common stock, and transactions involving our assets
undertaken at their direction or pursuant to their advice might violate
their fiduciary responsibilities under ERISA, especially with regard to
conflicts of interest,
- a fiduciary exercising his or her 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 we enter into
that do not conform to ERISA standards of prudence and fiduciary
responsibility, and
- certain transactions that we might enter into in the ordinary course of
its business and operations might constitute "prohibited transactions"
under ERISA and the Internal Revenue Code.
Based on the following discussion, we do not believe that our assets will
be deemed "plan assets" of any ERISA plan, IRA or non-ERISA plan that invests in
the common stock. The Department of Labor or the Treasury Department, however,
may reach a contrary conclusion.
Regulations of the Department of Labor defining "plan assets" generally
provide that when an ERISA plan or non-ERISA plan or IRA acquires a security
that is an equity interest in a company and not a "publicly-offered security,"
the ERISA plan's, 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 the equity interest, unless one or more exceptions specified in these
regulations are satisfied. We refer to these regulations defining plan assets as
the plan asset regulations.
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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 Securities
Exchange Act of 1934 or sold pursuant to an effective registration statement
under the Securities Act and registered under the Exchange Act within 120 days
after the end of the fiscal year of the issuer during which this offering
occurred.
We are selling the shares of common stock in an offering registered under
the Securities Act and we will register the shares 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 by 100 or more investors who
are independent from the issuer and one another. If the number independent
investors falls below 100 subsequent to the initial public offering as a result
of events beyond the issuer's control, the security will still be considered
widely held. We anticipate that upon completion of this 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. When a security is part of an offering in
which the minimum investment is $10,000 or less (as is the case with this
offering), the security will ordinarily be deemed to be freely transferable even
if there are certain restrictions on transfer. These permissible restrictions on
transfer include:
- 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,
- any requirement that advance notice of a transfer or assignment be given
to the issuer,
- 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
- any limitation or restriction on transfer or assignment that is not
imposed by the issuer or a person acting on behalf of the issuer.
We believe that the common stock will be "freely transferable" in spite of
the restrictions imposed under our Articles of Incorporation on the transfer of
the common stock. We also are not aware of any other facts or circumstances
limiting the transferability of the common stock that are not permitted by the
plan asset regulations. We do not intend to impose in the future, or to permit
any person to impose on our behalf, any impermissible limitations or
restrictions on transfer. The plan asset regulations only establish a
presumption in favor of a finding of free transferability, and the Department of
Labor or the Treasury Department may 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. Thus, our assets 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 Strategic Timber Partners will be deemed to be "plan assets." The
partnership interests in Strategic Timber Partners will not be publicly-offered
securities. Nevertheless, if the shares of common stock constitute
publicly-offered securities, your indirect investment in Strategic Timber
Partners through your ownership of common stock will not cause the assets of
Strategic Timber Partners to be treated as "plan assets" of an ERISA plan, IRA,
or a non-ERISA plan subject to section 4975 of the Internal Revenue Code.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and Strategic Timber has agreed to sell to such underwriter, the
number of shares set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ----------
<S> <C>
Salomon Smith Barney Inc....................................
Credit Suisse First Boston Corporation......................
Donaldson, Lufkin & Jenrette Securities Corporation.........
A.G. Edwards & Sons, Inc....................................
Warburg Dillon Read LLC.....................................
ABN AMRO Incorporated.......................................
Morgan Keegan & Company, Inc................................
----------
Total.................................................. 16,600,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, A.G.
Edwards & Sons, Inc., Warburg Dillon Read LLC, ABN AMRO Incorporated, and Morgan
Keegan & Company, Inc. are acting as representatives, propose to offer some of
the shares directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share on sales to certain other dealers. If all of the shares are
not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms. The representatives have
advised Strategic Timber that the underwriters do not intend to confirm any
sales to any accounts over which they exercise discretionary authority.
Strategic Timber has granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to 2,490,000 additional
shares of common stock at the public offering price less the underwriting
discount. The underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent such option is exercised, each underwriter will be obligated, subject to
certain conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
Strategic Timber will pay an advisory fee of 0.65% of the gross proceeds of
this offering, including any exercise of the underwriters' over-allotment
option, to Salomon Smith Barney Inc. for advisory services in connection with
the evaluation, analysis and structuring of the formation of Strategic Timber
and this offering. Assuming an initial public offering price of $20 per share,
the advisory fee will be $2,158,000. If the underwriters exercise their
over-allotment option in full, the advisory fee will be $2,481,700.
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Strategic Timber, its officers and directors, and Strategic Timber Partners
have agreed that, subject to certain exceptions, for a period of one year from
the date of the consummation of this offering, they will not, without the prior
written consent of Salomon Smith Barney Inc., dispose of or hedge any shares of
common stock or any partnership units or any securities convertible into, or
exercisable or exchangeable for, common stock or partnership units. The owners
of units and shares received in the formation transactions have agreed not to
dispose of or hedge the units or shares for a period of one year after
consummation of this offering, without the prior written consent of Salomon
Smith Barney Inc. However, Salomon Smith Barney Inc., in its sole discretion,
may release any of the securities subject to these lock-up agreements at any
time without notice.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the shares will be
determined by negotiations between Strategic Timber and the representatives.
Among the factors to be considered in determining the initial public offering
price are Strategic Timber's record of operations, its current financial
condition, its future prospects, its markets, the economic conditions in and
future prospects for the industry in which Strategic Timber competes, its
management, and currently prevailing general conditions in the equity securities
markets, including current market valuations of publicly traded companies
considered comparable to Strategic Timber. There can be no assurance, however,
that the prices at which the shares will sell in the public market after this
offering will not be lower than the price at which they are sold by the
underwriters or that an active trading market in the common stock will develop
and continue after this offering.
Strategic Timber has applied to have the common stock included for
quotation on the Nasdaq National Market under the symbol "STTR."
The following table shows the underwriting discounts and commissions
Strategic Timber will pay to the underwriters in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY STRATEGIC TIMBER
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
In connection with this offering, the representatives, on behalf of the
underwriters, may purchase and sell shares of common stock in the open market.
These transactions may include over-allotment, syndicate covering transactions
and stabilizing transactions. Over-allotment involves syndicate sales of common
stock in excess of the number of shares to be purchased by the underwriters in
the offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the common stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of certain bids or purchases of common stock
made for the purpose of preventing or retarding a decline in the market price of
the common stock while this offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
representatives, in covering syndicate short positions or making stabilizing
purchases, repurchase shares originally sold by that syndicate member.
Any of these activities may cause the price of the common stock to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
Strategic Timber estimates that the total expenses of this offering,
including the advisory fee to be paid to Salomon Smith Barney, will be $4.5
million.
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ABN AMRO Bank, which is affiliated with ABN AMRO Incorporated, one of the
representatives, is a lender under Strategic Timber's existing credit facilities
and has received customary fees in connection with those credit facilities. The
net proceeds of this offering will be used to repay all of Strategic Timber's
indebtedness under the credit facilities. See "Use of Proceeds." ABN AMRO
Incorporated is participating in the offering on the same terms as the other
underwriters and will not receive any benefit in connection with the offering
other than customary managing, underwriting and selling fees. ABN AMRO Bank is
also one of the lenders on Strategic Timber's new credit facility and will
receive customary fees for arranging this facility.
Strategic Timber and Strategic Timber Partners have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the underwriters may be required to
make in respect of any of those liabilities.
EXPERTS
The financial statements of:
- Pioneer Resources, LLC as of and for the years ended December 31, 1996
and 1997, and for the period from January 1, 1998 to October 8, 1998,
- Strategic Timber Trust, Inc. as of and for the period from inception
(April 21, 1998) to December 31, 1998, and
- Strategic Timber Trust II, LLC as of and for the period from inception
(October 9, 1998) to December 31, 1998,
included in this prospectus and elsewhere in this registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included in this
prospectus in reliance upon the authority of Arthur Andersen LLP as experts in
accounting and auditing in giving such reports.
Information included in this prospectus relating to our timber inventory,
acreage and timber sales plan with respect to the Pacific Northwest properties,
and the growth rate and species of our timber on these properties, as well as
historical price indices, current prices, the number of mills and timber
consumption in our markets, has been reviewed by Mason, Bruce & Girard, Inc., an
independent forest resource consulting firm, and is included in this prospectus
in reliance upon the authority of Mason, Bruce & Girard as an expert in timber
inventory, forest regulatory and appraisal matters. Information included in this
prospectus relating to our timber inventory, acreage and timber sales plan with
respect to the Louisiana property, and the growth rate and species of our timber
on this property, as well as current prices in our markets, has been reviewed by
Canal Forest Resources, Inc., an independent forest resource consulting firm,
and is included in this prospectus in reliance upon the authority of Canal
Forest Resources as an expert in timber inventory, forest regulatory and
appraisal matters.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP, Atlanta, Georgia, will pass upon certain
legal matters for Strategic Timber with respect to the validity of the common
stock offered by this prospectus. Andrews & Kurth L.L.P., Houston, Texas, will
pass upon certain legal matters for the underwriters. In connection with the
formation transactions, Sutherland Asbill & Brennan LLP received 46,651 shares
of common stock, which are now owned by certain partners of that firm, and
51,617 partnership units in Strategic Timber Partners.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-11 under the
Securities Act to register the common stock we are offering. This prospectus is
part of that registration statement and omits some of the information set forth
in the registration statement and the exhibits and schedules to the registration
statement. For further information about us and our common stock, you should
read registration statement and the exhibits and schedules. Statements contained
in this prospectus regarding the contents of any contract or other document are
not complete. You should read the exhibit for a more complete description of the
contract or document included in the exhibit. We qualify each statement
contained in this prospectus regarding the contents of any contract or document
filed as an exhibit to the registration statement by reference to the exhibit.
Upon completion of this offering, we will file annual, quarterly and
special reports, proxy statements and other information with the SEC. You can
read and copy any materials we file with the SEC at its Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a web site that contains information we file
electronically with the SEC, which you can access over the Internet at
http://www.sec.gov.
In addition, we have applied to have the common stock included for
quotation on the Nasdaq National Market under the symbol "STTR." Once the common
stock has been listed on the Nasdaq National Market, you will be able to obtain
information about Strategic Timber at the offices of The Nasdaq Stock Market,
Inc. at 1735 K Street N.W., Washington, D.C. 20006.
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GLOSSARY OF SELECTED TIMBER INDUSTRY TERMS
We have provided you with definitions for some of the timber industry terms
we use in this prospectus.
BOARD FOOT A standard unit of measure for lumber that is 12
inches square and one inch thick.
CONVERSION The process of sawing or otherwise processing logs
or transforming timber into any other type of wood
product.
CONVERSION FACILITY A sawmill, pulp mill or other facility at which
timber conversion occurs.
CUNIT A standard unit of measurement of volume equal to
one hundred cubic feet.
HARDWOODS Trees that generally have broad leaves and are
deciduous (losing leaves every year).
LOGS Segments of the main stem of a tree that are cut to
specific length and diameter specifications and are
utilized as raw materials for lumber, plywood and
pulp/paper manufacturers.
LUMBER Solidwood product that is manufactured from logs.
Lumber is produced in standard dimensions and used
for a variety of applications, including building
construction, furniture and shipping containers.
MERCHANTABLE TIMBER Timber exceeding a minimum size and usable volume
that is suitable for sale for commercial uses in
the market where the timber is to be sold.
PLANTATION A timber stand established either through sowing of
seeds or by planting seedlings.
PREMERCHANTABLE TIMBER Trees that have not yet reached a size where they
are suitable for sale.
PULPWOOD Wood that is cut primarily to make wood pulp, which
may be manufactured into paper, fiber, paperboard
and other paper products.
SAWTIMBER Trees containing logs of sufficient size and
quality to be suitable for conversion into lumber
or plywood.
SECOND-GROWTH REDWOODS Redwoods that have been replanted after the
original forest was harvested or regrown after
being destroyed by fire; these redwoods may be
harvested for commercial purposes.
SEEDLINGS Live trees less than one inch in diameter at ground
level.
SILVICULTURE The practice of establishing, tending and
reproducing forest stands of desired
characteristics.
SOFTWOODS Trees that are usually evergreen, bear cones and
have needles or scale-like leaves. They include
pines, spruces, firs and cedars.
SOLIDWOOD A term used to distinguish wood products that are
manufactured by sawing or cutting a log, such as
lumber or plywood, as opposed to wood products
produced from wood pulp, wood fiber or chips.
THINNING Removal of selected trees, usually to eliminate
overcrowding, to remove dying or diseased trees and
to promote more rapid growth of
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<PAGE> 151
desired trees. "Pre-commercial thinning" refers to
thinning that does not produce merchantable timber.
TIMBER A standing tree or group of standing trees. Once
cut, a tree is no longer considered timber, but
becomes a log that can then be converted into wood
products.
TIMBERLANDS Forestland generally capable of producing more than
20 cubic feet of wood per acre per year.
WOOD FIBER Generally refers to pulpwood or chips used in the
manufacture of pulp and paper.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Strategic Timber Trust, Inc. and Subsidiaries Consolidated
Financial Statements:
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheet -- December 31, 1998........... F-3
Consolidated Statement of Operations -- For the Period
from Inception (April 21, 1998) to December 31, 1998... F-4
Consolidated Statement of Changes in Shareholders'
Deficit -- For the Period from Inception (April 21,
1998) to December 31, 1998............................. F-5
Consolidated Statement of Cash Flows -- For the Period
from Inception (April 21, 1998) to December 31, 1998... F-6
Notes to Consolidated Financial Statements................ F-7
Strategic Timber Trust II, LLC and Subsidiaries Consolidated
Financial Statements:
Report of Independent Public Accountants.................. F-13
Consolidated Balance Sheet -- December 31, 1998........... F-14
Consolidated Statement of Operations -- For the Period
from Inception (October 9, 1998) to December 31,
1998................................................... F-15
Consolidated Statement of Changes in Members'
Deficit -- For the Period from Inception (October 9,
1998) to December 31, 1998............................. F-16
Consolidated Statement of Cash Flows -- For the Period
from Inception (October 9, 1998) to December 31,
1998................................................... F-17
Notes to Consolidated Financial Statements................ F-18
Pioneer Resources, LLC and Subsidiaries Consolidated
Financial Statements:
Report of Independent Public Accountants.................. F-24
Consolidated Balance Sheets -- December 31, 1996 and
1997................................................... F-25
Consolidated Statements of Operations -- Years Ended
December 31, 1996 and 1997 and the Period from January
1, 1998 to October 8, 1998............................. F-26
Consolidated Statements of Changes in Members'
Equity -- Years Ended December 31, 1996 and 1997 and
the Period from January 1, 1998 to October 8, 1998..... F-27
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1996 and 1997 and the Period from January
1, 1998 to October 8, 1998............................. F-28
Notes to Consolidated Financial Statements................ F-29
</TABLE>
F-1
<PAGE> 153
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Strategic Timber Trust, Inc.:
We have audited the accompanying consolidated balance sheet of Strategic
Timber Trust, Inc. (a Georgia corporation) and subsidiaries as of December 31,
1998, and the related consolidated statements of operations, changes in
shareholders' deficit and cash flows for the period from inception (April 21,
1998) to December 31, 1998. 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 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Strategic Timber Trust, Inc.
and subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the period from inception to December 31, 1998 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 26, 1999
F-2
<PAGE> 154
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 310,284
Trade accounts receivable................................. 56,708
Prepaid expenses.......................................... 1,311,988
------------
Total current assets.............................. 1,678,980
TIMBERLANDS................................................. 251,597,386
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... 8,395
Furniture and fixtures.................................... 5,918
Leasehold improvements.................................... 2,820
------------
17,133
Less -- Accumulated depreciation.......................... (1,588)
------------
15,545
LAND SUBJECT TO REPURCHASE (Note 5)......................... 3,000,000
DEFERRED FINANCING COSTS, net............................... 4,586,000
------------
Total assets...................................... $260,877,911
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bridge loan............................................... $ 85,000,000
Revolving line of credit.................................. 133,787,034
Accounts payable and other accrued liabilities............ 1,688,260
Accrued interest.......................................... 2,053,397
Due to affiliates......................................... 2,236,244
Deferred revenue.......................................... 3,537,015
------------
Total current liabilities......................... 228,301,950
MINORITY INTEREST........................................... 46,919,256
SHAREHOLDERS' DEFICIT:
Common stock ($.01 par value, 200,000,000 shares
authorized, 671,770 shares issued and outstanding)..... 1,000
Accumulated deficit....................................... (14,344,295)
------------
(14,343,295)
------------
Total liabilities and shareholders' deficit....... $260,877,911
============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of this consolidated balance sheet.
F-3
<PAGE> 155
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (APRIL 21, 1998) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES:
Timber and property sales................................. $ 322,954
Other..................................................... 183,985
------------
Total revenues.................................... 506,939
OPERATING EXPENSES:
Cost of timber sold....................................... 402,614
Amortization of deferred financing costs.................. 1,743,000
General and administrative expenses....................... 1,820,288
------------
Operating loss.................................... (3,458,963)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (13,781,366)
Interest income........................................... 33,324
------------
Loss before minority interest..................... (17,207,005)
MINORITY INTEREST IN LOSS OF SUBSIDIARY PARTNERSHIP......... 2,862,710
------------
Net loss.......................................... $(14,344,295)
============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of this consolidated statement.
F-4
<PAGE> 156
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (APRIL 21, 1998) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
------ ------------ ------------
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY, April 21, 1998................... $ -- $ -- $ --
Initial contribution................................. 1,000 -- 1,000
Net loss............................................. -- (14,344,295) (14,344,295)
------ ------------ ------------
SHAREHOLDERS' DEFICIT, December 31, 1998............... $1,000 $(14,344,295) $(14,343,295)
====== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of this consolidated statement.
F-5
<PAGE> 157
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (APRIL 21, 1998) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (14,344,295)
Adjustments to reconcile net loss to net cash used in
operating activities --
Minority interest in net loss of subsidiary
partnership........................................... (2,862,710)
Depletion.............................................. 402,614
Depreciation and amortization.......................... 1,744,458
Non-cash compensation.................................. 1,000
Changes in assets and liabilities:
Increase in trade accounts receivable.................. (56,708)
Increase in prepaid expenses........................... (7,223)
Increase in accounts payable and other accrued
liabilities........................................... 383,625
Increase in accrued interest........................... 2,053,397
Increase in due to affiliates.......................... 2,236,244
Increase in deferred revenue........................... 3,537,015
-------------
Net cash used in operating activities............. (6,912,583)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of timberlands.................................. (205,218,034)
Purchases of property and equipment....................... (17,133)
-------------
Net cash used in investing activities............. (205,235,167)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge loan................................. 85,000,000
Proceeds from borrowings under revolving line of credit... 138,787,034
Repayments of revolving line of credit.................... (5,000,000)
Deferred financing costs.................................. (6,329,000)
-------------
Net cash provided by financing activities......... 212,458,034
-------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 310,284
CASH AND CASH EQUIVALENTS, beginning of period.............. --
-------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 310,284
=============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 11,727,968
=============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of this consolidated statement.
F-6
<PAGE> 158
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND CONTROL --
Strategic Timber Trust, Inc., a Georgia corporation, was organized April
21, 1998 for the purpose of acquiring, owning and managing timberlands. Our
consolidated financial statements include the accounts of our wholly owned
subsidiary, Strategic Timber Operating Co., a Delaware corporation, and those of
Strategic Timber Partners, LP, a Delaware limited partnership in which we have a
79.4% limited partner interest. Strategic Timber Operating Co. is the sole
general partner of Strategic Timber Partners and holds a 1.0% general partner
interest. All significant intercompany transactions have been eliminated.
On April 27, 1998, we acquired 88,000 acres of timberland in southwest
Louisiana for total consideration valued at $255,000,000. Louisiana Timber
Partners, LLC, a Georgia limited liability company, contributed to Strategic
Timber Partners a contract to acquire the Louisiana property in exchange for
5,000 limited partnership units, representing an aggregate of 19.6% of the total
partnership units then outstanding. We valued these partnership units at
$50,000,000, which we believed to be the difference between the fair value of
the property and the purchase price of the property under the contract Louisiana
Timber contributed. Strategic Timber Partners then purchased the Louisiana
property on April 27, 1998 for $205,000,000 in cash. The partnership funded the
purchase price of the Louisiana property and related transaction costs by
borrowing $125,800,000 under a $215,000,000 bank revolving credit facility and
with an $85,000,000 cash contribution made to the partnership by Strategic
Timber. Strategic Timber borrowed these funds under a bank bridge loan.
We plan to sell shares of our common stock in an initial public offering
during 1999. Shortly before this offering, the timber operations of our
affiliate, Strategic Timber Trust II, LLC, will be merged into Strategic Timber
Partners. As the entities to be merged are under common control, we will account
for this merger using the historical carrying amounts of Strategic Timber Trust
II, LLC's assets and liabilities.
NATURE OF BUSINESS OPERATIONS --
We own and manage timberlands for the purpose of selling standing timber.
We negotiate and contract for the sale of our standing timber with buyers who
generally cut and pay for the trees during the contract period.
CONSOLIDATION --
The accompanying financial statements consolidate the accounts of Strategic
Timber and all entities in which Strategic Timber holds a majority and
controlling interest. Minority ownership in Strategic Timber Partners is
reflected as minority interest expense in the accompanying consolidated
statement of operations and minority interest in the accompanying consolidated
balance sheet.
USE OF ESTIMATES --
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of certain estimates by our
management in determining the reported amount 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.
REVENUE RECOGNITION --
We enter into timber cutting contracts with third parties that require
customers to harvest and remove timber at their expense. These contracts may
last for periods ranging from three months to six years, or
F-7
<PAGE> 159
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
occasionally longer. Contracts that are longer than one year typically require
the customer to harvest minimum amounts of timber each year. We recognize
revenue and depletion at the time our customer takes title to the timber, which
occurs when legal ownership and the risk of loss passes to the purchaser and the
quantity sold is determinable. We may receive payments under these contracts in
advance of recognition of revenue.
We may enter into timber deeds whereby all cutting rights on a tract of
timberland are sold to a buyer. At the end of the contract term, any uncut
timber will revert back to us. Risk of loss passes to our customers upon the
signing of the deeds. For instance, if a fire destroys or partially destroys the
timber subject to a timber deed, the purchaser would not be entitled to a refund
of any portion of the purchase price. Accordingly, we will recognize revenues
and costs under our timber deeds at the time the contracts close. We do not
expect to make outright sales of timber by timber deeds beyond the second
quarter of 1999.
CASH AND CASH EQUIVALENTS --
Cash and cash equivalents include cash and short term investments with
original maturities of three months or less.
TIMBERLANDS --
We capitalize acquisition costs of land and timber, site preparation and
other costs relating to the planting and growing of timber. Such costs are
charged to cost of timber sold as depletion at the time timber is harvested,
based on the relationship of harvested timber to the estimated volume of
currently merchantable timber. Estimates of currently merchantable timber are
subject to change based on periodic timber surveys. Depletion is calculated on a
property-by-property basis, and further by product category within the property.
Timberlands are stated at the lower of cost, net of depletion, or market
value.
PROPERTY AND EQUIPMENT --
Property and equipment consists of furniture and fixtures, machinery and
equipment and leasehold improvements. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets, which range
from three to five years. Amortization of leasehold improvements is calculated
on a straight-line basis over the lesser of the lease term or the estimated
useful lives of the assets.
DEFERRED FINANCING COSTS --
Deferred financing costs consist of fees and expenses incurred in
connection with our borrowings. These fees are being amortized over the terms of
the related debt agreements ranging from one to five years.
INCOME TAXES --
We intend to elect to be treated as a real estate investment trust, or
REIT, under provisions of the Internal Revenue Code. As a result, we will not be
subject to federal income taxes on the portion of our income that we currently
distribute to our shareholders.
We will be able to generate net operating losses for tax purposes in years
in which we do not have taxable income. No benefit for income taxes has been
provided on our loss since inception as the benefit is
F-8
<PAGE> 160
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not currently "more likely than not" to be realized due to our limited operating
history. Our net operating loss carryforwards are approximately $15.8 million at
December 31, 1998.
We may be subject to state and local taxes regardless of whether we
distribute some or all of our income to our shareholders. For the period ended
December 31, 1998, though, we did not incur any state or local income tax
liabilities due to our operating loss.
INTEREST RATE SWAPS --
Interest rate swaps involve the periodic exchange of interest payments
without the exchange of underlying principal or notional amounts. Net amounts
paid or received on interest rate swaps are recognized as interest expense as
incurred in the accompanying consolidated statement of operations.
SHAREHOLDERS' EQUITY --
The accompanying consolidated financial statements have been adjusted to
give effect to a 36.59-for-1 stock split that we expect will occur immediately
prior to completion of our initial public offering. We have also given effect in
the accompanying consolidated financial statements to a planned increase in the
number of common shares authorized for issuance to 200,000,000 shares, which is
expected to be approved by our board of directors and current shareholders
immediately prior to completion of our initial public offering. We also expect
to authorize 50,000,000 shares of preferred stock immediately prior to
completion of our initial public offering.
After giving effect to the stock split, our common stock account does not
contain the required par value. This deficit will be funded with the proceeds
from our initial public offering.
2. DEBT:
We have the following debt instruments outstanding as of December 31, 1998:
<TABLE>
<S> <C>
Revolving credit line(a)................................... $133,787,034
Bridge loan(b)............................................. 85,000,000
------------
$218,787,034
============
</TABLE>
(a) We have a senior revolving credit line that provides a maximum borrowing of
$215,000,000, subject to formula. The credit line is used to finance our
acquisitions of timberlands and for general corporate purposes. The
facility bears interest at LIBOR plus an applicable margin rate, 7.75% at
December 31, 1998. Interest is payable quarterly. The unused portion of the
credit facility is subject to a commitment fee of 50 basis points per
annum. This facility expires on April 25, 2003 and is secured by all assets
and properties of Strategic Timber Partners, including timberlands.
(b) The bridge loan was used to finance our initial acquisition of timberlands
and matures on October 27, 1999. The loan bears interest at LIBOR plus an
applicable margin rate, 9.25% at December 31, 1998. Interest is payable
quarterly. The bridge loan is secured by all assets and property of
Strategic Timber.
The revolving credit line and the bridge loan have certain financial and
non-financial covenants, including restrictions on additional borrowings, the
maintenance of certain financial ratios and limitations on capital spending,
investments and asset sales. We believe that we are in compliance with all
covenants at December 31, 1998. In addition, we are not permitted to make
distributions to our shareholders under these debt agreements.
F-9
<PAGE> 161
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All debt has been classified as current in the accompanying consolidated
balance sheet. This is due to the inclusion of clauses in the debt agreements
that allow our lenders to call the debt prior to its maturity in the event of a
"material adverse change" in our business. In addition, our intention is to
repay all of our outstanding borrowings with the proceeds from our initial
public offering and a new credit facility that will be put in place at the time
of the offering (see Note 10).
The fair value of the above financial instruments approximate their
carrying value at December 31, 1998.
3. INTEREST RATE SWAP:
In connection with our revolving line of credit, we have entered into a
$100,000,000 interest rate swap contract with our primary lender to hedge a
portion of the variable interest rate exposure on this debt instrument. Under
the terms of the swap, we are required to pay interest quarterly to the lender
at a fixed rate of 5.99% and receive interest quarterly at the three-month LIBOR
rate, which was 5.25% at December 31, 1998. At December 31, 1998, we have
recorded a payable of approximately $77,000 related to the net interest payment
due to the lender, with the offsetting charge applied to interest expense. The
swap will mature on May 13, 2002.
The fair value of this swap is estimated as the amount payable to the
lender to terminate the agreement as of December 31, 1998. At this date, the
fair value of this swap is a payable of approximately $2,793,000.
The counterparty to our interest rate swap contract is a major financial
institution. We do not expect non-performance by this institution, but we
periodically monitor the credit quality of this organization. Our credit risk on
this derivative financial instrument is limited to the unrealized gain on the
contract in the event that the swap has a positive fair value.
4. COMMITMENTS AND CONTINGENCIES:
At the time of our initial public offering, Louisiana Timber will be
entitled to receive consideration of approximately $12,945,000 in cash
representing a partial redemption of its interest in Strategic Timber Partners.
Louisiana Timber also will own 1,762,974 units in Strategic Timber Partners
after the initial public offering.
Our operations and timberlands are subject to federal, state and local laws
and regulations, including those related to the environment, endangered species
and forestry activities. In addition, our land may become subject to laws and
regulations designed to protect wetlands. All of these regulations may cause us
to incur significant costs, damages, penalties or other liabilities, and may
materially and adversely affect harvesting operations on our timberlands.
We 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 our opinion that the ultimate
outcome will not have a material adverse effect on the consolidated financial
statements of Strategic Timber or our subsidiaries.
As of December 31, 1998, we do not have any material commitments under
non-cancelable operating leases.
5. RELATED PARTY TRANSACTIONS:
In December 1998, we entered into a transaction with our President and
Chief Executive Officer, C. Edward Broom, in which Mr. Broom purchased for
$3,000,000 approximately 6,700 acres of agricultural
F-10
<PAGE> 162
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
land on our Louisiana property. Because we determined that this property was
ancillary to our ongoing business, we sold this property to provide a source of
cash to make required payments of our bank debt. Mr. Broom and other members of
our senior management determined this purchase price to provide the necessary
funds to make these required payments.
The purchase price does not necessarily reflect the price we might have
been able to obtain if the property had been fully prepared for sale and exposed
to the market for a sufficient period of time to produce the highest price. To
protect our economic interest in the property, Mr. Broom has agreed that we may
repurchase the property at any time before December 31, 2000, at the price paid
by Mr. Broom plus a pro-rata annual increase at the rate of 8% compounded
annually. Accordingly, we have recorded the proceeds from this sale as deferred
revenue and have classified the underlying property as land held for repurchase
in the accompanying consolidated balance sheet. If we decide not to exercise the
repurchase option, we will recognize revenue and costs of $3,000,000 during the
year ended December 31, 2000, resulting in no gain or loss on this related party
transaction.
We rent office space from a company controlled by two of our executive
officers. Rental payments under this lease arrangement are $5,000 per month and
totaled approximately $40,000 for the period from inception to December 31,
1998.
We also have a payable of $760,000 to Broom Resource Investments, LLC, an
entity whose shareholders are substantially the same as those of Strategic
Timber. This amount represents fees and expenses paid by this entity on our
behalf in connection with our acquisition of the Louisiana property.
Our management performs services on behalf of our affiliate, Strategic
Timber Trust II, LLC. We also pay vendors for certain shared expenses, such as
rent, utilities and insurance. During the period ended December 31, 1998, we
charged Strategic Timber Trust II, LLC approximately $624,000 for services
provided, and costs paid, on their behalf. All amounts charged by us were paid
by Strategic Timber Trust II, LLC prior to year end.
At December 31, 1998, we have a payable of approximately $1,500,000 to
Strategic Timber Trust II, LLC. This amount primarily relates to cash that they
advanced to us so that we could make required payments under our debt
agreements. We repaid this amount in February 1999.
6. EMPLOYEE BENEFIT PLANS:
We have established a 401(k) plan. All full time employees are eligible to
participate in the plan after completing 1,000 hours of service. The plan
provides that we may make contributions to the plan on behalf of our employees
at the discretion of our Board of Directors. No contributions were made during
the period from inception to December 31, 1998.
7. NON-CASH INVESTING AND FINANCING ACTIVITIES:
Our founding shareholders received approximately 587,798 shares of common
stock in exchange for services valued at $1,000. These services were provided in
lieu of funding the required initial capital contribution to form Strategic
Timber. The value of these services was determined based on the estimated
initial fair value of Strategic Timber.
In connection with Strategic Timber's acquisition of the Louisiana
property, Louisiana Timber, in lieu of cash consideration, received 5,000 units
in Strategic Timber Partners valued at approximately $50,000,000. The fair value
of these units was based on the difference between the fair value of the
Louisiana property, $255,000,000, and the actual cash we paid to purchase this
property, $205,000,000.
F-11
<PAGE> 163
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. MAJOR CUSTOMERS:
As we have recently commenced our timber sales plan on our newly acquired
timberlands, we have recognized limited revenues during this reporting period.
Accordingly, all of our timber sales during the reporting period were derived
from two customers and were limited to salvage operations. We expect that sales
to other customers will commence in the near term as we continue to expand the
operations of these timberlands.
9. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board released Standard
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
pronouncement requires the recognition of all derivative instruments on the
balance sheet at fair value. Any subsequent changes in fair value are then
recognized in earnings unless the derivative qualifies for treatment as a hedge.
Strategic Timber is currently assessing the effects, if any, the pronouncement
will have on earnings. This pronouncement could lead to increased volatility in
our earnings and other comprehensive income.
We do not believe that any other recently issued pronouncements will have a
significant effect on our financial condition or results of operation.
10. SUBSEQUENT EVENTS (UNAUDITED)
In April 1999, we entered into a new credit facility that provides for
borrowings of up to $375.0 million. This facility, together with the proceeds
from our initial public offering, will be used to retire our existing debt
facilities and to partially redeem units held by minority unitholders in
Strategic Timber Partners. Interest on this new facility will be based on LIBOR
or the bank's prime rate, plus an applicable margin. This facility contains
certain financial covenants, such as minimum ratios of EBITDDA to interest
expense and outstanding debt to EBITDDA. In addition, this facility permits us
to make shareholder distributions, so long as these distributions do not cause
us to default under other terms of the credit agreement.
On April 12, 1999, our Board of Directors declared a $0.175 distribution
per share of common stock, prorated for the partial quarter between the closing
of our initial public offering and June 30, 1999. The distribution will be
payable only if we complete the formation transactions and this offering no
later than June 30, 1999. Assuming that we complete this offering on or about
May 15, 1999, the aggregate amount that we would distribute to our shareholders
would approximate $1,528,000, or $1,748,000 if the underwriters exercise in full
their over-allotment option. We intend to fund this distribution using operating
cash flow or borrowings under our new credit facility, as permitted by this
facility.
F-12
<PAGE> 164
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Strategic Timber Trust II, LLC:
We have audited the accompanying consolidated balance sheet of Strategic
Timber Trust II, LLC (a Georgia limited liability company) and subsidiaries as
of December 31, 1998, and the related consolidated statements of operations,
changes in members' deficit and cash flows for the period from inception
(October 9, 1998) to December 31, 1998. 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 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Strategic Timber Trust II,
LLC and subsidiaries as of December 31, 1998 and the results of their operations
and their cash flows for the period from inception to December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 26, 1999
F-13
<PAGE> 165
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,842,918
Trade accounts receivable................................. 108,857
Prepaid expenses.......................................... 145,837
Due from affiliate........................................ 1,476,244
------------
Total current assets.............................. 7,573,856
TIMBERLANDS................................................. 354,298,144
PROPERTY AND EQUIPMENT:
Vehicles.................................................. 123,166
Machinery and equipment................................... 93,390
------------
216,556
Less -- Accumulated depreciation.................. (30,892)
------------
185,664
DEFERRED FINANCING COSTS, net............................... 7,024,096
------------
Total assets...................................... $369,081,760
============
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Bridge loan............................................... $ 35,000,000
Current portion of long-term debt......................... 2,500,000
Accounts payable and other accrued liabilities............ 530,126
Accrued interest.......................................... 4,844,870
Obligations under interest rate swaps..................... 3,316,300
------------
Total current liabilities......................... 46,191,296
LONG-TERM DEBT.............................................. 252,500,000
MINORITY INTEREST........................................... 72,413,153
MEMBERS' DEFICIT............................................ (2,022,689)
------------
Total liabilities and members' deficit............ $369,081,760
============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of this consolidated balance sheet.
F-14
<PAGE> 166
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (OCTOBER 9, 1998) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES.................................................... $ 9,017,504
OPERATING EXPENSES:
Cost of timber sold....................................... 5,746,026
Amortization of deferred financing costs.................. 499,116
General and administrative expenses....................... 1,737,587
-----------
Operating income.................................. 1,034,775
OTHER INCOME (EXPENSE):
Interest expense.......................................... (5,656,745)
Interest income........................................... 12,434
-----------
Loss before minority interest..................... (4,609,536)
MINORITY INTEREST IN LOSS OF SUBSIDIARY PARTNERSHIP......... 2,586,847
-----------
Net loss.......................................... $(2,022,689)
===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of this consolidated statement.
F-15
<PAGE> 167
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (OCTOBER 9, 1998) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
MEMBERS' EQUITY, October 9, 1998............................ $ --
Net loss.................................................. (2,022,689)
-----------
MEMBERS' DEFICIT, December 31, 1998......................... $(2,022,689)
===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of this consolidated statement.
F-16
<PAGE> 168
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 9, 1998) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (2,022,689)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Minority interest in net loss of subsidiary
partnership........................................... (2,586,847)
Depletion.............................................. 5,703,128
Depreciation and amortization.......................... 530,008
Changes in assets and liabilities:
Increase in trade accounts receivable.................. (108,857)
Increase in prepaid expenses........................... (145,837)
Increase in due from affiliate......................... (1,476,244)
Increase in accounts payable and other accrued
liabilities........................................... 530,126
Increase in accrued interest........................... 4,844,870
-------------
Net cash provided by operating activities......... 5,267,658
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Pioneer.................................... (295,000,000)
Reforestation activities.................................. (101,272)
Purchases of property and equipment....................... (116,556)
-------------
Net cash used in investing activities............. (295,217,828)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge loan................................. 35,000,000
Proceeds from investment by Mach One...................... 10,000,000
Proceeds from revolving line of credit and term loan...... 255,000,000
Deferred financing costs.................................. (4,206,912)
-------------
Net cash provided by financing activities......... 295,793,088
-------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 5,842,918
CASH AND CASH EQUIVALENTS, beginning of period.............. --
-------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 5,842,918
=============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 811,875
=============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of this consolidated statement.
F-17
<PAGE> 169
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND CONTROL --
Strategic Timber Trust II, LLC, a Georgia limited liability company, was
organized on October 9, 1998 for the purpose of acquiring, owning and managing
timberlands. Our consolidated financial statements include the accounts of our
wholly owned subsidiary, Strategic Timber Two Operating Co., LLC, a Georgia
limited liability company, and those of Strategic Timber Partners II, LP, a
Georgia limited partnership in which we have a 30.8% limited partner interest.
Strategic Timber Two Operating Co. is the sole general partner of Strategic
Timber Partners II. Our consolidated financial statements also include the
accounts of Pioneer Resources, LLC, an Oregon limited liability company that is
wholly-owned by Strategic Timber Partners II. All significant intercompany
transactions have been eliminated.
On October 9, 1998, Strategic Timber Partners II acquired all of the
membership interests in Pioneer from its members for total consideration valued
at approximately $360,000,000. Pioneer holds approximately 366,000 acres of
timberland in the U.S. Pacific Northwest. Strategic Timber Partners funded the
cash portion of the purchase price and related transaction costs with:
- a $35,000,000 cash contribution made by Strategic Timber II, in exchange
for 3,080 units, or a 30.8% limited partner interest in Strategic Timber
Partners II, and
- a $10,000,000 cash contribution made by Mach One Partners, LLC in
exchange for 909 units, or a 9.1% limited partner interest in Strategic
Timber Partners II.
To fund our contribution to Strategic Timber Partners II, we borrowed
$35,000,000 under a bank bridge loan.
Strategic Timber Partners II also issued 5,909 units, representing a 59.1%
limited partner interest in Strategic Timber Partners II, to the former Pioneer
members, which we valued at $65,000,000. In connection with the acquisition, we
retired Pioneer's then existing debt with the proceeds from a new $255,000,000
term loan and revolving credit line.
The acquisition was accounted for using the purchase method. The purchase
price has been allocated to timberlands, property and equipment and certain
other assets and liabilities based on an independent third party valuation of
the assets acquired. However, the accounting for this transaction is preliminary
and may be subject to certain purchase accounting adjustments as additional
information becomes available.
The members of Strategic Timber II also own and control Strategic Timber
Trust, Inc., an affiliated entity that was organized in April 1998 to acquire,
own and manage timberlands. Strategic Timber has a controlling interest in
Strategic Timber Partners, LP. Strategic Timber plans to sell shares of its
common stock in an initial public offering during 1999. Shortly before the
offering, Strategic Timber II, Strategic Timber Two Operating Co. and Strategic
Timber Partners II will be merged into Strategic Timber Partners, leaving
Pioneer as a wholly owned subsidiary of Strategic Timber Partners. Because the
entities to be merged are under common control, this merger will be accounted
for using the historical carrying amounts of Strategic Timber II's assets and
liabilities.
NATURE OF BUSINESS OPERATIONS --
We own and manage timberlands for the purpose of selling standing timber.
We negotiate and contract for the sale of our standing timber with buyers who
generally cut and pay for the trees during the contract period.
F-18
<PAGE> 170
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATION --
The accompanying financial statements consolidate the accounts of Strategic
Timber II and all entities in which Strategic Timber II holds a majority or
controlling interest. Strategic Timber II consolidates the results of Strategic
Timber Partners II, and its wholly owned subsidiary, Pioneer, as the management
and control of this entity is held by Strategic Timber Two Operating Co.,
Strategic Timber II's wholly-owned subsidiary. Minority ownership in our
subsidiaries is reflected as minority interest in the accompanying consolidated
balance sheet and minority interest expense in the accompanying consolidated
statement of operations.
USE OF ESTIMATES --
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of certain estimates by our
management in determining the reported amount 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.
REVENUE RECOGNITION --
We enter into timber cutting contracts with third parties that require
customers to harvest and remove timber at their expense. These contracts may
last for periods ranging from three months to six years, or occasionally longer.
Contracts that are longer than one year typically require the customer to
harvest minimum amounts of timber each year. We recognize revenue and depletion
at the time our customer takes title to the timber, which occurs when legal
ownership and the risk of loss passes to the purchaser and the quantity sold is
determinable. We may receive payments under these contracts in advance of
recognition of revenue.
We have entered into timber deeds whereby all cutting rights on a tract of
timberland are sold to a buyer. At the end of the contract term, any uncut
timber will revert back to us. Risk of loss passed to our customers upon the
signing of the deeds. For instance, if a fire destroys or partially destroys the
timber subject to a timber deed, the purchaser would not be entitled to a refund
of any portion of the purchase price. Accordingly, we recognized revenues and
costs under our timber deeds at the time the contracts closed. We do not plan to
make outright sales of timber by timber deeds on an ongoing basis.
CASH AND CASH EQUIVALENTS --
Cash and cash equivalents include cash and short term investments with
original maturities of three months or less.
TIMBERLANDS --
We capitalize acquisition costs of land and timber, site preparation and
other costs relating to the planting and growing of timber. Such costs are
charged to cost of timber sold as depletion at the time timber is harvested,
based on the relationship of harvested timber to the estimated volume of
currently merchantable timber. Estimates of currently merchantable timber are
subject to change based on periodic timber surveys. Depletion is calculated on a
property-by-property basis, and further by product category within the property.
Timberlands are stated at the lower of cost, net of depletion, or market
value.
F-19
<PAGE> 171
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT --
Property and equipment consists principally of vehicles and machinery and
equipment. Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets, which range from three to five years.
DEFERRED FINANCING COSTS --
Deferred financing costs consist of fees and expenses incurred in
connection with our borrowings. These fees are being amortized over the terms of
the related debt agreements ranging from one to five years.
INCOME TAXES --
We have not provided for income taxes in the accompanying statement of
operations as we are a limited liability corporation. Accordingly, our members
will be responsible for any federal or state income tax liabilities resulting
from our operations.
INTEREST RATE SWAPS --
Interest rate swaps involve the periodic exchange of interest payments
without the exchange of underlying principal or notional amounts. Net amounts
paid or received on interest rate swaps are recognized as interest expense as
incurred in the accompanying consolidated statement of operations.
2. DEBT:
We have the following debt instruments outstanding as of December 31, 1998:
<TABLE>
<S> <C>
Revolving credit line(a)................................... $ 55,000,000
Term loan(b)............................................... 200,000,000
Bridge loan(c)............................................. 35,000,000
------------
$290,000,000
============
</TABLE>
(a) We have a revolving credit line that provides a maximum borrowing of
$70,000,000, subject to formula. The credit line was used to finance our
acquisition of Pioneer and will be used for general corporate purposes. A
portion of the facility bears interest at LIBOR plus a margin, 7.85% at
December 31, 1998, while the remaining portion bears interest at the base
rate plus a margin, 8.75% at December 31, 1998. Interest is payable
quarterly. This facility expires on September 30, 2003 and is secured by
all assets of Pioneer, including timberlands. We expect that this credit
facility will be retired prior to maturity with proceeds from the Strategic
Timber initial public offering and a new credit facility that will be put
in place at the time of the offering.
(b) The term loan was used to finance our acquisition of Pioneer and is payable
in quarterly installments commencing on December 31, 1999, with the last
installment being due on September 30, 2003. We expect that this loan will
be retired prior to maturity with the proceeds from the Strategic Timber
initial public offering and the new credit facility. The loan bears
interest at adjusted LIBOR plus a margin, 7.85% at December 31, 1998.
Interest is payable quarterly. The term loan is also secured by all assets
of Pioneer, including timberlands.
(c) The bridge loan was also used to finance our acquisition of Pioneer and
matures on October 27, 1999. Similar to our other debt instruments, we
expect that this loan will be retired prior to maturity with the proceeds
from the Strategic Timber initial public offering and the new credit
facility. The loan
F-20
<PAGE> 172
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bears interest at a fixed rate of 9.06%. Interest is payable quarterly. The
bridge loan is secured by all assets of Strategic Timber II, including our
investments in Strategic Timber Partners II and Pioneer.
Under the bridge loan agreement, additional interest will be charged on the
principal balance if the loan is not repaid before the beginning of the
following periods:
<TABLE>
<S> <C>
Between January 1, 1999 and March 31, 1999................. 1.5%
Between April 1, 1999 and June 30, 1999.................... 4.5%
Between July 1, 1999 and September 30, 1999................ 10.5%
On or after October 1, 1999................................ 19.5%
</TABLE>
Also, we will be required to pay additional compensation upon termination
if the bridge loan is not repaid before the beginning of the following
periods:
<TABLE>
<S> <C>
Between January 1, 1999 and March 31, 1999................. $ 1,125,000
Between April 1, 1999 and June 30, 1999.................... 1,725,000
Between July 1, 1999 and September 30, 1999................ 2,100,000
On or after October 1, 1999................................ 2,250,000
</TABLE>
All instruments described above have certain financial and non-financial
covenants, including restrictions on additional borrowings, the maintenance of
certain financial ratios and limitations on capital spending, investments,
distributions and asset sales. We believe that we are in compliance with all
covenants at December 31, 1998.
Contractual maturities of debt as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31,
1999..................................................... $ 37,500,000
2000..................................................... 13,750,000
2001..................................................... 27,500,000
2002..................................................... 36,250,000
2003..................................................... 175,000,000
------------
$290,000,000
============
</TABLE>
The fair value of the above financial instruments approximate their
carrying value at December 31, 1998.
3. INTEREST RATE SWAPS:
We have entered into a series of interest rate swap agreements to hedge a
portion of the variable interest rate exposure on our underlying debt
instruments. The following table outlines the key terms of each swap:
<TABLE>
<CAPTION>
RATE RECEIVED AT FAIR VALUE AT
NOTIONAL COMPANY COMPANY DECEMBER 31, DECEMBER 31,
COUNTERPARTY AMOUNT PAYS RECEIVES 1998 1998
- ------------ ------------ ------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
First Union................. $ 25,000,000 6.69% 3 month LIBOR 5.34% $(1,700,534)
Bank of America............. 25,000,000 6.69% 3 month LIBOR 5.34% (1,766,524)
ABN Amro.................... 50,000,000 5.77% 3 month LIBOR 5.34% (1,295,852)
------------
$100,000,000
============
</TABLE>
Net interest payments are to be made quarterly on January 14, April 14,
July 14 and October 14, commencing on January 14, 1999, under the terms of each
swap. The maturity dates of the swaps range
F-21
<PAGE> 173
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from September 30, 2003 to October 14, 2003. At December 31, 1998, we have
recorded a payable of approximately $189,000 related to the net interest payment
due, with the offsetting charge applied to interest expense.
We have recorded a payable of $3,316,000 in the accompanying consolidated
financial statements related to the fair value of swaps assumed or entered into
in connection with the acquisition of Pioneer.
The counterparties to our interest rate swap contracts consist of major
financial institutions. We do not expect non-performance by any of these
counterparties but we periodically monitor the credit quality of these
institutions. Our credit risk on these derivative financial instruments is
limited to the unrealized gain on those contracts with a positive fair value.
4. COMMITMENTS AND CONTINGENCIES:
The units held by the former Pioneer members entitle them to certain
rights. In the event that the initial public offering of Strategic Timber common
stock has not occurred by June 30, 1999, the former Pioneer members will be
entitled to a payment of $65,000,000 in redemption of their interests, to be
paid at the option of the former Pioneer members. In addition, the former
Pioneer members will be entitled to 15% simple interest on this $65,000,000,
beginning on June 30, 1999. If the redemption amount is not paid by December 31,
1999, the former Pioneer members will have the right to assume control of
Strategic Timber Partners II.
The ownership units held by Mach One in Strategic Timber Partners II
entitle Mach One to a dividend of 40% per year on its initial investment of
$10,000,000. Mach One is entitled to $10,000,000 plus accrued dividends in
redemption of its interest if the initial public offering of Strategic Timber
common stock has not occurred by June 30, 1999. Dividends are payable at the
earlier of the closing of Strategic Timber's initial public offering or
redemption of Mach One's ownership interest. Our maximum liability under this
dividend would be approximately $4,900,000, assuming that such payment is made
on December 31, 1999. Under a separate agreement with Mach One, the expected
payment on this dividend will be made in the form of 100,110 limited partnership
units of Strategic Timber Partners.
At the time of the merger of Strategic Timber II and subsidiaries into
Strategic Timber Partners, the former Pioneer members and Mach One will be
entitled to receive consideration valued at $67,457,000 and $12,002,000,
respectively, representing a full redemption of their interests in Strategic
Timber Partners II. This consideration will be in the form of cash and limited
partnership units of Strategic Timber Partners.
We have engaged Mason, Bruce & Girard for a fee of approximately $1,300,000
to develop timber harvest plans with respect to our Coastal forest to be
submitted to the California Department of Forestry and Fire Protection. Such
payment is expected to be made in 1999.
Our operations and timberlands are subject to federal, state and local laws
and regulations, including those related to the environment, endangered species
and forestry activities. In addition, our land may become subject to laws and
regulations designed to protect wetlands. All of these regulations may cause us
to incur significant costs, damages, penalties or other liabilities, and may
materially and adversely affect harvesting operations on our timberlands.
We 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 our opinion that the ultimate
outcome will not have a material adverse effect on our financial statements.
As of December 31, 1998, we do not have any material commitments under
non-cancelable operating leases.
F-22
<PAGE> 174
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. RELATED PARTY TRANSACTIONS:
In December 1998, we entered into a timber deed with Kinzua Resources, LLC,
an entity controlled by Gregory M. Demers, a beneficial owner of more than 5% of
the partnership units of Strategic Timber Partners II. Under the terms of the
deed, we conveyed approximately 19,300,000 board feet of timber for
approximately $5,600,000. This timber deed will expire in September 1999. In
accordance with our accounting policies, we have recognized revenues on the
entire value of the contract, as well as related costs, during the period ended
December 31, 1998.
The management of our affiliate, Strategic Timber, performs services on our
behalf. They also pay vendors for certain shared expenses, such as rent,
utilities and insurance. During the period ended December 31, 1998, we
recognized expenses of approximately $624,000 allocated to us by Strategic
Timber for services they provided, and costs they paid, on our behalf. We paid
all amounts due to Strategic Timber prior to year end.
At December 31, 1998, we have a receivable of approximately $1,500,000 due
from Strategic Timber. This amount primarily relates to cash that we advanced to
them so that they could make required payments under their debt agreements.
Strategic Timber repaid this amount in February 1999.
6. EMPLOYEE BENEFIT PLANS:
We have established a 401(k) plan. All full time employees are eligible to
participate in the plan after completing 1,000 hours of service. The plan
document provides that we may make contributions on behalf of our employees at
the discretion of our board of directors. No contributions were made for the
period ended December 31, 1998.
7. NON-CASH INVESTING AND FINANCING ACTIVITIES:
In connection with our acquisition of Pioneer, the former Pioneer members
received 5,909 units, or a 59.1% limited partnership interest, in Strategic
Timber Partners II and $35,000,000 in cash. The limited partnership interest in
Strategic Timber Partners II was valued at approximately $65,000,000.
8. MAJOR CUSTOMERS:
All of our revenues during the reporting period were derived from two
customers, including the related party transaction discussed in Note 5. We
expect that sales to other customers will commence in the near term as we
continue to expand the operations of these timberlands.
9. NEW PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board released Standard
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
pronouncement requires the recognition of all derivative instruments on the
balance sheet at fair value. Any subsequent changes in fair value are then
recognized in earnings unless the derivative qualifies for treatment as a hedge.
Strategic Timber II is currently assessing the effects, if any, the
pronouncement will have on earnings. This pronouncement could lead to increased
volatility in our earnings and other comprehensive income.
We do not believe that any other recently issued pronouncements will have a
significant effect on our financial condition on results of operations.
F-23
<PAGE> 175
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Pioneer Resources, LLC:
We have audited the accompanying consolidated balance sheets of Pioneer
Resources, LLC (an Oregon limited liability company and predecessor to Strategic
Timber Trust II, LLC) and subsidiaries (the "Company") as of December 31, 1996
and 1997, and the related consolidated statements of operations, changes in
members' equity and cash flows for the years then ended and for the period from
January 1, 1998 to October 8, 1998. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pioneer Resources, LLC and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the years then ended and for the period from
January 1, 1998 to October 8, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
February 26, 1999
F-24
<PAGE> 176
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,429,000 $ 1,362,000
Trade accounts receivable................................. 2,338,000 3,396,000
Receivables, related party................................ 176,000 256,000
Inventories............................................... 11,623,000 12,602,000
Prepaid expenses and deposits............................. 258,000 4,198,000
Real estate investments................................... 1,091,000 2,000,000
Current portion of notes receivable....................... -- 1,522,000
Net current assets of discontinued operation.............. 3,331,000 3,209,000
------------ ------------
Total current assets.............................. 23,246,000 28,545,000
------------ ------------
TIMBER, TIMBERLANDS AND TIMBER CUTTING RIGHTS............... 86,294,000 99,126,000
REAL ESTATE INVESTMENTS..................................... 5,128,000 7,409,000
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 1,233,000 1,145,000
Buildings................................................. 2,222,000 2,364,000
Machinery and equipment................................... 8,482,000 10,035,000
Aircraft.................................................. 5,735,000 3,660,000
------------ ------------
17,672,000 17,204,000
Less -- Accumulated depreciation.......................... (1,924,000) (2,845,000)
------------ ------------
Total property, plant and equipment............... 15,748,000 14,359,000
------------ ------------
NOTES RECEIVABLE............................................ 1,420,000 2,546,000
OTHER ASSETS................................................ 224,000 2,445,000
------------ ------------
Total assets...................................... $132,060,000 $154,430,000
============ ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 17,119,000 $ 2,600,000
Accounts payable.......................................... 1,749,000 3,096,000
Accounts payable -- related party......................... 101,000 27,000
Accrued liabilities....................................... 2,209,000 2,180,000
Deferred income taxes..................................... 901,000 515,000
------------ ------------
Total current liabilities......................... 22,079,000 8,418,000
------------ ------------
DEFERRED INCOME TAXES....................................... 2,363,000 1,688,000
CUTTING CONTRACT DEPOSIT.................................... 16,819,000 --
LONG-TERM DEBT, less current maturities..................... 79,446,000 124,341,000
NET NONCURRENT LIABILITIES OF DISCONTINUED OPERATION........ 622,000 --
MINORITY INTEREST........................................... 991,000 46,000
MEMBERS' EQUITY............................................. 9,740,000 19,937,000
------------ ------------
Total liabilities and members' equity............. $132,060,000 $154,430,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-25
<PAGE> 177
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE PERIOD FROM JANUARY 1, 1998 TO
OCTOBER 8, 1998
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1998 TO
------------------------- OCTOBER 8,
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
Log sales................................................. $25,901,000 $39,505,000 $ 23,097,000
Lumber and by-product sales............................... 36,004,000 52,623,000 45,213,000
Timberland and property sales............................. 613,000 6,774,000 5,901,000
----------- ----------- ------------
Total revenues...................................... 62,518,000 98,902,000 74,211,000
OPERATING EXPENSES:
Cost of products sold..................................... 25,897,000 39,602,000 45,498,000
Cost of timberland and property sales..................... 486,000 4,292,000 2,536,000
Depletion, depreciation and amortization.................. 15,366,000 25,259,000 12,966,000
Selling, general and administrative expenses.............. 3,144,000 7,444,000 7,137,000
Write down of real estate investments (Note 3)............ -- -- 583,000
----------- ----------- ------------
Operating income.................................... 17,625,000 22,305,000 5,491,000
OTHER INCOME (EXPENSE):
Interest expense.......................................... (6,070,000) (8,722,000) (12,505,000)
Interest income........................................... 248,000 224,000 56,000
Other income (expense), net............................... -- 502,000 (780,000)
----------- ----------- ------------
Income (loss) from continuing operations before
income taxes and minority interest................ 11,803,000 14,309,000 (7,738,000)
INCOME TAX BENEFIT (PROVISION).............................. (978,000) 355,000 336,000
----------- ----------- ------------
Income (loss) from continuing operations before
minority interest................................. 10,825,000 14,664,000 (7,402,000)
MINORITY INTEREST IN LOSS OF SUBSIDIARY..................... 262,000 51,000 12,000
----------- ----------- ------------
Income (loss) from continuing operations............ 11,087,000 14,715,000 (7,390,000)
DISCONTINUED OPERATION:
Loss from discontinued plywood operation (less applicable
tax benefits of $30,000 and $821,000 for 1996 and
1997)................................................... (48,000) (1,339,000) --
Gain (loss) on disposal of discontinued plywood operation
(less applicable tax provision of $241,000 in 1997 and
tax benefit of $550,000 for the period from January 1,
1998 to October 8, 1998................................. -- 394,000 (897,000)
----------- ----------- ------------
Income (loss) before extraordinary item............. 11,039,000 13,770,000 (8,287,000)
EXTRAORDINARY ITEM:
Loss on extinguishment of debt............................ (780,000) -- (2,106,000)
----------- ----------- ------------
Net income (loss)................................... $10,259,000 $13,770,000 $(10,393,000)
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE> 178
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 8, 1998
<TABLE>
<S> <C>
MEMBERS' EQUITY, December 31, 1995.......................... $ --
Member contributions...................................... 1,159,000
Member distributions...................................... (1,678,000)
Net income................................................ 10,259,000
------------
MEMBERS' EQUITY, December 31, 1996.......................... 9,740,000
Member contributions...................................... 4,075,000
Member distributions...................................... (7,648,000)
Net income................................................ 13,770,000
------------
MEMBERS' EQUITY, December 31, 1997.......................... 19,937,000
Member contributions...................................... 62,000
Member distributions...................................... (6,104,000)
Net loss.................................................. (10,393,000)
------------
MEMBERS' EQUITY, October 8, 1998............................ $ 3,502,000
============
</TABLE>
- ---------------
The accompanying notes are an integral part of these consolidated statements.
F-27
<PAGE> 179
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 8, 1998
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JANUARY 1, 1998
--------------------------- TO
1996 1997 OCTOBER 8, 1998
------------ ------------ ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)......................................... $ 10,259,000 $ 13,770,000 $ (10,393,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Extraordinary loss...................................... 780,000 -- 2,106,000
Write down of assets to estimated realizable value...... -- -- 1,283,000
(Gain)/loss on sale of assets........................... -- (433,000) 212,000
Minority interest in loss of subsidiary................. (262,000) (51,000) (12,000)
Depletion, depreciation, amortization, and cost of
timber and property sold............................... 15,852,000 29,551,000 15,502,000
Deferred income taxes................................... (387,000) (1,154,000) (656,000)
Changes in balance sheet captions, (in 1996, net of
effects of businesses acquired during the period) --
Trade accounts receivable............................... (727,000) (1,094,000) (555,000)
Inventories............................................. (5,891,000) 136,000 549,000
Related party receivables and payables, net............. (929,000) (31,000) (778,000)
Accounts payable........................................ 645,000 235,000 195,000
Net advances (reduction) on cutting contract deposit.... 7,244,000 (16,819,000) --
Changes in other asset and liability accounts, net...... 222,000 639,000 314,000
------------ ------------ -------------
Net cash provided by operating activities........... 26,806,000 24,749,000 7,767,000
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for Lane acquisition............................ (10,062,000) -- --
Cash paid for Pilot Rock acquisition...................... (30,323,000) -- --
Cash paid for Pioneer Aviation acquisition................ (3,725,000) -- --
Purchase of minority interest in Pioneer Aviation......... -- (1,173,000) --
Purchases of timber and timberlands....................... (9,816,000) (40,308,000) (162,356,000)
Purchases of real estate investments...................... (1,132,000) (3,164,000) (1,414,000)
Purchases of property, plant and equipment................ (3,359,000) (4,654,000) (1,885,000)
Collection (issuances) of notes receivable, net........... (1,420,000) (4,541,000) 1,891,000
Proceeds from sale of fixed assets........................ 1,051,000 6,156,000 1,467,000
Deposit on timber and timberlands......................... -- 1,169,000 --
Contribution of Old Pioneer net assets.................... 524,000 -- --
Acquisition of Kinzua net assets.......................... 152,000 -- --
------------ ------------ -------------
Net cash used by investing activities............... (58,110,000) (46,515,000) (162,297,000)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' contributions.................................... $ 10,000 $ -- $ 62,000
Long-term borrowings...................................... 55,531,000 66,281,000 193,700,000
Repayment of borrowings................................... (19,558,000) (37,212,000) (32,127,000)
Deferred financing fees incurred.......................... (150,000) (2,722,000) (2,363,000)
Cash payments for members' distributions.................. (100,000) (7,648,000) (6,104,000)
------------ ------------ -------------
Net cash provided by financing activities........... 35,733,000 18,699,000 153,168,000
------------ ------------ -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 4,429,000 (3,067,000) (1,362,000)
CASH AND CASH EQUIVALENTS, beginning of period.............. -- 4,429,000 1,362,000
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 4,429,000 $ 1,362,000 $ --
============ ============ =============
</TABLE>
- ---------------
The accompanying notes are an integral part of these consolidated statements.
F-28
<PAGE> 180
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SALE OF PIONEER RESOURCES, LLC:
Effective October 9, 1998, a significant portion of Pioneer Resources,
LLC's (Pioneer) timberland assets were sold to Strategic Timber Partners II, LP.
The acquisition was effected by the acquisition of the ownership interests of
Pioneer by Strategic Timber Partners II, LP.
Immediately prior to the sale, certain assets and liabilities of Pioneer
(including all of the interests in Pioneer's subsidiaries) were conveyed to
Frontier Resources, LLC, a newly formed entity with the same ownership structure
as Pioneer prior to the transaction.
2. BASIS OF PRESENTATION AND NATURE OF OPERATIONS:
BASIS OF PRESENTATION
Pioneer Resources, LLC and its subsidiaries were formed in December 1995
for the purpose of acquiring certain assets and liabilities of Old Pioneer.
Pioneer has three subsidiaries:
- Kinzua Resources, LLC ("Kinzua"), which owns and operates sawmills in
Heppner and Pilot Rock, Oregon;
- Pioneer Aviation, LLC ("Pioneer Aviation"), which owns aircraft and
related buildings and equipment; and
- Lane Plywood, Inc. ("Lane") owns timber and timberlands and real estate.
Pioneer, Kinzua and Pioneer Aviation are Oregon limited liability
companies. Lane is an Oregon C corporation. One member owns a controlling
interest in Pioneer. The accompanying consolidated financial statements
represent the financial position of Pioneer as of December 31, 1996 and 1997.
The consolidated statements of operations, cash flows and members' equity for
the period from January 1, 1998 to October 8, 1998 represent results of
operations and cash flows for the nine-month period ended September 30, 1998.
Activity between October 1, 1998 and October 8, 1998 is insignificant. All
significant intercompany transactions and balances have been eliminated.
On January 3, 1996, certain assets and liabilities of Old Pioneer were
contributed to Pioneer by noncontrolling members of Old Pioneer and recorded at
their historical cost. In addition, Pioneer acquired timber and timberlands from
former members of Old Pioneer at fair value. These former members of Old Pioneer
collectively represented a controlling ownership in Old Pioneer and did not
become members in Pioneer. This acquisition was made with the proceeds from debt
financing. Pioneer also acquired 99.5% of the ownership interest in Kinzua. The
purchase price of Kinzua approximated Kinzua's book value. Accordingly, the
respective assets and liabilities acquired have been recorded at Kinzua's
historical cost. This series of transactions is referred to in these notes as
the "Transactions". Because of the insignificant activity on January 1 and
January 2, 1996, the Transactions have been reflected as if they occurred on
January 1, 1996 in the accompanying financial statements.
On November 25, 1996, the owners of Pioneer Merger, Inc. ("PMI"), which
became a wholly owned subsidiary of Pioneer on the same date, transferred their
ownership interests in Lane to Pioneer. Lane then became a wholly owned
subsidiary of Pioneer. This transaction was treated as a reorganization under
common control and therefore the historical basis of the assets and liabilities
did not change. Lane had been under common ownership and management with Pioneer
since its acquisition by PMI on May 1, 1996 (see Note 9). Accordingly, the
financial position, results of operations and cash flows of Lane have been
included in the accompanying consolidated financial statements. In 1997, the
plywood operation of Lane was discontinued and the majority of Lane's
plywood-related assets were sold in December 1997. See
F-29
<PAGE> 181
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note 11 for additional discussion of the discontinued plywood operation. Lane
continues to manage its timber and timberlands, and real estate investments.
NATURE OF OPERATIONS
Pioneer's primary products are logs and lumber. Pioneer owns timber and
timberlands in the western United States, principally Oregon, California and
Washington, and sells logs harvested to unrelated third parties or transfers
them to its sawmills for conversion to lumber. The sawmills also purchase and
convert logs from unrelated third parties. These products are commodities whose
price is significantly affected by factors outside of their control. These
factors include the availability of logs and lumber from other domestic and
foreign markets, the demand for new construction materials, and general economic
conditions. Lumber is sold principally to furniture manufacturers and the
construction market through wholesalers within the United States. External third
party log sales are principally made to other wood products converters in the
western United States.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires our 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.
REVENUE RECOGNITION
Log, lumber and by-product sales are recognized upon shipment or delivery
of products to customers.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with
maturities at date of purchase of 90 days or less.
INVENTORIES
Inventories are valued at the lower of cost or market value, applied on a
last-in, first-out (LIFO) basis. The major types of inventories are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Logs............................................ $ 8,794,000 $ 7,479,000
Lumber.......................................... 4,503,000 6,586,000
Supplies and other.............................. 14,000 4,000
LIFO reserve.................................... (1,688,000) (1,467,000)
----------- -----------
Total................................. $11,623,000 $12,602,000
=========== ===========
</TABLE>
TIMBER AND TIMBERLANDS
Pioneer's timber and timberlands consist principally of fee timber located
in the western United States. Pioneer uses a composite rate for timber
depletion. Depletion rates are based on estimated remaining merchantable volume;
these estimates are subject to change based on periodic timber surveys.
F-30
<PAGE> 182
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REAL ESTATE INVESTMENTS
Real estate investments consist primarily of undeveloped commercial real
estate located in Eugene, Oregon, as well as ranch property. A substantial
portion of the commercial real estate was obtained as part of the Lane
acquisition (see Note 9). Pioneer monitors the carrying costs of its real estate
properties and records reserves to reduce carrying costs to estimated market
value when it believes impairment has occurred. During 1998, Pioneer wrote down
the value of one of its real estate investments by $583,000 based on Pioneer's
current assessment of the fair value of this property.
Pioneer anticipates selling a portion of its commercial real estate within
one year of the balance sheet date. Accordingly, the cost basis associated with
parcels anticipated to be sold within one year has been reflected as a current
asset in the accompanying consolidated balance sheets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists principally of land, buildings,
machinery and equipment located on the Heppner and Pilot Rock sawmill sites.
Aircraft consists of planes and a helicopter owned by Pioneer Aviation and used
by Pioneer as part of its business and timber management activities.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets, approximately 5 to 15 years for manufacturing equipment, 15
to 40 years for buildings and 5 to 10 years for vehicles and aircraft.
OTHER ASSETS
Other assets consist principally of unamortized deferred financing fees.
Deferred financing fees are being amortized over the term of the underlying
debt.
TIMBER AND TIMBERLAND PURCHASES
Pioneer purchased the Coastal tract in July 1998 for approximately
$131,000,000. The Coastal tract consists primarily of timber located in northern
California. Other significant properties purchased in 1998 were the Riffe Lake
tract in January 1998 for approximately $15,000,000, and the Aloha tract in
March 1998 for approximately $17,000,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Pioneer's cash and cash equivalents, accounts
receivable, accounts payable and debt instruments approximates market value as
of December 31, 1996 and 1997.
F-31
<PAGE> 183
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
Supplemental cash flow information and significant noncash transactions are
included as follows:
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1998 TO
------------------------ OCTOBER 8,
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................................... $ 5,059,000 $8,497,000 $12,153,000
Cash paid for income taxes............................... 258,000 960,000 173,000
SIGNIFICANT NONCASH TRANSACTIONS:
Distributions declared but not paid...................... -- -- --
Reduction of member notes receivable in consideration for
timber and timberlands................................. 10,862,000 -- --
Issuance of long-term debt in consideration for timber
and timberlands........................................ 23,000,000 -- --
Reduction of member notes receivable in consideration of
ownership interest in Kinzua........................... 969,000 -- --
Issuance of note payable to seller in connection with
Pilot Rock acquisition................................. 5,000,000 -- --
Reduction of member note receivable in consideration for
interest in Pioneer Aviation........................... 1,300,000 -- --
Reduction of member note receivable in lieu of member's
distribution........................................... 1,578,000 -- --
Reduction of member note receivable in consideration for
real estate investments................................ 980,000 -- --
Contribution of timber deposit and equipment for equity
interest............................................... -- 4,075,000 --
Application of timber deposit to purchase of timber...... -- -- 3,793,000
</TABLE>
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current period's presentation.
4. LONG-TERM DEBT AND SUBSEQUENT REFINANCING:
On February 26, 1998, Pioneer refinanced a substantial portion of its
outstanding debt as of December 31, 1997. The current portion of long-term debt
in the accompanying consolidated balance sheet as of December 31, 1997 reflects
the terms of the new agreement with the Bank of Montreal (the Lending
Commitment). The debt outstanding as of December 31, 1997 consists of
$125,232,000 of borrowings pursuant to a Credit Agreement with the Bank of
Montreal and certain other banks. As a part of the refinancing, unamortized
deferred financing fees of $2,106,000 related to refinanced borrowings were
written off in 1998.
LENDING COMMITMENT TERMS
The Lending Commitment provides for a senior secured revolving Credit
Facility of up to $350,000,000 for a term of seven years. The Lending Commitment
will allow Pioneer to refinance the majority of its outstanding debt and, under
conditions defined in the Lending Commitment, will allow Pioneer to borrow
additional funds for acquisitions or other general business purposes. The amount
F-32
<PAGE> 184
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
available for borrowing is based on the value of Pioneer's assets, computed in
accordance with terms set forth in the Lending Commitment.
Interest rates will be based on either a base rate, computed as the higher
of the Federal Funds rate plus 0.5% or the Bank of Montreal's prime commercial
lending rate, or LIBOR, plus a margin. The margin is contingent upon Pioneer's
EBITDDA, calculated as earnings before interest, taxes, depletion, depreciation
and amortization, to debt ratio.
The amount available for borrowing will be permanently reduced, on a
quarterly basis, according to the following schedule:
<TABLE>
<CAPTION>
TOTAL ANNUAL
COMMITMENT CUMULATIVE
YEAR REDUCTION REDUCTION
- ---- ------------ ----------
<S> <C> <C>
2002................................................ 15% 15%
2003................................................ 20% 35%
2004................................................ 30% 65%
2005................................................ 35% 100%
</TABLE>
In addition, all payments received related to the timber harvesting
contract discussed in Note 5 must be applied against the principal portion of
outstanding borrowings.
The Lending Commitment contains covenants that require Pioneer to maintain
certain financial ratios. Pioneer was in compliance with these covenants based
on the consolidated financial statement balances as of December 31, 1997. The
Lending Commitment is collateralized by essentially all assets of Pioneer.
OTHER DEBT
Other debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Term note, payable in monthly installments of approximately
$31,000 including interest. Interest is variable (8.25% as
of December 31, 1997). Debt is secured by aviation
equipment................................................. $2,450,000 $ --
Term note, payable in annual installments of $250,000,
including interest at 8.0%. Debt is secured by real
property.................................................. 1,000,000 830,000
Term note, payable in annual installments of $81,000,
including interest at 5.0%. Debt is secured by timber and
timberlands............................................... 323,000 242,000
Term note, payable in monthly installments of $6,100,
including interest. Interest is variable (8.12% as of
December 31, 1997). Debt is secured by aviation
equipment................................................. -- 497,000
Other term notes with varying maturities and interest rates.
Debt is secured by timber and timberlands................. -- 140,000
</TABLE>
REPAYMENT SCHEDULE
The following debt payout schedule is computed based on the terms of the
Lending Commitment with the Bank of Montreal, as well as the repayment terms of
the debt instruments not refinanced.
These amounts include principal payments required by the sale of timber
under the long-term cutting contract as discussed above and in Note 5, which
totaled $2,300,000 for 1998. These principal amounts are in addition to the
regularly scheduled payments required by the Lending Commitment. As this
long-term
F-33
<PAGE> 185
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cutting contract expires in 1998, no payments for periods beyond 1998 are
included in the debt repayment schedule.
Principal payments due on long-term debt as of December 31, 1997,
considering the effect of the subsequent refinancing and including the impact of
1998 harvest levels as previously discussed, are as follows:
<TABLE>
<S> <C>
1998....................................................... $ 2,600,000
1999....................................................... 615,000
2000....................................................... 336,000
2001....................................................... 275,000
2002....................................................... 16,153,000
Thereafter................................................. 106,962,000
------------
$126,941,000
============
</TABLE>
On October 9, 1998, Pioneer's outstanding balance under the Credit Facility
was paid off as a part of the sale of a significant portion of Pioneer's
timberland assets to Strategic Timber Partners II, LP. This sale is discussed in
Note 1.
INTEREST RATE SWAPS
To hedge its exposure to adverse fluctuations in interest rates, Pioneer
entered into loan swap arrangements with two financial institutions in 1997. The
interest rate differential on interest rate swap contracts used to hedge
underlying debt obligations is reflected as an adjustment to interest expense
over the life of the swaps.
Pursuant to these arrangements, Pioneer swapped a portion of its variable
rate debt for fixed rate debt. The notional amount swapped totaled $70,000,000,
which consists of $50,000,000 expiring in 2000 and $20,000,000 expiring in 2002.
$40,000,000 of the swaps maturing in 2000 can be extended to 2002 at the
financial institutions' option.
5. LONG-TERM CUTTING CONTRACT:
Pioneer has rights to a cutting contract with an unrelated third party
customer. This contract requires periodic advance deposits to Pioneer prior to
harvesting the timber. The purchase price of timber removed under this contract
is applied against the advance at the time of harvest according to prices
specified in the agreement. During 1997, the deposit balance was fully utilized
and the customer began paying Pioneer for volume removed on a current basis. As
discussed in Note 4, these payments were applied as principal payments against
Pioneer's long-term debt.
6. INCOME TAXES:
Pioneer, Kinzua and Pioneer Aviation are limited liability companies. As
owners of a limited liability company, members of Pioneer, Kinzua and Pioneer
Aviation are taxed on their respective share of income and there is no entity
level tax. Accordingly, no income tax accounts for Pioneer, Kinzua and Pioneer
Aviation have been reflected in the accompanying consolidated financial
statements.
PMI and Lane are C corporations and are, therefore, subject to income
taxes. Both companies account for deferred tax assets and liabilities based on
the temporary differences between the financial statement and tax bases of
assets and liabilities as measured by the enacted tax rates for the years in
which the taxes are expected to be paid. As discussed further in Note 11, the
plywood operations of Lane
F-34
<PAGE> 186
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were discontinued in September 1997. The components of deferred taxes related to
the continuing operations of PMI and Lane included in Pioneer's consolidated
balance sheets as of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Current liabilities:
Land............................................ $ 901,000 $ 515,000
========== ==========
Long-term liabilities:
Timber.......................................... $1,284,000 $ 483,000
Land............................................ 1,079,000 1,205,000
---------- ----------
$2,363,000 $1,688,000
========== ==========
</TABLE>
Deferred tax liabilities of $93,000 and $301,000, respectively, related to
temporary differences between the financial statement and tax bases of Lane's
inventory are included in net current assets of discontinued operation in the
accompanying consolidated balance sheets as of December 31, 1996 and 1997.
On a stand-alone basis, Lane's effective tax rate was approximately 38% for
the period from acquisition (May 1, 1996) through December 31, 1996, the year
ended December 31, 1997 and the period from January 1, 1998 to October 8, 1998.
This rate differs from the federal statutory rate due primarily to state taxes.
Lane's tax benefit (provision) has been allocated between continuing and
discontinued operations in the statements of operations for the period from
acquisition (May 1, 1996) through December 31, 1996, the year ended December 31,
1997 and the period from January 1, 1998 to October 8, 1998.
7. MEMBERS' EQUITY AND RELATED PARTY TRANSACTIONS:
The liability of the individual members of Pioneer is limited to the
balances of their respective members' equity accounts.
The members of Pioneer were actively involved in managing the company and
paid regular salaries which are included in selling, general and administrative
expenses in the accompanying consolidated statements of operations. Prior to the
sale of Pioneer as described in Note 1, Greg Demers owned or controlled a
majority of the Pioneer's ownership interest and five other individuals or
entities owned the balance.
Pioneer has had transactions with several of its members and entities
affiliated with its members. Related party receivables and payables as of
December 31, 1996 and 1997 consist primarily of receivables and payables to
members or to entities affiliated with members.
MINORITY INTEREST
Greg Demers owns the 0.5% ownership interest in Kinzua not owned by
Pioneer. This ownership is reflected as minority interest in the accompanying
consolidated financial statements.
OTHER RELATED PARTY TRANSACTIONS
Various related parties have used the services of Pioneer Aviation's
aircraft and have been charged accordingly for such services at a rate that
approximates fair market value. These charges totaled $571,000, $258,000 and
$71,000 in 1996 and 1997, and the period from January 1, 1998 to October 8,
1998, respectively.
F-35
<PAGE> 187
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Beginning in 1996, Pioneer engaged a forest products trading company to
market its lumber products. One of Pioneer's members also has an ownership
interest in the trading company. Sales commissions paid to this entity, which
approximated market value, were $248,000, $700,000 and $324,000 in 1996, 1997
and the period from January 1, 1998 to October 8, 1998, respectively.
8. COMMITMENTS AND CONTINGENCIES:
LAND OWNERSHIP DISPUTE
In 1994, Old Pioneer filed a lawsuit against an unrelated third party for
$6,000,000, alleging that this party was erroneously deeded certain tracts of
timber and timberlands valued at $6,000,000 in April 1994. The other party then
counter-sued Old Pioneer for $6,000,000. Discovery and trial proceedings
occurred through 1997.
In January 1998, an Oregon Circuit/District Court ruled in Old Pioneer's
favor and ordered that the other party reconvey the timber and timberlands to
Old Pioneer and compensate Old Pioneer for the value of timber harvested during
the period the disputed property was under the other party's control. The other
party's claims were denied.
As Pioneer believes the other party is likely to appeal the Court's
decision, and as Pioneer has not yet assumed possession of the property or
collected damages, Pioneer has not recorded the gain contingency in the
accompanying consolidated financial statements. Any ultimate recoveries from the
lawsuit will be allocated among the owners of Old Pioneer at the time of the
related transaction. Pioneer's share of any recoveries would be approximately
27% of total recoveries received by Old Pioneer.
OTHER CLAIMS
Pioneer is subject to ongoing litigation and claims as part of its normal
business operations. In the opinion of management, none of these claims will
have a material adverse effect on the business or results of operations of
Pioneer.
9. ACQUISITIONS:
Three acquisitions have been reflected in the accompanying consolidated
financial statements. In May 1996, Lane was acquired by a group of investors who
also have ownership interests in Pioneer. The investors' ownership interests
were transferred to Pioneer in November 1996. In June 1996, Pioneer and Kinzua
acquired timber and timberlands and a sawmill in Pilot Rock, Oregon. In August
1996, Pioneer acquired a majority ownership interest in Pioneer Aviation.
LANE PLYWOOD ACQUISITION
Lane was formed in 1952. PMI was formed in 1996 by members of Pioneer for
the purpose of acquiring Lane. Lane was acquired by PMI on May 1, 1996. Lane's
operating assets principally consisted of timber-related operations and a
plywood operation. The acquisition was accounted for using the purchase method
of accounting; the purchase price was $10,100,000. The results of operations of
Lane are included in the accompanying consolidated financial statements for all
periods beginning May 1, 1996. As discussed in Note 11, Lane's plywood operation
was discontinued in 1997. Thus, the results of the plywood operation are
reflected as discontinued for all periods presented in the consolidated
financial statements.
On November 25, 1996, the ownership of PMI was transferred to Pioneer. This
transaction was accounted for as a reorganization of entities under common
control and, accordingly, the carrying values of Lane's accounts were not
adjusted as a result of the ownership transfer to Pioneer.
F-36
<PAGE> 188
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the unaudited pro forma results of
discontinued operations for the year ended December 31, 1996 as if the Lane
acquisition had been consummated at the beginning of the period. The pro forma
results were prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the Lane acquisition been consummated
at the beginning of the period.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(UNAUDITED)
<S> <C>
Revenue from discontinued operation...................... $39,363,000
Loss from discontinued operation......................... (142,000)
</TABLE>
PILOT ROCK ACQUISITION
In June 1996, Kinzua acquired a sawmill in Pilot Rock, Oregon ("Pilot
Rock") for $5,500,000. Concurrently, Pioneer purchased timber and timberlands in
northeastern Oregon from the same seller for $28,500,000. The acquisition was
accounted for using the purchase method of accounting. Results of operations of
the acquired sawmill and timber operations for the period from July 1, 1996
through December 31, 1996, the year ended December 31, 1997 and the period from
January 1, 1998 to October 8, 1998 are included in the accompanying consolidated
financial statements.
The following table presents the unaudited pro forma revenue and income
from continuing operations for the year ended December 31, 1996 as if the Pilot
Rock acquisition had been consummated at the beginning of the period. The pro
forma results were prepared for comparative purposes only and do not purport to
be indicative of what would have occurred had the Pilot Rock acquisition been
consummated at the beginning of the period.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(UNAUDITED)
<S> <C>
Revenue.................................................. $74,355,000
Income from continuing operations........................ 8,649,000
</TABLE>
PIONEER AVIATION ACQUISITION
As discussed in Note 2, Pioneer Aviation was a related entity to Pioneer
prior to Pioneer acquiring a majority interest in Pioneer Aviation in August
1996. Through a series of purchases, capital contributions and ownership
exchanges in 1996 and 1997, Pioneer acquired all of the ownership interest in
Pioneer Aviation. The combined total of capital contributions, purchases of
other owners' interests and ownership exchanges totaled $5,000,000 and
$1,246,000 in 1996 and 1997, respectively. These acquisitions were accounted for
by the purchase method of accounting, except exchanges that have been recorded
at historical cost. Results of operations have been included in the accompanying
consolidated financial statements for each of the periods presented.
10. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION:
Pioneer operates in two industry segments - timber operations and lumber
operations. The timber operations segment consists of sales of logs to both
outside customers and to the lumber operations segment. The lumber operations
segment consists of lumber and by-products produced by Pioneer's two sawmills.
Operating income from the timber operations segment includes timberland and
property sales of $613,000, $6,774,000 and $5,901,000 in 1996, 1997, and the
period from January 1, 1998 to October 8, 1998, respectively.
F-37
<PAGE> 189
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents Pioneer's sales to certain customers as a
percentage of total sales for the applicable period. Other than as reflected in
the table, there were no other customers with sales equal to or in excess of 10%
of total sales for the years ended December 31, 1996, 1997 and for the period
from January 1 to October 8, 1998.
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Customer A.................................................. 33% 29%
Customer B.................................................. 13% --
</TABLE>
While many of Pioneer's logs and lumber products are of export quality,
Pioneer does not directly export any logs or other products.
Segment information for the years ended December 31, 1996, 1997 and for the
period from January 1, 1998 to October 8, 1998 are as follows:
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1998 TO
------------------------- OCTOBER 8,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Timber operations............................. $34,244,000 $60,304,000 $38,965,000
Lumber operations............................. 36,004,000 52,623,000 45,213,000
Intersegment sales to lumber operations....... (7,730,000) (14,025,000) (9,967,000)
----------- ----------- -----------
$62,518,000 $98,902,000 $74,211,000
=========== =========== ===========
Operating income (loss):
Timber operations............................. $13,618,000 $18,771,000 $ 8,788,000
Lumber operations............................. 4,007,000 3,534,000 (3,297,000)
----------- ----------- -----------
$17,625,000 $22,305,000 $ 5,491,000
=========== =========== ===========
Depreciation, depletion and amortization:
Timber operations............................. $13,809,000 $23,171,000 $11,152,000
Lumber operations............................. 639,000 781,000 610,000
General corporate assets...................... 918,000 1,307,000 1,204,000
----------- ----------- -----------
$15,366,000 $25,259,000 $12,966,000
=========== =========== ===========
Capital expenditures (a):
Lumber operations............................. $ 350,000 $ 917,000 $ 1,524,000
General corporate assets...................... 3,009,000 3,737,000 361,000
----------- ----------- -----------
$ 3,359,000 $ 4,654,000 $ 1,885,000
=========== =========== ===========
</TABLE>
(a) Capital expenditures do not include the cost of acquiring additional timber
and timberland properties.
Balance sheet segment information as of December 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Identifiable Assets:
Timber operations....................................... $ 92,625,000 $108,690,000
Lumber operations....................................... 22,614,000 25,442,000
General corporate assets................................ 16,821,000 20,298,000
------------ ------------
$132,060,000 $154,430,000
============ ============
</TABLE>
F-38
<PAGE> 190
PIONEER RESOURCES, LLC AND SUBSIDIARIES
(AN OREGON LIMITED LIABILITY COMPANY AND PREDECESSOR TO STRATEGIC TIMBER TRUST
II, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. DISCONTINUED OPERATION:
In September 1997, Pioneer decided to dispose of its plywood manufacturing
operation, as owned and operated by Lane. This operation ceased in November
1997.
The net losses of the plywood operation for all periods presented are
included in the consolidated statements of operations under discontinued
operation. Revenues from the plywood operation were $27,788,000 in 1996 and
$36,818,000 in 1997. Except for certain receivables, inventories, and other
current assets carried at a total estimated net realizable value of $3,209,000,
all assets of the plywood operation were disposed of prior to December 31, 1997.
The gain in 1997 on disposal of the discontinued operation reflected in the
consolidated statement of operations includes gains on the sale of equipment
used in the plywood operation, less estimated closure-related costs, net of tax
provision on the gain. The loss in the period from January 1, 1998 to October 8,
1998 related to the disposal of this operation principally represents costs
incurred in excess of those estimated in 1997 for closure-related expenses.
12. SUBSEQUENT EVENT:
As discussed in Note 1, Pioneer's interest in Kinzua was conveyed to
Frontier Resources. In January 1999, Frontier decided to permanently close the
Heppner, Oregon sawmill operated by Kinzua. Based on an initial assessment,
Frontier believes that closure costs related to the plant shutdown will not be
significant.
F-39
<PAGE> 191
[INSIDE BACK COVER]
[PHOTO A]
Mid-rotation, intensively-managed
Southern pine plantation.
Life Cycle of A Tree
Strategic Timber owns and manages a diversified portfolio of
commercial timber, a renewable natural resource.
<TABLE>
<S> <C>
[PHOTO B] [PHOTO C]
Fast-growing 5 year-old Southern Mature Southern pine ready for
pine plantation in Louisiana. harvest. Clear, straight and
large diameter sawtimber has
many high-value end uses.
</TABLE>
<PAGE> 192
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16,600,000 SHARES
STRATEGIC TIMBER TRUST, INC.
COMMON STOCK
LOGO
------------
PROSPECTUS
, 1999
------------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
A.G. EDWARDS & SONS, INC.
WARBURG DILLON READ LLC
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 193
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Unless otherwise defined, all capitalized terms contained in this Part II
shall have the meanings ascribed to them in the prospectus which forms a part of
this Registration Statement. Strategic Timber is sometimes referred to herein as
the "Registrant."
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses expected to be incurred
by Strategic Timber 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>
<S> <C>
SEC registration fee........................................ $ 111,448
National Association of Securities Dealers, Inc. filing
fee....................................................... 30,500
Nasdaq National Market listing fee.......................... 90,000
Blue Sky fees and expenses.................................. 5,000
Accounting fees and expenses................................ 650,000
Legal fees and expenses..................................... 1,000,000
Financial advisory fee...................................... 2,158,000
Printing and engraving expenses............................. 250,000
Registrar and Transfer Agent's fees......................... 15,500
Directors' and Officers' liability insurance................ 162,000
Miscellaneous fees and expenses............................. $ 50,000
----------
Total............................................. 4,522,448
==========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
In connection with the formation transactions, the following sales of
Strategic Timber's and Strategic Timber Partners' securities have occurred
within the past six months or will occur upon the completion of this offering:
(i) In accordance with the terms of the Strategic Timber Partners II
partnership units held by the former members of Pioneer and the Strategic
Timber Partners II partnership units held by Mach One, the former members
of Pioneer will receive $24.1 million in cash and 2,170,086 Strategic
Timber Partners partnership units having a value of $43.4 million, based on
an initial public offering price of $20 per share, and Mach One will
receive $10.0 million in cash and 100,110 Strategic Timber Partners
partnership units having a value of $2.0 million, based on the initial
public offering price of $20 per share, in connection with the merger of
Strategic Timber Partners II into Strategic Timber Partners. All of the
units in Strategic Timber Partners II, consisting of 10,000 partnership
units, will be cancelled in connection with the merger of Strategic Timber
Partners II into Strategic Timber Partners, and the holders will receive
Strategic Timber Partners units in exchange for their Strategic Timber
Partners II units. The former members of Pioneer acquired their Strategic
Timber Partners II partnership units in connection with Strategic Timber
Partners II's acquisition of Pioneer. Mach One acquired its interest in
Strategic Timber Partners II in exchange for $10.0 million cash to
Strategic Timber Partners II that was used to finance Strategic Timber
Partners II's acquisition of Pioneer.
(ii) In accordance with the terms of the Strategic Timber Partners
partnership units held by Louisiana Timber, Louisiana Timber will receive
$12.9 million in cash and will own 1,762,974 Strategic Timber Partners
partnership units having a value of $35.3 million, based on an initial
public offering price of $20 per share, as of the completion of the
offering. Louisiana Timber acquired its Strategic Timber Partners
partnership units in exchange for the contribution to Strategic Timber
Partners of a contract (valued by the parties at $50.0 million) to acquire
the Louisiana property.
II-1
<PAGE> 194
(iii) At the completion of this offering, the shareholders of
Strategic Timber who formed Strategic Timber II will receive 933,035
Strategic Timber Partners partnership units in connection with the merger
of Strategic Timber II, Strategic Timber Partners II and Strategic Timber
Two Operating Co. into Strategic Timber Partners. The Strategic Timber
Partners II partnership units held by these individuals will be canceled in
the merger.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
In addition to the issuances described in Item 32, Strategic Timber and
Strategic Timber Partners have issued the following securities:
(i) In April 1998, Strategic Timber issued an aggregate of 16,065 (or
587,798 shares adjusted for Strategic Timber's 36.59-for-1 stock split)
shares of common stock to six individuals for services rendered as
employees of Strategic Timber: C. Edward Broom, Christopher J. Broom,
Thomas P. Broom, Charles W. Godfrey, Vladimir Harris and Joseph E. Rendini.
Based on an initial public offering price of $20 per share, these shares
are worth approximately $11.8 million.
(ii) In April 1998, Strategic Timber Partners issued 500 Class B
partnership units and 4,500 Class C partnership units to Louisiana Timber
in exchange for assignment to Strategic Timber Partners of a contract to
acquire the Louisiana property. The parties valued the contract at $50.0
million. In connection with the completion of this offering, these units
will be converted into an aggregate of 1,762,974 partnership units and
$12.9 million in cash. Based on an initial public offering price of $20 per
share, these units are worth approximately $35.3 million.
(iii) In April 1998, Strategic Timber issued 1,275 shares (or 46,651
shares adjusted for the stock split) of common stock to Sutherland Asbill &
Brennan LLP in consideration of legal services rendered to Strategic
Timber. Based on an initial public offering price of $20 per share, these
shares are worth approximately $933,000.
(iv) In June 1998, Strategic Timber issued 1,020 (or 37,321 shares
adjusted for the stock split) shares of common stock to Nicholas C. Brunet
for services rendered as an employee of Strategic Timber. Based on an
initial public offering price of $20 per share, these shares are worth
approximately $746,000.
With respect to the issuances of common stock, options and partnership
units convertible into common stock described in Item 32 above and in this Item
33, Strategic Timber relied upon the exemption provided by section 4(2) of the
Securities Act, and in all but the issuance of shares to Mr. Brunet, Regulation
D, Rule 506, promulgated thereunder.
Each recipient of the securities described above and in Item 32 represented
his or 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. Each recipient had adequate access to
information about Strategic Timber.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
GEORGIA BUSINESS CORPORATION CODE
Section 14-2-851 of the GBCC empowers a corporation to indemnify a director
(including a former director and including a director who is or was serving at
the request of the corporation as a director, officer, partner, trustee,
employee or agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise) against liability
arising from official acts if the director acted in good faith and reasonably
believed that his or her conduct was in the best interests of the corporation.
For all other acts, the corporation may indemnify a director who acted in good
faith and reasonably believed that the conduct was not opposed to the best
interests of the corporation. The corporation may indemnify a director with
respect to criminal proceedings if the director acted in good
II-2
<PAGE> 195
faith and had no reasonable cause to believe the conduct was unlawful. A
corporation may not indemnify a director adjudged liable for conduct involving
receipt of an improper personal benefit.
In addition, section 14-2-856 of the GBCC permits the articles of
incorporation, bylaws, a contract, or resolution approved by the shareholders to
authorize the corporation to indemnify a director against claims to which the
director was a party, including claims by the corporation or in the right of the
corporation (e.g., a shareholder derivative action). However, the corporation
may not indemnify the director for liability to the corporation for any
appropriation of a corporate opportunity, intentional misconduct or knowing
violation of law, unlawful distributions or receipt of an improper benefit.
Section 14-2-852 of the GBCC provides for mandatory indemnification against
reasonable expenses incurred by a director who is wholly successful in defending
an action to which the director was a party due to his or her status as a
director of the corporation on the merits or otherwise. Section 14-2-854 allows
a court, upon application by a director, to order indemnification and
advancement of expenses if it determines that the director is entitled to
indemnification under the GBCC or if it determines that indemnification is fair
and reasonable even if the director has failed to meet the statutory standard of
conduct under section 14-2-851. However, the court may not order indemnification
in excess of reasonable expenses for liability to the corporation or for receipt
of an improper benefit.
Section 14-2-857 of the GBCC permits a corporation to indemnify an officer
(including a former officer and including an officer who is or was serving at
the request of the corporation as a director, officer, partner, trustee,
employee or agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise) to the same extent as
a director. A corporation may indemnify an officer who is not a director to a
further extent by means of articles of incorporation, bylaw, board resolution,
or contract. However, the corporation may not indemnify an officer for liability
arising from conduct involving appropriation of a corporate opportunity,
intentional misconduct or knowing violation of law, unlawful distributions, or
receipt of an improper personal benefit. An officer who is not a director is
also entitled to mandatory indemnification and may apply for court-ordered
indemnification.
Section 14-2-858 of the GBCC permits a corporation to purchase and maintain
insurance on behalf of directors and officers against liability incurred by them
in their capacities or arising out of their status as directors and officers of
the corporation, regardless of whether the corporation would have the power to
indemnify or advance expenses to the director or officer for the same liability
under the GBCC.
ARTICLES OF INCORPORATION
Article V of the Articles of Incorporation exculpates the directors of
Strategic Timber from personal liability for money damages to Strategic Timber
or its shareholders to the fullest extent permitted by the GBCC, as it may be
amended from time to time. Currently, the directors are exculpated from all
liability to Strategic Timber or its shareholders except for liability arising
from conduct involving appropriation of a corporate opportunity, intentional
misconduct or knowing violation of law, unlawful distributions, or receipt of an
improper personal benefit. The Articles of Incorporation also provide that any
repeal or modification of Article V of the Articles of Incorporation by the
shareholders of Strategic Timber shall not adversely affect any right or
protection of a director of Strategic Timber existing at the time of such repeal
or modification.
BYLAWS
Article VI of Strategic Timber's Bylaws provides that Strategic Timber
shall indemnify to the fullest extent permitted under the GBCC any person who is
or was a director or an officer of Strategic Timber, including a director or an
officer who is or was serving at the request of Strategic Timber as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise.
No amendment, termination, or other elimination of Article VI of the Bylaws
or of any relevant provisions of the GBCC or of any other applicable law shall
affect or diminish in any way the rights to
II-3
<PAGE> 196
indemnification under the Bylaws with respect to any action, suit or proceeding
arising out of, or relating to, any event or act or omission occurring or fact
or circumstance existing prior to such amendment, termination or other
elimination. The indemnification and advancement of expenses provided by, or
granted pursuant to, Strategic Timber's Bylaws are not exclusive of any other
rights permitted by applicable law to which a person seeking indemnification or
advancement of expenses may be entitled, whether by contract or otherwise. All
rights to indemnification under Article VI of the Bylaws continue as to a person
who has ceased to be a director or officer and shall be deemed to be a contract
between Strategic Timber and each such person.
INDEMNIFICATION AGREEMENTS
Strategic Timber will enter into indemnification agreements with each of
its directors and executive officers prior to completion of this offering, and
intends to enter into similar agreements with its prospective directors upon
completion of the offering. The indemnification agreements provide for
indemnification to the fullest extent permitted by applicable law, the Articles
of Incorporation, the Bylaws and any resolutions of the Board of Directors and
shareholders of Strategic Timber as in effect on the date of execution of each
such indemnification agreement, and to such greater extent as applicable law may
thereafter from time to time permit. The terms of these indemnification
agreements are consistent with the terms of Article VI of Strategic Timber's
Bylaws and Article V of the Articles of Incorporation.
INSURANCE
Strategic Timber intends to purchase a policy of insurance providing
reimbursement of indemnification payments to officers and directors of Strategic
Timber and reimbursement of certain liabilities incurred by directors and
officers of Strategic Timber in their capacities as such, to the extent that
they are not otherwise indemnified by Strategic Timber.
UNDERWRITING AGREEMENT
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the underwriters of Strategic Timber, its directors and its officers, and by
Strategic Timber of the underwriters, for certain liabilities, including
liabilities arising under the Securities Act, and affords certain rights of
contribution with respect thereto.
PARTNERSHIP AGREEMENT
The Partnership Agreement (Exhibit 3.5.4) provides for indemnification of
Strategic Timber, Strategic Timber Operating Co., and the directors and officers
of Strategic Timber, as well as any other persons Strategic Timber Operating
Co., as general partner, may designate. Strategic Timber Partners shall
indemnify any of these indemnitees against any losses, claims, damages,
liabilities, judgments, fines, settlements and expenses arising from the
operations of Strategic Timber Partners 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 interest of Strategic Timber Partners, and in the case of any criminal
proceeding, the indemnitee had no reasonable cause to believe that its conduct
was unlawful. This indemnification is limited to the assets of Strategic Timber
Partners and no partner in Strategic Timber Partners shall be personally liable
for such indemnification. Strategic Timber Partners may reimburse reasonable
expenses incurred by any such indemnitee in defense of an action relating to the
operations of Strategic Timber Partners, if Strategic Timber Partners receives
certain written affirmations and undertakings from the indemnitee. Strategic
Timber Partners may purchase and maintain insurance on behalf of such
indemnitees against liabilities incurred by them in connection with Strategic
Timber Partners' activities, regardless of whether Strategic Timber Partners
would have the power to indemnify the indemnitee for the same liability under
the Partnership Agreement.
II-4
<PAGE> 197
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 on page F-1 of the prospectus which
forms a part of this Registration Statement.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement
2.1.1+* Contract for the Purchase and Sale of Real Property, dated
April 15, 1998, by and between Griffin Logging, Inc. and
Louisiana Timber Partners, LLC
2.1.2+* Partial Assignment and Assumption of Contract, dated April
23, 1998, by and between Louisiana Timber Partners, LLC and
Strategic Timber Partners, LP
2.1.3+* Contribution Agreement, dated April 23, 1998, by and among
Strategic Timber Partners, LP, Strategic Timber Operating
Co., the Registrant and Louisiana Timber Partners, LLC
2.2+* Acquisition and Contribution Agreement, dated October 9,
1998, by and among Strategic Timber Trust II, LLC, Strategic
Timber Two Operating Co., LLC, Strategic Timber Partners II,
LP, Frontier Resources, LLC and all of the former owners of
the membership interests of Pioneer Resources, LLC
2.3* Plan and Agreement of Merger with respect to the Merger of
Strategic Timber Trust II, LLC, Strategic Timber Two
Operating Co., LLC, and Strategic Timber Partners II, LP
with and into Strategic Timber Partners, LP, dated as of
January 25, 1999
3.1.1* Articles of Incorporation of the Registrant
3.1.2* Form of Amended and Restated Articles of Incorporation of
the Registrant to be effective on or prior to the
consummation of this offering
3.2.1* Bylaws of the Registrant
3.2.2* Form of Amended and Restated Bylaws of the Registrant to be
effective on or prior to the consummation of this offering
3.3* Certificate of Incorporation of Strategic Timber Operating
Co.
3.4* Bylaws of Strategic Timber Operating Co.
3.5.1* Agreement of Limited Partnership of Strategic Timber
Partners, LP
3.5.2* First Amended and Restated Agreement of Limited Partnership
of Strategic Timber Partners, LP
3.5.3* First Amendment to First Amended and Restated Agreement of
Limited Partnership of Strategic Timber Partners, LP
3.5.4* Form of Second Amended and Restated Agreement of Limited
Partnership of Strategic Timber Partners, LP, to be
effective on or prior to the consummation of this offering
3.6.1* Agreement of Limited Partnership of Strategic Timber
Partners II, LP
3.6.2* First Amended and Restated Agreement of Limited Partnership
of Strategic Timber Partners II, LP
3.7* Operating Agreement of Strategic Timber Trust II, LLC
3.8* Operating Agreement of Strategic Timber Two Operating Co.,
LLC
</TABLE>
II-5
<PAGE> 198
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
3.9* Fourth Amended and Restated Operating Agreement of Pioneer
Resources, LLC
4.1 Form of Common Stock Certificate
5.1** Opinion of Sutherland Asbill & Brennan LLP as to certain
matters regarding the shares of Common Stock offered hereby
8.1 Opinion of Sutherland Asbill & Brennan LLP as to tax matters
8.2* Private Letter Ruling issued to the Registrant from the
Internal Revenue Service, dated March 19, 1999
10.1* Form of 1999 Strategic Timber Trust Omnibus Incentive Plan
10.2* Form of Indemnification Agreement to be executed between
Registrant and certain of its officers and directors
10.3* Form of Stock Option Agreement
10.4* Form of Stock Option Agreement for Outside Directors
10.5+* Replacement Credit Agreement, dated October 9, 1998, by and
among Pioneer Resources, LLC, First Union National Bank, ABN
AMRO Bank N.V., NationsBank, N.A., and the other lenders
which are or become parties thereto
10.6+* Loan Agreement, dated April 27, 1998, by and among Strategic
Timber Partners, LP, ABN AMRO Bank N.V., and the other
lenders which are or become parties thereto
10.7+* Bridge Loan Agreement, dated April 27, 1998, by and among
the Registrant, ABN AMRO Bank N.V. and the lenders named
therein
10.8+* Bridge Loan Agreement, dated October 9, 1998, by and among
Strategic Timber Trust II, LLC, ABN AMRO Bank N.V. and the
lenders named therein
10.9.1* Timber Purchase Agreement, dated December 29, 1998, between
Kinzua Resources, LLC and Pioneer Resources, LLC
10.9.2* Statutory Bargain and Sale Timber Deed between Kinzua
Resources, LLC and Pioneer Resources, LLC, dated December
29, 1998
10.10* Employment and Non-Competition Agreement between the
Registrant and C. Edward Broom
10.11* Employment and Non-Competition Agreement between the
Registrant and Christopher J. Broom
10.12* Employment and Non-Competition Agreement between the
Registrant and Thomas P. Broom
10.13* Employment and Non-Competition Agreement between the
Registrant and Kenneth L. Chute
10.14* Employment and Non-Competition Agreement between the
Registrant and Vladimir Harris
10.15* Employment and Non-Competition Agreement between the
Registrant and Nicholas C. Brunet
10.16* Employment and Non-Competition Agreement between the
Registrant and Joseph E. Rendini
10.17 Loan Agreement by and among Strategic Timber Partners, LP
and Pioneer Resources, LLC, as borrowers, and ABN AMRO Bank
N.V., as Administrative Agent, and the lenders named
therein, dated April 9, 1999.
21.1* Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Sutherland Asbill & Brennan LLP
</TABLE>
II-6
<PAGE> 199
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
23.3 Consent of Mason, Bruce & Girard, Inc.
23.4 Consent of Canal Forest Resources, Inc.
24.1* Power of Attorney
27.1* Financial Data Schedule
99.1* Consent of Prospective Director Starling W. Childs, II
99.2* Consent of Prospective Director Jay S. Lucas
99.3* Consent of Prospective Director Hanns A. Pielenz
99.4* Consent of Prospective Director Richard P. Urfer
99.5 Report of Mason, Bruce & Girard, Inc.
99.6 Report of Canal Forest Resources, Inc.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Schedules and similar attachments to this exhibit have been omitted. A list
of these omitted schedules has been provided in this exhibit, and the
Registrant agrees to furnish supplementally to the Commission a copy of any
omitted schedule upon request.
ITEM 37. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Strategic
Timber pursuant to the foregoing provisions, or otherwise, Strategic Timber has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Strategic Timber of expenses
incurred or paid by a director, officer or controlling person of Strategic
Timber 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, Strategic Timber will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(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 Strategic Timber 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 this 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-7
<PAGE> 200
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies 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 New London, State of New Hampshire, on the 19th day
of April, 1999.
STRATEGIC TIMBER TRUST, INC.
By: /s/ CHRISTOPHER J. BROOM
----------------------------------
Christopher J. Broom
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief Executive April 19, 1999
- ----------------------------------------------------- Officer and Chairman of
C. Edward Broom the Board of Directors
(Principal Executive
Officer)
/s/ KENNETH L. CHUTE Senior Vice President and April 19, 1999
- ----------------------------------------------------- Chief Financial Officer
Kenneth L. Chute (Principal Financial and
Accounting Officer)
/s/ CHRISTOPHER J. BROOM Executive Vice President, April 19, 1999
- ----------------------------------------------------- Chief Investment Officer
Christopher J. Broom and Director
/s/ THOMAS P. BROOM Executive Vice President, April 19, 1999
- ----------------------------------------------------- Chief Operating Officer
Thomas P. Broom and Director
*By: /s/ CHRISTOPHER J. BROOM
------------------------------------------------
Christopher J. Broom
Attorney-in-fact
</TABLE>
II-8
<PAGE> 201
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement
2.1.1+* Contract for the Purchase and Sale of Real Property, dated
April 15, 1998, by and between Griffin Logging, Inc. and
Louisiana Timber Partners, LLC
2.1.2+* Partial Assignment and Assumption of Contract, dated April
23, 1998, by and between Louisiana Timber Partners, LLC and
Strategic Timber Partners, LP
2.1.3+* Contribution Agreement, dated April 23, 1998, by and among
Strategic Timber Partners, LP, Strategic Timber Operating
Co., the Registrant and Louisiana Timber Partners, LLC
2.2+* Acquisition and Contribution Agreement, dated October 9,
1998, by and among Strategic Timber Trust II, LLC, Strategic
Timber Two Operating Co., LLC, Strategic Timber Partners II,
LP, Frontier Resources, LLC and all of the former owners of
the membership interests of Pioneer Resources, LLC
2.3* Plan and Agreement of Merger with respect to the Merger of
Strategic Timber Trust II, LLC, Strategic Timber Two
Operating Co., LLC, and Strategic Timber Partners II, LP
with and into Strategic Timber Partners, LP, dated as of
January 25, 1999
3.1.1* Articles of Incorporation of the Registrant
3.1.2* Form of Amended and Restated Articles of Incorporation of
the Registrant to be effective on or prior to the
consummation of this offering
3.2.1* Bylaws of the Registrant
3.2.2* Form of Amended and Restated Bylaws of the Registrant to be
effective on or prior to the consummation of this offering
3.3* Certificate of Incorporation of Strategic Timber Operating
Co.
3.4* Bylaws of Strategic Timber Operating Co.
3.5.1* Agreement of Limited Partnership of Strategic Timber
Partners, LP
3.5.2* First Amended and Restated Agreement of Limited Partnership
of Strategic Timber Partners, LP
3.5.3* First Amendment to First Amended and Restated Agreement of
Limited Partnership of Strategic Timber Partners, LP
3.5.4* Form of Second Amended and Restated Agreement of Limited
Partnership of Strategic Timber Partners, LP, to be
effective on or prior to the consummation of this offering
3.6.1* Agreement of Limited Partnership of Strategic Timber
Partners II, LP
3.6.2* First Amended and Restated Agreement of Limited Partnership
of Strategic Timber Partners II, LP
3.7* Operating Agreement of Strategic Timber Trust II, LLC
3.8* Operating Agreement of Strategic Timber Two Operating Co.,
LLC
3.9* Fourth Amended and Restated Operating Agreement of Pioneer
Resources, LLC
4.1 Form of Common Stock Certificate
5.1** Opinion of Sutherland Asbill & Brennan LLP as to certain
matters regarding the shares of Common Stock offered hereby
8.1 Opinion of Sutherland Asbill & Brennan LLP as to tax matters
</TABLE>
<PAGE> 202
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
8.2* Private Letter Ruling issued to the Registrant from the
Internal Revenue Service, dated March 19, 1999
10.1* Form of 1999 Strategic Timber Trust Omnibus Incentive Plan
10.2* Form of Indemnification Agreement to be executed between
Registrant and certain of its officers and directors
10.3* Form of Stock Option Agreement
10.4* Form of Stock Option Agreement for Outside Directors
10.5+* Replacement Credit Agreement, dated October 9, 1998, by and
among Pioneer Resources, LLC, First Union National Bank, ABN
AMRO Bank N.V., NationsBank, N.A., and the other lenders
which are or become parties thereto
10.6+* Loan Agreement, dated April 27, 1998, by and among Strategic
Timber Partners, LP, ABN AMRO Bank N.V., and the other
lenders which are or become parties thereto
10.7+* Bridge Loan Agreement, dated April 27, 1998, by and among
the Registrant, ABN AMRO Bank N.V. and the lenders named
therein
10.8+* Bridge Loan Agreement, dated October 9, 1998, by and among
Strategic Timber Trust II, LLC, ABN AMRO Bank N.V. and the
lenders named therein
10.9.1* Timber Purchase Agreement, dated December 29, 1998, between
Kinzua Resources, LLC and Pioneer Resources, LLC
10.9.2* Statutory Bargain and Sale Timber Deed between Kinzua
Resources, LLC and Pioneer Resources, LLC, dated December
29, 1998
10.10* Employment and Non-Competition Agreement between the
Registrant and C. Edward Broom
10.11* Employment and Non-Competition Agreement between the
Registrant and Christopher J. Broom
10.12* Employment and Non-Competition Agreement between the
Registrant and Thomas P. Broom
10.13* Employment and Non-Competition Agreement between the
Registrant and Kenneth L. Chute
10.14* Employment and Non-Competition Agreement between the
Registrant and Vladimir Harris
10.15* Employment and Non-Competition Agreement between the
Registrant and Nicholas C. Brunet
10.16* Employment and Non-Competition Agreement between the
Registrant and Joseph E. Rendini
10.17 Loan Agreement by and among Strategic Timber Partners, LP
and Pioneer Resources, LLC, as borrowers, and ABN AMRO Bank
N.V., as Administrative Agent, and the lenders named
therein, dated April 9, 1999.
21.1* Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Sutherland Asbill & Brennan LLP
23.3 Consent of Mason, Bruce & Girard, Inc.
23.4 Consent of Canal Forest Resources, Inc.
24.1* Power of Attorney
</TABLE>
<PAGE> 203
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
27.1* Financial Data Schedule
99.1* Consent of Prospective Director Starling W. Childs, II
99.2* Consent of Prospective Director Jay S. Lucas
99.3* Consent of Prospective Director Hanns A. Pielenz
99.4* Consent of Prospective Director Richard P. Urfer
99.5 Report of Mason, Bruce & Girard, Inc.
99.6 Report of Canal Forest Resources, Inc.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Schedules and similar attachments to this exhibit have been omitted. A list
of these omitted schedules has been provided in this exhibit, and the
Registrant agrees to furnish supplementally to the Commission a copy of any
omitted schedule upon request.
<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
[ STT ] [ ]
COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS
[LOGO] CUSIP 000000 00 0
STRATEGIC TIMBER TRUST, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF GEORGIA
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE, OF
Strategic Timber Trust, Inc. transferable on the books of the
Corporation in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Joseph E. Rendini
Secretary
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NY) Transfer Agent
and Registrar,
By
AUTHORIZED SIGNATURE.
[STRATEGIC TRUST INC. SEAL]
<PAGE> 2
STRATEGIC TIMBER TRUST, INC.
The shares of Strategic Timber Trust, Inc. (the "Corporation")
represented by this certificate are subject to restrictions set forth in the
Corporation's Articles of Incorporation which prohibit in general (a) any Person
from Beneficially Owning Equity Shares in excess of the Ownership Limit and (b)
any Person from acquiring or maintaining any ownership interest in the capital
stock of the Corporation that is inconsistent with (i) the requirements of the
Code pertaining to real estate investment trusts or (ii) the Articles of
Incorporation of the Corporation, and the holder of this certificate by his
acceptance hereof consents to be bound by such restrictions. Any purported
transfer of Equity Shares in violation of such restrictions shall be void ab
initio and the Equity Shares transferred in violation of such restrictions,
whether as a result of a Transfer or the Non-Transfer Event, shall be
automatically converted into Excess Shares and transferred to a Trust for
disposition as provided in the Articles of Incorporation. Capitalized terms used
in this paragraph and not defined herein are defined in the Corporation's
Articles of Incorporation. The Corporation will furnish without charge, to each
shareholder who so requests, a copy of the Articles of Incorporation of the
Corporation, containing, among other things, a statement of the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof that the Corporation is
authorized to issue and the qualifications, limitations or restrictions of such
preferences and/or rights. Any such request shall be addressed to the Secretary
of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT- Custodian
TEN ENT- as tenants by the entireties ----------------- --------------------
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants
in common under Uniform Gifts to Minors
Act
-----------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
----------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated
----------------------------------
----------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
----------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF SUTHERLAND ASBILL & BRENNAN LLP]
April 12, 1999
Strategic Timber Trust, Inc.
5 North Pleasant Street
New London, NH 03257
Re: Strategic Timber Trust, Inc./REIT
Gentlemen:
We have acted as counsel to Strategic Timber Trust, Inc. in
connection with your initial public offering of 16,600,000 shares of common
stock, and your election to be taxed as a Real Estate Investment Trust for
federal income tax purposes. Except as indicated therein, and subject to the
limitations and qualifications stated therein, the discussion in your form S-11
entitled "Federal Income Tax Consequences" is our opinion regarding the federal
income tax consequences that may be relevant to your shareholders.
Yours truly,
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ William H. Bradley
----------------------------------------
William H. Bradley, a partner
WHB/mjb
<PAGE> 1
EXHIBIT 10.17
===============================================================================
===============================================================================
LOAN AGREEMENT
BY AND AMONG
STRATEGIC TIMBER PARTNERS, LP
AND
PIONEER RESOURCES, LLC
AS THE BORROWERS,
THE LENDERS NAMED HEREIN
AND
ABN AMRO BANK N.V.
AS THE ADMINISTRATIVE AGENT
ABN AMRO BANK N.V.
AND
NATIONSBANK, N.A.
AS LEAD ARRANGERS AND BOOK MANAGERS
NATIONSBANK, N.A.
(A SUBSIDIARY OF BANK OF AMERICA CORPORATION)
AS THE SYNDICATION AGENT
SOCIETE GENERALE
AS THE DOCUMENTATION AGENT
April 9, 1999
===============================================================================
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I DEFINITIONS.................................................................................2
Section 1.1 Defined Terms..........................................................................2
Section 1.2 Other Interpretive Provisions.........................................................29
(a) Accounting Terms......................................................................29
(b) Other Terms...........................................................................29
(c) Performance; Time.....................................................................29
(d) Laws..................................................................................30
(e) Rounding..............................................................................30
(f) Schedules And Exhibits................................................................30
ARTICLE II THE CREDITS................................................................................30
Section 2.1 Amounts And Terms Of Commitments......................................................30
(a) Term Loan.............................................................................30
(b) Revolving Credit Facility.............................................................30
(c) Limitation On Each Lender's Obligation With Respect
to Revolving Loans....................................................................31
(d) Funding Of Loans To The Administrative Agent..........................................31
(e) Disbursement Of Loans To The Borrowers................................................31
(f) General Provisions Relating To Loans..................................................31
(g) Permitted Uses Of Loan Proceeds.......................................................32
(h) Joint and Several Obligations.........................................................32
Section 2.2 Notes.................................................................................32
(a) Notations In The Lenders' Books And Records...........................................32
Section 2.3 Repayment Of Principal Amount Of Loans................................................32
Section 2.4 Payment Of Interest On The Loans......................................................33
(a) Loans.................................................................................33
(b) Interest Payment Dates................................................................33
(c) Interest Upon Events Of Default.......................................................33
(d) Limitations On Interest Rates.........................................................33
Section 2.5 Procedure For The Borrowing Of Revolving Loans........................................33
Section 2.6 Conversion And Continuation Elections.................................................34
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 2.7 Special Provisions Governing Eurodollar Rate Loans....................................35
(a) Determination Of Applicable Interest Rate.............................................35
(b) Inability To Determine Applicable Interest Rate.......................................35
(c) Illegality Or Impracticability Of LIBOR Loans.........................................36
(d) Compensation For Breakage Or Non-Commencement Of Interest
Periods...............................................................................36
(e) Booking Of LIBOR Loans................................................................37
(f) Assumptions Concerning Funding Of LIBOR Loans.........................................37
(g) Eurodollar Rate Loans After Default...................................................37
Section 2.8 Optional Prepayments..................................................................37
Section 2.9 Mandatory Prepayments.................................................................38
Section 2.10 Commitment Fee For Providing Revolving Loan Commitments...............................38
Section 2.11 Voluntary Reduction Of Commitments....................................................38
Section 2.12 Calculation Of Interest And Fees......................................................38
Section 2.13 Payments..............................................................................39
Section 2.14 Payment On Non-Business Days..........................................................39
Section 2.15 Application Of Payments...............................................................39
Section 2.16 Distribution Of Payments..............................................................39
Section 2.17 The Administrative Agent's Right To Assume Funds Available For
Revolving Loans.......................................................................39
Section 2.18 The Administrative Agent's Right To Assume Payments Will Be
Made By The Borrowers.................................................................40
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY.....................................................40
Section 3.1 Taxes.................................................................................40
Section 3.2 Increased Costs.......................................................................44
Section 3.3 Capital Requirements..................................................................44
Section 3.4 Certificates Of Lenders...............................................................44
Section 3.5 Substitution Of Lenders...............................................................45
Section 3.6 Survival..............................................................................45
</TABLE>
ii.
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE IV CONDITIONS PRECEDENT TO CLOSING AND THE MAKING
OF LOANS...................................................................................45
Section 4.1 Conditions Precedent To The Closing...................................................45
(a) Corporate Documents...................................................................45
(b) Loan Documents........................................................................47
(c) Opinions Of Counsel...................................................................49
(d) Pay-Off Letters.......................................................................49
(e) Merger Documents......................................................................50
(f) IPO Documents.........................................................................50
(g) Consummation of the Merger............................................................50
(h) Consummation of the IPO...............................................................50
(i) Borrowing Base Availability...........................................................51
(j) Governmental Consents.................................................................51
(k) Third Party Consents..................................................................51
(l) Timber Valuations.....................................................................51
(m) Senior Management and Board of Directors of STT and STOC..............................51
(n) Financial Statements..................................................................51
(o) Harvest Plan..........................................................................52
(p) Environmental Review..................................................................52
(q) Material Agreements...................................................................52
(r) Access Rights And Servitudes..........................................................52
(s) Entitlements..........................................................................52
(t) Title Policy..........................................................................52
(u) Insurance.............................................................................52
(v) No Material Adverse Change............................................................53
(w) UCC Searches..........................................................................53
(x) No Litigation.........................................................................53
(y) The Borrowers' Bring-Down Certificate.................................................53
(z) Arrangers/Agent Fee Letter............................................................53
</TABLE>
iii.
<PAGE> 5
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
(aa) Escrow Agreement......................................................................53
(bb) Funds Transfer Memorandum.............................................................53
(cc) Fees And Costs........................................................................54
(dd) Other Documents.......................................................................54
Section 4.2 The Making Of Loans...................................................................54
ARTICLE V THE BORROWERS' REPRESENTATIONS AND WARRANTIES..............................................54
Section 5.1 Organization, Power And Authority Of The Borrowers....................................54
Section 5.2 Organization, Power And Authority of The Borrowers'
Subsidiaries..........................................................................55
Section 5.3 Loan Documents Authorized; Binding Obligations........................................55
Section 5.4 No Conflict...........................................................................56
Section 5.5 Capital Structure.....................................................................56
Section 5.6 Financial Condition...................................................................56
Section 5.7 No Material Adverse Change............................................................57
Section 5.8 Ownership Of Properties...............................................................57
Section 5.9 Litigation............................................................................57
Section 5.10 Material Documents; Third Party Consents..............................................57
Section 5.11 No Government Consents Needed.........................................................57
Section 5.12 Solvency..............................................................................57
Section 5.13 Management And Labor Agreements.......................................................57
Section 5.14 ERISA Compliance......................................................................58
Section 5.15 Margin Regulations....................................................................58
Section 5.16 Taxes.................................................................................59
Section 5.17 Intellectual Property Rights..........................................................59
Section 5.18 Other Regulations.....................................................................59
Section 5.19 Year 2000.............................................................................59
Section 5.20 Nature Of Representations And Warranties..............................................59
ARTICLE VI INSURANCE..................................................................................60
Section 6.1 Insurance By The Borrowers And Services...............................................60
Section 6.2 General Insurance Requirements........................................................60
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C> <C>
(a) Workers' Compensation Insurance.......................................................60
(b) Employer's Liability Insurance........................................................60
(c) General Liability Insurance...........................................................60
(d) Automobile Liability Insurance........................................................60
(e) Excess Insurance......................................................................60
(f) Standing Timber.......................................................................61
Section 6.3 Endorsements..........................................................................61
Section 6.4 Conditions............................................................................61
Section 6.5 Evidence Of Insurance.................................................................61
Section 6.6 Failure To Maintain Insurance.........................................................62
ARTICLE VII AFFIRMATIVE COVENANTS OF THE BORROWER......................................................62
Section 7.1 Records And Reports...................................................................62
(a) Quarterly Borrower-Prepared Financial Statements......................................62
(b) Annual Audited Financial Statements...................................................63
(c) Accountants' Statement................................................................63
(d) Compliance Certificate................................................................64
(e) Borrowing Base Certificate............................................................64
(f) Quarterly Timber Report...............................................................64
(g) Merchantable Timber Valuation Reports.................................................65
(h) Financial Forecasts...................................................................65
(i) Other Reports.........................................................................65
(j) Notices...............................................................................65
(k) ERISA.................................................................................66
(l) SEC Filing............................................................................66
(m) Other Information.....................................................................66
Section 7.2 Maintenance Of Rights And Properties..................................................67
(a) Maintenance Of Existence And Rights...................................................67
(b) Maintenance Of Properties.............................................................67
Section 7.3 Taxes And Other Liabilities...........................................................67
Section 7.4 Inspection Of Books And Records.......................................................67
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C> <C>
Section 7.5 Marketing Of Timber...................................................................68
Section 7.6 Compliance With Laws..................................................................68
Section 7.7 Interest Rate Protection..............................................................68
Section 7.8 New Subsidiaries......................................................................68
Section 7.9 Agreements............................................................................68
Section 7.10 Supplemental Disclosure...............................................................68
Section 7.11 Further Assurances....................................................................69
ARTICLE VIII NEGATIVE COVENANTS OF THE BORROWERS........................................................69
Section 8.1 Limitation On Liens...................................................................69
Section 8.2 Disposition Of Assets.................................................................70
Section 8.3 Consolidations And Mergers............................................................71
Section 8.4 Acquisitions; Loans And Investments...................................................71
Section 8.5 Limitation On Indebtedness............................................................73
Section 8.6 Transactions With Affiliates..........................................................74
Section 8.7 Use Of Proceeds.......................................................................74
Section 8.8 Lease Obligations.....................................................................74
Section 8.9 Capital Expenditures..................................................................75
Section 8.10 Restricted Distributions..............................................................75
Section 8.11 Modification Of Certain Agreements....................................................76
Section 8.12 Maintenance Of Business...............................................................76
Section 8.13 ERISA.................................................................................76
Section 8.14 No Use Of Any Lender's Name...........................................................76
Section 8.15 Accounting Changes....................................................................77
ARTICLE IX FINANCIAL COVENANTS OF THE BORROWERS.......................................................77
Section 9.1 Minimum Interest Coverage Ratio.......................................................77
Section 9.2 Maximum Leverage Ratio................................................................77
Section 9.3 Minimum Fixed Charge Coverage Ratio...................................................78
ARTICLE X EVENTS OF DEFAULT AND REMEDIES.............................................................78
Section 10.1 Events Of Default.....................................................................78
(a) Installments Of Principal.............................................................78
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C> <C>
(b) Other Payments........................................................................78
(c) Cross Defaults........................................................................78
(d) Representations And Warranties Of The Borrowers.......................................78
(e) Specific Defaults.....................................................................79
(f) Other Defaults........................................................................79
(g) Insolvency; Voluntary Proceedings.....................................................79
(h) Involuntary Proceedings...............................................................79
(i) Monetary Judgments....................................................................79
(j) Non-Monetary Judgments................................................................80
(k) Collateral............................................................................80
(l) ERISA.................................................................................80
(m) Change of Control.....................................................................80
(n) Event of Default Under Intercreditor Agreement........................................80
Section 10.2 Waiver Of Default.....................................................................80
Section 10.3 Remedies..............................................................................80
Section 10.4 Set-Off...............................................................................81
(a) Rights Of Set-Off.....................................................................81
(b) The Administrative Agent's Consent To Set-Off Required................................81
Section 10.5 Sharing Of Payments...................................................................81
Section 10.6 Rights And Remedies Cumulative........................................................82
ARTICLE XI THE ADMINISTRATIVE AGENT...................................................................82
Section 11.1 Appointment And Authorization.........................................................82
Section 11.2 Delegation Of Duties..................................................................82
Section 11.3 Exculpatory Provisions................................................................82
Section 11.4 Reliance By The Administrative Agent..................................................83
Section 11.5 Notice Of Default.....................................................................83
Section 11.6 Credit Decision.......................................................................84
Section 11.7 Indemnification.......................................................................84
Section 11.8 The Administrative Agent In Individual Capacity.......................................85
Section 11.9 Successor Administrative Agent........................................................85
</TABLE>
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(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C> <C>
Section 11.10 Collateral Matters....................................................................86
ARTICLE XII MISCELLANEOUS..............................................................................86
Section 12.1 Amendments And Waivers................................................................86
Section 12.2 Notices...............................................................................87
Section 12.3 No Waiver By Administrative Agent Or The Lenders......................................88
Section 12.4 Entire Agreement; Construction........................................................88
Section 12.5 Indemnification.......................................................................88
Section 12.6 Costs And Expenses....................................................................89
Section 12.7 Reliance By The Lenders...............................................................90
Section 12.8 Marshalling; Payments Set Aside.......................................................90
Section 12.9 No Set-Offs By The Borrowers..........................................................90
Section 12.10 Successors And Assigns................................................................90
Section 12.11 Assignments, Participations, Etc......................................................90
Section 12.12 Headings..............................................................................93
Section 12.13 Severability..........................................................................93
Section 12.14 Notification Of Addresses, Lending Offices, Etc.......................................93
Section 12.15 No Third Parties Benefited............................................................93
Section 12.16 Relationship Of Parties...............................................................93
Section 12.17 Time..................................................................................94
Section 12.18 Counterparts..........................................................................94
Section 12.19 Joinder to Collateral Agency Agreement and Intercreditor
Agreement.............................................................................94
Section 12.20 Equitable Relief......................................................................94
Section 12.21 Obligations Of Each Borrower..........................................................94
Section 12.22 Co-Borrower Waivers...................................................................95
Section 12.23 Notice Of Claims; Claims Bar..........................................................97
Section 12.24 Waiver Of Punitive Damages............................................................97
Section 12.25 Governing Law.........................................................................98
Section 12.26 Service Of Process....................................................................98
Section 12.27 Waiver Of Jury Trial..................................................................98
</TABLE>
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(CONTINUED)
<TABLE>
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Section 12.28 Submission to Jurisdiction............................................................98
Section 12.29 Agreements in Writing.................................................................99
</TABLE>
ix.
<PAGE> 11
LOAN AGREEMENT
THIS LOAN AGREEMENT is entered into as of April 9, 1999, by and among
STRATEGIC TIMBER PARTNERS, LP, a Delaware limited partnership ("STP"), and
Pioneer Resources, LLC, an Oregon limited liability company ("Pioneer"), as
co-borrowers (each a "Borrower" and collectively, the "Borrowers"), the LENDERS
(as defined below) and ABN AMRO BANK N.V., not in its individual capacity, but
solely as Administrative Agent for the benefit of the Lenders (in such
capacity, the "ADMINISTRATIVE AGENT").
RECITALS
A. As of the date of this Agreement and without giving effect to
the Merger (as defined below), Strategic Timber Trust II, LLC, a Georgia
limited liability company ("STTII"), owns one hundred percent (100.0%) of the
membership interests of Strategic Timber Two Operating Co. LLC, a Georgia
limited liability company ("STTOC"), which in turn is the sole general partner
of Strategic Timber Partners II, LP, a Georgia limited partnership ("STPII").
STTOC, Mach One Partners, LLC, a Georgia limited liability company ("Mach
One"), Gregory M. Demers, an individual ("Demers"), T. Yates Exley, an
individual ("Exley"), King Investment Group, Inc., an Oregon corporation
("King"), Old Pioneer, LLC, an Oregon limited liability company ("Old
Pioneer"), Darrick Salyers, an individual ("Salyers"), and James A. Youel, an
individual ("Youel"; and together with Demers, Exley, King, Old Pioneer and
Salyers collectively referred to as the "Demers Group") collectively own one
hundred percent (100.0%) of the limited partnership interests of STPII, and
STPII owns one hundred percent (100.0%) of the membership interests in Pioneer.
B. Strategic Timber Trust, Inc., a Georgia corporation ("STT"),
owns one hundred percent (100.0%) of the outstanding capital stock of Strategic
Timber Operating Company, a Delaware corporation ("STOC"), which is the sole
general partner of STP. Louisiana Timber Partners, LLC, a Georgia limited
liability company ("LTP"), and STT collectively own one hundred percent
(100.0%) of the limited partnership interests of STP.
C. In connection with and immediately prior to the closing of
the IPO of shares of common stock of STT only, STTII, STTOC and STPII will be
merged into STP, with STP being the surviving entity (the "Merger"). Following
the consummation of the Merger, STOC will be the sole general partner of STP,
and STT, Mach One, the Demers Group and LTP collectively will own one hundred
percent (100.0%) of the limited partnership interests of STP. STP will own one
hundred percent (100.0%) of the membership interests of Pioneer.
D. STP and Pioneer own Timberlands in Louisiana, California,
Oregon and Washington.
E. The Borrowers have requested that the Lenders and the
Administrative Agent enter into this Agreement pursuant to which the Lenders
severally agree (in accordance with their respective Commitments) to advance to
the Borrowers (i) at Closing, Term Loans in the aggregate amount of
$200,000,000 and Revolving Loans in an amount equal to a portion of the
availability under the Lenders' Aggregate Revolving Commitment (subject to the
Borrowing
1.
<PAGE> 12
Base Availability) for the purpose of refinancing the remainder of the Existing
STP Debt and the Existing Pioneer Debt (after the application of the Net
Issuance Proceeds of the IPO to repay and retire in their entirety the Existing
STT Debt and the Existing STT II Debt and repay a portion of the Existing STP
Debt) and funding certain transaction costs in connection with the Merger, the
IPO and the financing evidenced by this Agreement and the other Loan Documents,
and (ii) thereafter from time to time, Revolving Loans, subject to the terms
and conditions of this Agreement including Borrowing Base Availability, for the
purpose of funding (1) working capital and general business purposes, (2)
permitted acquisitions, including the acquisition of additional Timberlands,
and (3) permitted distributions.
F. The Lenders have agreed to make the Loans described in this
Agreement available to the Borrowers, but only on the terms, subject to the
conditions and in reliance on the representations and warranties set forth
below.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants set forth below, and intending to be legally bound, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINED TERMS. As used in this Agreement, the
following terms shall have the following meanings:
"ABN AMRO" means ABN AMRO Bank N.V., a Dutch banking corporation.
"Acquisition" means any transaction, or any series of related
transactions, by which either Borrower or any of its Subsidiaries directly or
indirectly (a) acquires any ongoing business or all or substantially all of the
assets of any firm, partnership, limited liability company, real estate
investment trust, business trust or other similar trust, joint venture,
corporation or division thereof, whether through purchase of assets, merger or
otherwise, (b) acquires (in one transaction or as the most recent transaction
in a series of transactions) control of at least a majority of the capital
stock of a corporation having ordinary voting power for the election of
directors, (c) acquires control of fifty percent (50.0%) or more of the
ownership interest in any partnership, limited liability company or joint
venture or (d) in a single or in a series of related transactions, from one or
more Persons, acquires assets, including Timberlands and other related
Properties and facilities, including mills and other Timber conversion or
processing facilities, having an aggregate, all-in purchase price of at least
$2,000,000.
"Actual Title Policy" has the meaning set forth in SECTION 4.1(T).
"Adjusted LIBOR" means, for each Interest Period in respect of LIBOR
Loans comprising part of the same Borrowing, an interest rate per annum
(rounded upward to the nearest 1/16th of one percent (0.0625%)) determined
pursuant to the following formula:
2.
<PAGE> 13
Adjusted LIBOR = LIBOR
--------------------------------------
1.00 - Eurodollar Reserve Percentage
The Adjusted LIBOR shall be adjusted automatically as of the effective date of
any change in the Eurodollar Reserve Percentage.
"Administrative Agent" has the meaning set forth in the PREAMBLE and
also means and includes any successor Administrative Agent appointed pursuant
to SECTION 11.9.
"Administrative Agent-Related Persons" means the Administrative Agent,
and any successor Administrative Agent, together with their respective
Affiliates, and the officers, directors, employees, agents and
attorneys-in-fact of such Persons.
"Administrative Agent's Payment Office" means the address for payments
set forth on the signature page hereto in relation to the Administrative Agent
or such other address as the Administrative Agent may from time to time specify
in accordance with SECTION 12.2.
"Affected Lender" has the meaning set forth in SECTION 2.7(C).
"Affiliate" means, with respect to any Person, each other Person
which, directly or indirectly, controls, is controlled by or is under common
control with such Person (excluding any trustee under, or any committee with
responsibility for administering, any Pension Plan or Employee Benefit Plan). A
Person shall be deemed to be "controlled by" another Person if such other
Person possesses, directly or indirectly, power (a) to vote five percent (5.0%)
or more of the securities (on a fully diluted basis) having ordinary voting
power for the election of directors, managing general partners or managing
members or (b) to direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.
"Aggregate Commitments" means the combined Commitments of the Lenders
in the initial aggregate principal amount of Three Hundred Seventy-Five Million
Dollars ($375,000,000).
"Aggregate Revolving Commitment" means the combined Revolving Loan
Commitments of the Lenders in the initial aggregate principal amount of One
Hundred Seventy-Five Million Dollars ($175,000,000).
"Aggregate Term Commitment" means the combined Term Loan Commitments
of the Lenders in the initial aggregate principal amount of Two Hundred Million
Dollars ($200,000,000).
"Agreement" means this Loan Agreement dated as of April 9, 1999,
including all amendments, modifications and supplements hereto and all
appendices, exhibits and schedules to any of the foregoing, and shall refer to
the Agreement as the same may be in effect from time to time.
"Annual Merchantable Timber Valuation Report" has the meaning set
forth in SECTION 7.1(G)(I).
3.
<PAGE> 14
"Applicable Fee Rate" means the following rate, expressed as a
percentage of the unused Revolving Commitments, based on the Leverage Ratio
maintained by STP, on a consolidated basis, as determined as of the end of the
most recent Fiscal Quarter for which the Borrowers have furnished a Compliance
Certificate to the Administrative Agent pursuant to SECTION 7.1(D), commencing
with the Compliance Certificate for the Fiscal Quarter ending September 30,
1999:
<TABLE>
<CAPTION>
======================================================
LEVERAGE RATIO UNUTILIZED
REVOLVING
COMMITMENT
------------------------------------------------------
Applicable Fee
Rate
======================================================
<S> <C>
Less than or equal to 4.0:1.0 0.375%
------------------------------------------------------
Greater than 4.0:1.0 0.50%
======================================================
</TABLE>
Notwithstanding anything to the contrary contained in this Agreement, (a) the
Applicable Fee Rate during the Initial Period shall be one-half of one percent
(0.50%), (b) if at any time during a Fiscal Quarter the aggregate amount of
outstanding Funded Debt, including, without limitation, all outstanding Loans
and Pari Passu Debt, exceeds an amount equal to eighty percent (80.0%) of the
Borrowing Base as in effect at such time, the Applicable Fee Rate shall be
one-half of one percent (0.50%), and (c) except as otherwise provided, the
Applicable Fee Rate shall be subject to increase or decrease, as provided
above, based on the current Leverage Ratio determined with any change in the
Applicable Fee Rate being effective as of the first day of the Fiscal Quarter
next succeeding such date of determination; provided that in no event shall the
Borrowers be entitled to a decrease in the Applicable Fee Rate if a Default or
Event of Default has occurred and is continuing at the time such decrease would
become effective.
"Applicable Margin" means with respect to any Base Rate Loan or any
LIBOR Loan, as applicable, the following margin, expressed as a percentage,
based on the current Leverage Ratio maintained by STP, on a consolidated basis,
as determined as of the end of the most recent Fiscal Quarter for which the
Borrowers have furnished a Compliance Certificate to the Administrative Agent
pursuant to SECTION 7.1(D), commencing with the Compliance Certificate for the
Fiscal Quarter ending September 30, 1999:
4.
<PAGE> 15
<TABLE>
<CAPTION>
==============================================================================
LEVERAGE RATIO LOANS
------------------------------------------------------------------------------
Applicable Applicable
Margin for Margin for
LIBOR Loans Base Rate
Loans
------------------------------------------------------------------------------
<S> <C> <C>
Less than or equal to 4.0:1.0 1.75% 0.25%
(LEVEL I)
------------------------------------------------------------------------------
Less than or equal to 4.5:1.0 but 2.00% 0.50%
greater than 4.0:1.0 (LEVEL II)
------------------------------------------------------------------------------
Less than or equal to 5.0:1.0 but 2.25% 0.75%
greater than 4.5:1.0 (LEVEL III)
------------------------------------------------------------------------------
Less than or equal to 5.5:1.0 but 2.50% 1.00%
greater than 5.0:1.0 (LEVEL IV)
------------------------------------------------------------------------------
Greater than 5.5:1.0 (LEVEL V) 3.00% 1.50%
==============================================================================
</TABLE>
Notwithstanding anything to the contrary contained in this Agreement, (a) the
Applicable Margin applying to Base Rate Loans during the Initial Period shall
be one percent (1.0%), (b) the Applicable Margin applying to LIBOR Loans during
the Initial Period shall be two and one-half percent (2.50%), (c) the
Applicable Margin applying to any Base Rate Loan shall be subject to increase
or decrease, as provided above, based on the current Leverage Ratio, with any
change in the Applicable Margin being effective as of the first day of the
Fiscal Quarter next succeeding such date of determination; provided, that if
any Base Rate Loan is repaid after the end of any Fiscal Quarter but prior to
the delivery of the Compliance Certificate for such Fiscal Quarter, such Base
Rate Loan shall, for such period (from the first Business Day of such Fiscal
Quarter until the date of delivery of the Compliance Certificate), continue to
have the same Applicable Margin as applied during the prior Fiscal Quarter, (d)
if at any time during a Fiscal Quarter the aggregate amount of outstanding
Funded Debt, including, without limitation, all outstanding Loans and Pari
Passu Debt, exceeds an amount equal to eighty percent (80.0%) of the Borrowing
Base as in effect at such time, the Applicable Margin applying to any Base Rate
Loan or any LIBOR Loan outstanding during such Fiscal Quarter shall either be
that corresponding to Level IV on the grid set forth above (if the Applicable
Margin, but for the application of this clause (d), otherwise would be that
corresponding to Levels I, II III or IV) or to Level V on the grid set forth
above (if the Applicable Margin otherwise would be that corresponding to Level
V) and (e) the Applicable Margin applying to any LIBOR Loan having an Interest
Rate Determination Date occurring after the end of any Fiscal Quarter but prior
to the delivery of the Compliance Certificate for such Fiscal Quarter shall be
based on the Leverage Ratio calculated as of the last day of the most recent
Fiscal Quarter for which the Borrowers have delivered a Compliance Certificate;
provided that in no event shall the Borrowers be entitled to a decrease in the
Applicable Margin if a Default or an Event of Default has occurred and is
continuing at the time such decrease otherwise would become effective.
"Applicable Timber Valuation Report" means, as of any date of
determination, the October 1998 Pioneer Valuation, December 1998 STP Valuation,
the Updated Pioneer
5.
<PAGE> 16
Valuation, the Updated STP Valuation, the Annual Merchantable Timber Valuation
Report or the Updated Merchantable Timber Valuation Report, whichever has been
most recently delivered, as of such date of determination, by the Borrowers to
the Administrative Agent and each Lender.
"Arrangers/Agent Fee Letter" means the side letter relating to fees
dated April 9, 1999, among STP, Pioneer, ABN AMRO and Bank of America, National
Trust and Savings Association.
"Assignee" has the meaning set forth in SECTION 12.11(A).
"Assignment and Acceptance" has the meaning specified in SECTION
12.11(A).
"Attorney Costs" means and includes all reasonable fees and
disbursements of any law firm or other external counsel.
"Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978, as
codified under Title 11 of the United States Code, and the Bankruptcy Rules
promulgated thereunder, as amended.
"Base Rate" means for any day, the higher of (a) the per annum
floating rate established by ABN AMRO at its branch office in Chicago, Illinois
as its "prime rate" for domestic (United States) commercial loans in effect on
such day, and (b) the per annum floating rate equal to one-half of one percent
(0.50%) in excess of the Federal Funds Rate in effect on such day. ABN AMRO's
prime rate is a rate set by ABN AMRO based upon various factors, including ABN
AMRO's costs and desired return, general economic conditions and other factors,
and is neither directly tied to an external rate of interest or index or
necessarily the lowest nor best rate of interest actually charged by ABN AMRO
at any given time to any customer or particular class of customers for any
particular credit extension. ABN AMRO may make commercial or other loans at
rates of interest at, above or below its prime rate.
"Base Rate Loan" means a Loan that bears interest based on the Base
Rate.
"Borrower(s)" has the meaning set forth in THE PREAMBLE.
"Borrowing" means a borrowing under this Agreement consisting of Loans
made to either Borrower on the same day by the Lenders pursuant to ARTICLE II.
"Borrowing Base" means, as calculated for the Borrowers, on a
consolidated basis, as of any date of determination, an amount equal to the sum
of (a) an amount equal to eighty percent (80.0%) of the contract price for all
Timber sold forward under Eligible Timber Agreements (calculated on the basis
of the applicable floor or minimum price over the remaining term of such
Eligible Timber Agreements), whether title to such underlying Timber transfers
immediately, as under a timber deed, or at the time such Timber is harvested,
plus (b) an amount equal to sixty percent (60.0%) of the Value of Merchantable
Timber. The Borrowing Base advance rate percentage applicable under clause (b),
above, shall be reduced incrementally and automatically by two percent (2.0%)
on each anniversary of the Closing Date (i.e., to 58% on the first
6.
<PAGE> 17
anniversary of the Closing, 56% on the second anniversary, 54% on the third
anniversary, and so on).
"Borrowing Base Availability" means, as of any date of determination,
an amount equal to the Borrowing Base minus Funded Debt (including, without
limitation, all outstanding Loans and Pari Passu Debt).
"Borrowing Base Certificate" means a certificate signed by the chief
financial officer of each Borrower, substantially in the form set forth in
EXHIBIT C, completed with appropriate insertions.
"Business" means the acquisition, ownership, management and harvesting
of Timber and activities incidental thereto.
"Business Day" means any day other than a Saturday, Sunday or other
day on which banking institutions in the States of Illinois, New York,
Louisiana, Oregon or Washington are authorized or required by law or other
governmental action to close, except that if any determination of a "Business
Day" shall relate to a LIBOR Loan, the term "Business Day" shall also mean a
day on which dealings are carried on in the London interbank market.
"Canal" means Canal Forest Resources, Inc.
"Capital Expenditures" means all expenditures for any fixed assets or
improvements or for replacements, substitutions or additions thereto, that have
a useful life of more than one (1) year and which are required to be
capitalized under GAAP.
"Capital Lease Obligation" means, with respect to any capital lease,
the amount of the obligation of the lessee thereunder that, in accordance with
GAAP, would appear on a balance sheet of such Person in respect of such Capital
Lease or otherwise be disclosed in a note to such balance sheet.
"Cash Equivalents" means:
(A) securities issued or unconditionally guaranteed or
insured by the United States Government or any agency or any State thereof and
backed by the full faith and credit of the United States or such State having
maturities of not more than one (1) year from the date of acquisition;
(B) certificates of deposit, time deposits, Eurodollar
time deposits, repurchase agreements, reverse repurchase agreements or bankers'
acceptances, having in each case a tenor of not more than one (1) year, issued
by any Lender, or by any nationally or state chartered commercial bank or any
branch or agency of a foreign bank licensed to conduct business in the United
States having combined capital and surplus of not less than $100,000,000 whose
short term securities are rated at least A-1 by Standard & Poor's Rating Group
and P-1 by Moody's Investors Service, Inc.; and
7.
<PAGE> 18
(C) commercial paper of an issuer rated at least A-1 by
Standard & Poor's Rating Group or P-1 by Moody's Investors Service, Inc. and in
either case having a tenor of not more than two hundred and seventy (270) days.
"Change of Control" means any of (a) STT shall cease to own of record
and beneficially at least fifty-one (51.0%) of the aggregate Partnership Units
(as defined in and determined pursuant to the STP Partnership Agreement) in
STP, (b) STOC shall cease to be the sole general partner of the STP, (c) STT
shall cease to own of record and beneficially one hundred percent (100.0%) of
the outstanding shares of STOC and (d) STP shall cease to be the sole member of
Pioneer.
"Charges" means all federal, state, county, parish, city, municipal,
local, foreign or other governmental taxes, levies, assessments, charges or
claims, in each case then due and payable, upon or relating to (a) the
Collateral, (b) the Loans, (c) each Borrower's employees, payroll, income or
gross receipts, (d) each Borrower's ownership or use of any of its Properties
or assets or (e) any other aspect of each Borrower's business.
"Closing" means the time at which each of the conditions precedent set
forth in SECTION 4.1 shall have been duly satisfied by the Borrowers, as
determined by the Lenders, in their discretion.
"Closing Date" means the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations adopted thereunder.
"Collateral" means all Property and interests in Property, and all
proceeds thereof, including the Property covered by the Collateral Documents,
now existing or hereafter acquired, that may at any time be or become subject
to a Lien granted or created in favor of the Collateral Agent, for the benefit
of itself and the Lenders, to secure the full and complete payment and
performance of each Borrower's Obligations under this Agreement and under the
other Loan Documents.
"Collateral Agency Agreement" means that Collateral Agency Agreement
dated as of the date of this Agreement by and among the Collateral Agent and
the Lenders and such Pari Passu Lenders as may hereafter become a party thereto
by executing a joinder agreement in the form of Exhibit A to the Collateral
Agency Agreement.
"Collateral Agent" means ABN AMRO, not when acting in its individual
capacity, but solely when acting in its capacity as Collateral Agent under the
Collateral Agency Agreement or any of the other Collateral Documents, and any
successor Collateral Agent appointed pursuant to Section 2.8 of the Collateral
Agency Agreement.
"Collateral Documents" means, collectively, (a) the Timberlands
Mortgages, the Security Agreements, the Financing Statements and such other
agreements, assignments, documents and instruments (other than and expressly
excluding the Pledge Documents) from time to time executed and delivered by
either Borrower granting, assigning or transferring or otherwise evidencing or
relating to any Lien granted, assigned or transferred to the Collateral
8.
<PAGE> 19
Agent pursuant to or in connection with the transactions contemplated by this
Agreement and (b) any amendments, supplements, modifications, renewals,
restatements, replacements, consolidations, substitutions and extensions of any
of the foregoing.
"Commitment" means, as to each Lender, the amount set forth on
SCHEDULE 1 next to such Lender's name as its Revolving Loan Commitment or its
Term Loan Commitment.
"Commitment Percentage" means, as to any Lender's Term Loan
Commitment, such Lender's Term Commitment Percentage, and as to any Lender's
Revolving Loan Commitment, such Lender's Revolving Commitment Percentage.
"Compliance Certificate" means a certificate signed by the chief
financial officer of each Borrower, substantially in the form set forth in
EXHIBIT D, with such changes therein as the Administrative Agent may from time
to time reasonably request for the purpose of having such certificate disclose
the matters certified therein and the method of computation thereof.
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including any such obligation directly or indirectly guaranteed, endorsed
(otherwise than for collection or deposit in the ordinary course of business),
co-made or discounted or sold with recourse by that Person, or in respect of
which that Person is otherwise directly or indirectly liable, including any
such obligation for which that Person is in effect liable through any agreement
(contingent or otherwise) (a) to purchase, repurchase or otherwise acquire such
primary obligations or any property constituting direct or indirect security
therefor, or (b) to advance or provide funds (i) for the payment or discharge
of any such primary obligation (whether in the form of loans, advances, capital
stock purchases, capital contributions or otherwise), or (ii) to maintain
working capital or equity capital of the primary obligor or otherwise to
maintain the net worth or solvency or any balance sheet item, level of income
or financial condition of the primary obligor, or (c) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment
of such primary obligation, or (d) otherwise to assure or hold harmless the
holder of any such primary obligation against loss in respect thereof, or (e)
to make payment for any products, materials or supplies or for any
transportation, services or lease regardless of the non-delivery or
non-furnishing thereof, in any such case if the purpose or intent of such
agreement is to provide assurance that such obligation will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such obligation will be protected (in whole or in part)
against loss in respect thereof. The amount of any Contingent Obligation shall
be deemed to be an amount equal to the stated or determined amount of the
primary obligation in respect of which such Contingent Obligation is made or,
if not stated or determinable, the maximum reasonably anticipated liability in
respect thereof as determined by such Person in good faith; provided, however,
that such amount shall not in any event exceed the maximum amount of the
obligations under the guaranty or other support arrangement.
"Continuation Date" means any date on which either Borrower elects to
continue a LIBOR Loan into another Interest Period.
9.
<PAGE> 20
"Conversion Date" means any date on which either Borrower elects to
convert a Base Rate Loan to a LIBOR Loan or a LIBOR Loan to a Base Rate Loan.
"Cutting Rights Agreements" means all timber deeds, timber leases,
timber mortgages, cutting rights agreements and other agreements, contracts,
arrangements or other contractual obligations, whether now existing or
hereafter entered into, whereby either Borrower or its predecessors in interest
have granted, grant or will grant to third Persons the right to cut, harvest or
otherwise remove Timber from the Timberlands or any other real property owned
or leased by such Borrower.
"December 1998 STP Valuation" means that Bel-Quatre Quarterly Value
Update dated February 5, 1999 prepared by Canal and addressed to ABN AMRO
stating a valuation of the Timberlands and other Land owned by STP located in
Louisiana as of December 31, 1998.
"Default" means any event or circumstance which, with the giving of
notice, the lapse of time, or both, would (if not cured or otherwise remedied
during such time) constitute an Event of Default.
"Default Rate" has the meaning set forth in SECTION 2.4(C).
"Demers Group" has the meaning set forth in RECITAL A.
"Designated Deposit Account" means the deposit account designated by
each Borrower from time to time by written notice to the Administrative Agent,
for the purpose of receiving the disbursement of Loans, which designation shall
be subject to the Administrative Agent's prior written approval.
"Designation of Responsible Persons" means a separate Designation of
Responsible Persons dated the date of this Agreement, executed by an authorized
officer of each Borrower, substantially in the form of EXHIBIT F, identifying
the officers of such Borrower as having authority to request, convert or
continue Loans hereunder.
"Disclosure Schedule" means SCHEDULE 2.
"Disposition" means the sale, lease, conveyance or other disposition
by either Borrower of any of its respective Property or other assets in a
single transaction or related series of transactions.
"Dollars," "dollars" and "$" each mean lawful money of the United
States of America.
"Domestic Lending Office" means, with respect to each Lender, the
office of that Lender designated as such in the signature pages hereto or such
other office of the Lender as it may from time to time specify to the Borrowers
and the Administrative Agent.
"Due Inquiry" means any and all inquiry, investigation and analysis
which a prudent Person would undertake and complete with diligence with the
intent of coming to an understanding appropriate to the scope of importance of
the subject to which the inquiry relates.
10.
<PAGE> 21
"EBITDDA" means, as calculated for STP, on a consolidated basis
(including Pioneer), for any period as of any date of determination, the sum of
(a) Net Income, plus (b) all amounts treated as expenses for depreciation and
the amortization of intangibles of any kind to the extent included in the
determination of Net Income, plus (c) all amounts treated as expenses for the
depletion of Timber from the Timberlands owned by STP and its consolidated
Subsidiaries, plus (d) Net Interest Expense to the extent included in the
determination of Net Income, plus (e) net taxes on income attributable to the
business of STP and its Subsidiaries (including Pioneer).
"Effective Amount" means with respect to any Loans on any date, the
aggregate outstanding principal amount thereof after giving effect to any
borrowing and prepayments or repayments thereof occurring on such date.
"Eligible Assignee" means (a) a commercial bank organized under the
laws of the United States, or any State thereof, and having combined capital
and surplus of at least $100,000,000; (b) a commercial bank organized under the
laws of any other country which is a member of the Organization for Economic
Cooperation and Development ("OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least $100,000,000;
provided, however, that such bank is acting through a branch or agency located
in the country in which it is organized or another country which is also a
member of the OECD or the Cayman Islands; (c) the central bank of any country
which is a member of the OECD; (d) a finance company or other financial
institution or fund (whether a corporation, partnership, trust or other entity)
that is engaged in making, purchasing or otherwise investing in commercial
loans in the ordinary course of its business and having a combined capital and
surplus of at least $100,000,000; (e) an insurance company organized under the
laws of the United States, or any state thereof, and having a combined capital
and surplus of at least $100,000,000; (f) any Lender party to this Agreement;
(g) any Lender Affiliate and (h) any other Person approved by the
Administrative Agent and each Borrower, such approval not to be unreasonably
withheld; provided, however, that (1) each Borrower's approval shall not be
required so long as an Event of Default has occurred and is continuing and (ii)
an Affiliate of either Borrower shall not qualify as an Eligible Assignee.
"Eligible Timber Agreement" means a Cutting Rights Agreement or a
Timber Sales Agreement:
(A) which is entered into by either Borrower with a
Person (other than (i) an Affiliate of such Borrower or (ii) a Governmental
Authority) having a minimum senior unsecured rating by Moody's Services, Inc.
of Baa3 or Standard & Poor's Corporation of BBB-;
(B) which is subject to the Collateral Agent's perfected
fully enforceable first priority Lien and no other Lien except a Permitted
Lien;
(C) which includes annual or quarterly volume purchase
obligations (based on Fiscal Years or Fiscal Quarters) for the amount of Timber
to be cut or harvested, but only to the extent that such volume requirements
remain to be harvested (i) in respect of agreements with annual requirements,
for the Fiscal Year in which the date of determination is being made and the
Fiscal Year immediately subsequent to such current Fiscal Year, or (ii) in
respect of agreements with quarterly requirements, for the Fiscal Quarter in
which the date of determination
11.
<PAGE> 22
is being made and the seven (7) Fiscal Quarters immediately and serially
subsequent to such current Fiscal Quarter (but, in any case, without inclusion
of possible extensions of such term of up to an aggregate of six (6) months on
account of force majeure events);
(D) as and to the extent to which the contract price
remains unpaid or outstanding and title to the Timber subject to such Cutting
Rights Agreement or Timber Sale Agreement has not been transferred from either
Borrower;
(E) which has a fixed floor or minimum price for Timber
to be cut or harvested;
(F) as to which the Lenders' Forestry Consultants have
confirmed the volume estimate;
(G) as to which the other Person party to such Cutting
Rights Agreement or Timber Sales Agreement has not disputed liability;
(H) as to which the other Person party to such Cutting
Rights Agreement or Timber Sales Agreement has not commenced a voluntary
Insolvency Proceeding or had an order for relief or similar order or decree has
been entered in an involuntary Insolvency Proceeding in respect of such Person;
and
(I) as to which a copy of which has been furnished to
and is reasonably acceptable to the Administrative Agent.
"Employee Benefit Plan" means any Pension Plan and any employee
welfare benefit plan, as defined in Section 3(1) of ERISA, that is maintained
for the employees of any Person or any ERISA Affiliate of such Person.
"Environmental Indemnity" means the Environmental Indemnity dated as
of the date of this Agreement, executed and delivered by the Borrowers and STT,
jointly and severally and in solido, in favor of and to each of the Lenders and
the Administrative Agent.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
regulations promulgated thereunder.
"ERISA Affiliate" means, as applied to any Person, any trade or
business (whether or not incorporated) under common control with either
Borrower within the meaning of Section 414(b) or (c) of the Code (and Sections
414(m) and (o) of the Code for purposes of provisions relating to Section 412
of the Code).
"ERISA Event" means (a) a Reportable Event with respect to a Pension
Plan; (b) a withdrawal by either Borrower or any ERISA Affiliate from a Pension
Plan subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation
of operations which is treated as such a withdrawal under Section 4062(e) of
ERISA; (c) a complete or partial withdrawal by such Borrower or any ERISA
Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan
is in reorganization; (d) the filing of a notice of intent to terminate, the
treatment of a Plan amendment
12.
<PAGE> 23
as a termination under Section 4041 or 4041A of ERISA, or the commencement of
proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e)
an event or condition which might reasonably be expected to constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the
imposition of any liability under Title IV of ERISA, other than PBGC premiums
due but not delinquent under Section 4007 of ERISA, upon such Borrower or any
ERISA Affiliate.
"Escrow Agent" means Fidelity National Title Insurance Company.
"Escrow Agreement" means that Escrow Agreement dated prior to the
Closing Date, executed by the Escrow Agent, each Borrower, the Administrative
Agent, the Collateral Agent, ABN AMRO, as the agent for the Lenders in respect
of the Existing STP Debt, and First Union National Bank, as the agent for the
Lenders in respect of the Existing Pioneer Debt, setting forth, among other
things, the mechanics and instructions to effect the due recording in the
recording office of the applicable Governmental Authorities of all
reconveyances of timber mortgages and UCC financing statements securing the
Existing STP Debt, all timber deeds of trust and UCC financing statements
securing the Existing Pioneer Debt, the Timberlands Mortgages, the Financing
Statements, requests for notices and other documents to be recorded of record.
"Eurodollar Reserve Percentage" means the reserve percentage
(expressed as a decimal, rounded upward to the nearest 1/100th of one percent
(0.01%)) in effect on the date LIBOR for such Interest Period is determined
(whether or not applicable to any Lender) under regulations issued from time to
time by the Federal Reserve Board for determining the maximum reserve
requirement (including any emergency, supplemental or other marginal reserve
requirement) with respect to Eurocurrency funding (currently referred to as
"Eurocurrency liabilities") having a term comparable to such Interest Period.
"Event of Default" means any of the events or circumstances set forth
in SECTION 10.1.
"Event of Loss" means, with respect to any Property, any of the
following: (a) any material loss, destruction or damage of such Property,
including any destruction of Timber due to fire, disease or infestation, or (b)
any actual condemnation, seizure or taking, by exercise of the power of eminent
domain or otherwise, of such Property, or confiscation of such Property or the
requisition of the use of such Property to the extent compensation is paid for
such loss, whether under an insurance policy or otherwise.
"Existing Pioneer Debt" means all outstanding liabilities or
obligations, including, but not limited to, outstanding principal, accrued and
unpaid interest, the stated amount of issued and undrawn letters of credit,
amounts owing in respect of drawn and unreimbursed letters of credit, fees,
expenses and costs, in each case owing or existing as of the Closing Date under
or in respect of that Replacement Credit Agreement dated as of October 9, 1998,
as amended through the Closing Date, among Pioneer, the banks, financial
institutions and other institutional lenders party thereto and First Union
National Bank, as the administrative agent for the lenders and letter of credit
issuer thereunder.
13.
<PAGE> 24
"Existing STP Debt" means all outstanding liabilities or obligations,
including, but not limited to, outstanding principal, accrued and unpaid
interest, fees, expenses and costs, in each case owing or existing as of the
Closing Date under or in respect of that Loan Agreement dated as of April 27,
1998, as amended through the Closing Date, among STP, the banks, financial
institutions and other institutional lenders party thereto and ABN AMRO, as the
agent for the lenders thereunder.
"Existing STT Debt" means all outstanding liabilities or obligations,
including, but not limited to, outstanding principal, accrued and unpaid
interest, fees, expenses and costs, in each case owing or existing as of the
Closing Date under or in respect of that Bridge Loan Agreement dated as of
April 27, 1998, as amended through the Closing Date, among STT, the banks,
financial institutions and other institutional lenders party thereto and ABN
AMRO, as the agent for the lenders thereunder.
"Existing STTII Debt" means all outstanding liabilities or
obligations, including, but not limited to, outstanding principal, accrued and
unpaid interest, fees, expenses and costs, in each case owing or existing as of
the Closing Date under or in respect of that Bridge Loan Agreement dated as of
October 9, 1998, as amended through the Closing Date, among STTII, the banks,
financial institutions and other institutional lenders party thereto and ABN
AMRO, as the administrative agent for the lenders thereunder.
"Federal Funds Rate" means, for any period, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Board (including any such
successor, "H.15(519)") for such day opposite the caption "Federal Funds
(Effective)". If on any relevant day such rate is not yet published in
H.15(519), the rate for such day will be the rate set forth in the daily
statistical release designated as the Composite 3:30 p.m. Quotations for U.S.
Government Securities, or any successor publication, published by the Federal
Reserve Bank of New York (including any such successor, the "Composite 3:30
p.m. Quotation") for such day under the caption "Federal Funds Effective Rate".
If on any relevant day the appropriate rate for such previous day is not yet
published in either H.15(519) or the Composite 3:30 p.m. Quotation, the rate
for such day will be the arithmetic mean of the rates for the last transaction
in overnight Federal funds arranged prior to 9:00 a.m., New York Time, on that
day by each of three leading brokers of Federal funds transactions in New York
City selected by the Administrative Agent.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System or any successor thereto.
"Financing Statements" means the UCC-1 financing statements (including
UCC-1F farm product forms for Louisiana and ESF-1 farm product forms and UCC-1A
real property forms for Oregon) executed by STP or Pioneer, as the case may be,
as debtor, and the Collateral Agent, as secured party, pursuant to the
Collateral Documents, and the UCC-1 financing statements executed by STP, STT
and STOC, as the case may be, and the Administrative Agent, as secured party,
pursuant to the Pledge Documents, including a description of the personal
property Collateral granted or pledged by STP, Pioneer, STT and STOC, as the
case may be, to the Collateral Agent or the Administrative Agent, as the case
may be, as security for the Obligations (and in the case of farm product and
fixture filings, a legal description of the real property where
14.
<PAGE> 25
the timber or fixtures are located), which Financing Statements shall
concurrent with the Closing be caused to be filed with the Governmental
Authorities indicated on SCHEDULE 3.
"Fiscal Quarter" means each fiscal quarter of each Borrower ending on
each March 31, June 30, September 30 and December 31.
"Fiscal Year" means each fiscal year of each Borrower or ending on
each December 31.
"Fixed Charge Coverage Ratio" means, as calculated quarterly as of the
last day of each Fiscal Quarter on a rolling four (4) Fiscal Quarter basis, the
ratio of (a) EBITDDA to (b) Fixed Charges.
"Fixed Charges" means, as calculated for STP, on a consolidated basis
(including Pioneer), for any period as of any date of determination, the sum of
(a) Net Interest Expense during such period, plus (b) all distributions made by
STP, including Permitted STP Tax Distributions and Permitted General
Distributions, during such period, plus (c) Capital Expenditures, other than
Acquisitions permitted hereunder, made during such period.
"Form 1001" has the meaning set forth in SECTION 3.1(G)(I)(A).
"Form 4224" has the meaning set forth in SECTION 3.1(G)(I)(A).
"Form W-8" has the meaning set forth in SECTION 3.1(G)(II)(A).
"Funded Debt" means, as calculated for STP on a consolidated basis
(including Pioneer) as of any date of determination, the total amount of all
interest bearing Indebtedness (including all issued and undrawn letters of
credit), which Indebtedness shall include the principal amount outstanding
under all Loans advanced by the Lenders hereunder, but shall specifically
exclude Capital Lease Obligations.
"Funding Date" means with respect to any proposed Borrowing hereunder,
the date funds are advanced to either Borrower for any Loan.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other Person as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"Governmental Authority" means (a) any foreign, federal, state,
county, parish or municipal government, or political subdivision thereof, (b)
any governmental or quasi-governmental agency, authority, board, bureau,
commission, department, instrumentality or public body, (c) any court or
administrative tribunal or (d) with respect to any Person, any arbitration
tribunal or other non-governmental authority to whose jurisdiction that Person
has consented.
15.
<PAGE> 26
"Gross Interest Expense" means, as calculated for STP, on a
consolidated basis (including Pioneer), for any period as at any date of
determination, interest expense for such period (including all commissions,
discounts, fees and other charges under letters of credit and similar
instruments and under any Rate Contract) classified and accounted for in
accordance with GAAP.
"Harvest Plan" means the ten (10) year harvest plan of each Borrower
for the harvesting and sale of Timber and stumpage, as amended or modified from
time to time with the approval of the Administrative Agent.
"Harvesting Contracts" means all agreements, contracts or other
contractual obligations, whether now existing or hereafter entered into,
whereby third Persons have granted or will grant to either Borrower the right
to cut, harvest or otherwise remove Timber from real property other than the
Timberlands or other Land owned by such Borrower and all other rights of either
Borrower to cut, harvest or otherwise remove Timber from real property other
than the Timberlands or other Land owned by such Borrower.
"Indebtedness" means, as to any Person, (a) all indebtedness of such
Person for borrowed money, including, without limitation, all amounts
outstanding under this Agreement and any of the other Loan Documents, (b) all
capital leases of such Person (but excluding any operating leases), (c) to the
extent of the outstanding Indebtedness thereunder, all obligations of such
Person that are evidenced by a promissory note or other instrument representing
an extension of credit to such Person, whether or not for borrowed money, (d)
all obligations of such Person for the deferred purchase price of Property or
services (other than trade or other accounts payable in the ordinary course of
business in accordance with customary industry terms), (e) all obligations of
such Person of the nature described in clauses (a), (b), (c) or (d), above, and
not otherwise included therein that is secured by a Lien on assets of such
Person, whether or not that Person has assumed such obligation or whether or
not such obligation is non-recourse to the credit of such Person, but only to
the extent of the fair market value of the assets so subject to the Lien, (f)
all obligations of such Person arising under acceptance facilities or under
facilities for the discount of accounts receivable of such Person, (g) all
obligations of such Person to reimburse the issuer of any letter of credit
issued for the account of such Person, whether drawn or undrawn, (h) all
obligations of such Person to a counterparty under any Rate Contract and (i)
all Contingent Obligations of such Person.
"Indemnified Matters" has the meaning set forth in SECTION 12.5.
"Indemnitees" has the meaning set forth in SECTION 12.5.
"Initial Period" means the period from the Closing Date to, but not
including, the date that is the first Business Day to occur six months after
the Closing Date.
"Insolvency Proceeding" means (a) any case, action or proceeding
before any court or other Governmental Authority relating to bankruptcy,
reorganization, insolvency, liquidation, receivership, dissolution, winding-up
or relief of debtors, or (b) any general assignment for the benefit of
creditors, composition, marshalling of assets for creditors or other, similar
arrangement in respect of its creditors generally or any substantial portion of
its creditors, in each
16.
<PAGE> 27
of case (a) and (b) undertaken under federal, state or foreign law, including
the Bankruptcy Code.
"Intercreditor Agent" means ABN AMRO, not when acting in its
individual capacity, but solely when acting in its capacity as Intercreditor
Agent under the Intercreditor Agreement, and any successor Intercreditor Agent
appointed pursuant to Section 6.9 of the Intercreditor Agreement.
"Intercreditor Agreement" means that Intercreditor Agreement dated as
of the date of this Agreement by and among the Collateral Agent and the Lenders
and such Pari Passu Lenders as may hereafter become a party thereto by
executing a joinder agreement in the form of Exhibit A to the Intercreditor
Agreement.
"Interest Coverage Ratio" means, as calculated quarterly for STP, on a
consolidated basis (i including Pioneer), as of the last day of each Fiscal
Quarter on a rolling four (4) Fiscal Quarter basis, the ratio of (a) EBITDDA to
(b) Net Interest Expense.
"Interest Differential" means, with respect to any prepayment of a
LIBOR Loan on a day other than an Interest Payment Date on which such LIBOR
Loan matures, the difference between (a) the per annum interest rate payable
with respect to such LIBOR Loan as of the date of the prepayment and (b) the
Adjusted LIBOR on, or as near as practicable to, the date of the prepayment for
a LIBOR Loan commencing on such date and ending on the last day of the
applicable Interest Period. The determination of the Interest Differential by
the Administrative Agent shall be conclusive in the absence of manifest error.
"Interest Payment Date" means, with respect to any LIBOR Loan, the
last day of each Interest Period applicable to such Loan and, with respect to
Base Rate Loans, the last Business Day of each Fiscal Quarter, and each date a
Base Rate Loan is converted into a LIBOR Loan; provided, however, that if any
Interest Period for a LIBOR Loan exceeds three (3) months, interest shall also
be paid on the date which falls three (3) months after the beginning of such
Interest Period.
"Interest Period" means, as to any LIBOR Loan, the period commencing
on the date of such LIBOR Loan and ending with respect to LIBOR Loans, on the
numerically corresponding day (or, if there is no numerically corresponding
day, on the last day) in the calendar month that is one (1), two (2), three (3)
or six (6) months thereafter, in each case as the applicable Borrower may
elect; provided, however, that (a) no Interest Period with respect to any LIBOR
Loan shall end later than the Maturity Date, (b) if an Interest Period would
end on a day that is not a Business Day, such Interest Period shall be extended
to the next succeeding Business Day unless such next succeeding Business Day
would fall in the next calendar month, in which case such Interest Period shall
end on the immediately preceding Business Day, and (c) interest shall accrue
from and including the first Business Day of an Interest Period to but
excluding the last Business Day of such Interest Period.
"Interest Rate Determination Date" means each date for calculating the
LIBOR for purposes of determining the interest rate in respect of an Interest
Period. The Interest Rate
17.
<PAGE> 28
Determination Date shall be the second Business Day prior to the first day of
the related Interest Period for such LIBOR Loan.
"Investment" means, when used in connection with any Person, any
investment by or of that Person, whether by means of purchase or other
acquisition of securities of any other Person or by means of loan, advance,
capital contribution, guaranty or other debt or equity participation or
interest, or otherwise, in any other Person, including any partnership, joint
venture or limited liability company interests of such Person in any other
Person. The amount of any Investment shall be the original principal or capital
amount thereof less all returns of principal or equity thereon (and without
adjustment by reason of the financial condition of such other Person) and
shall, if made by the transfer or exchange of Property other than cash, be
deemed to have been made in an original principal or capital amount equal to
the fair market value of such Property.
"Investment Company Act" means the Investment Company Act of 1940, as
amended (15 U.S.C.ss. 80a-1 et seq.).
"IPO" means a initial public offering of shares of the common stock of
STT pursuant to the STT Registration Statement which satisfies the following
two (2) conditions:
(A) the STT Registration Statement shall have been
declared effective by the SEC without amendment subsequent to Amendment No. 1
filed with the SEC on March 26, 1999, ("Amendment No. 1") other than for
amendments: (1) the substance of which has not been determined by the
Administrative Agent to reflect a Material Adverse Change or a material adverse
difference in information from that set forth in the Registration Statement as
amended through Amendment No. 1, (2) amendments necessary to reflect final
pricing and underwriting information, (3) nonmaterial post-effective amendments
(or supplements to the related prospectus) and (4) such other amendments,
changes, modifications or supplements as shall be consented to by the
Administrative Agent; and
(B) the IPO shall close on or before May 31, 1999,
unless such date is extended by the written consent of the Lenders.
"IRS" means the Internal Revenue Service and any Governmental
Authority succeeding to any of its principal functions under the Code.
"Land" means the real property owned of record by either Borrower.
"Lender Affiliate" means a Person engaged primarily in the business of
commercial banking and that is an Affiliate of a Lender or of a Person of which
a Lender is an Affiliate.
"Lenders" means the banks, financial institutions or other
institutional lenders which have executed signature pages to this Agreement and
such other Assignees, banks, financial institutions or other institutional
lenders as shall hereafter execute and deliver an Assignment and Acceptance
with respect to all or any portion of the Commitments and the Loans advanced
and maintained pursuant to the Commitments, in each case pursuant to and in
accordance with SECTION 12.11.
18.
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"Lenders' Forestry Consultants" means such forest management
consultants as may be engaged by the Lenders for the purposes set forth in this
Agreement, which consultants may be the same independent forest management
consultants as engaged by the Borrowers.
"Lending Office" means, with respect to any Lender, the office or
offices of the Lender specified as its "Domestic Lending Office" opposite its
name on the applicable signature page hereto, or such other office or offices
of the Lender as it may from time to time notify the Borrowers and the
Administrative Agent.
"Leverage Ratio" means, as calculated quarterly as of the last day of
each Fiscal Quarter on a rolling four (4) Fiscal Quarter basis, the ratio of
(a) Funded Debt to (b) EBITDDA.
"LIBOR" means, for any Interest Rate Determination Date with respect
to an Interest Period for any Loan to be made, continued as or converted into a
LIBOR Loan, the London interbank offered rate, rounded upward to the nearest
1/16th of one percent (0.0625%), equal to the offered rate for deposits in
Dollars for a period equal to such Interest Period, commencing on the first day
of such Interest Period, which appears on Telerate Page 3750 (or such other
page as may replace Telerate Page 3750 on that service or any successor service
for the purpose of displaying London interbank offered rates of major banks) as
of 11:00 a.m., London Time, on the day that is two (2) Business Days prior to
the first day of such Interest Period. If the LIBOR Rate for an Interest Period
cannot be determined pursuant to the preceding sentence, then the LIBOR Rate
for such Interest Period shall be determined on the basis of the rates at which
deposits in Dollars are offered to the Reference Lender at approximately 11:00
a.m. London Time on the day that is two (2) Business Days prior to the first
day of such Interest Period, and on an amount approximately equal to the
principal amount of the Reference Lender's LIBOR Loans to which such Interest
Period is applicable. The Administrative Agent will request the principal
London office of the Reference Lender to provide a quotation of its rate.
"LIBOR Loan" means a Loan that bears interest based on Adjusted LIBOR.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
assignment for security, security interest, encumbrance, levy, lien or charge
of any kind, whether voluntarily incurred or arising by operation of law or
otherwise, against any Property, including any agreement to grant any of the
foregoing, any conditional sale or other title retention agreement, any lease
in the nature of a security interest.
"Loan" means a Term Loan or a Revolving Loan, which Loan may be in the
form of either a Base Rate Loan or a LIBOR Loan, depending upon the context.
"Loan Documents" means this Agreement, the Notes, the Collateral
Documents, the Pledge Documents, the Collateral Agency Agreement, the
Intercreditor Agreement, the Environmental Indemnity, the Arrangers/Agent Fee
Letter, and any and all other agreements (including any Rate Contract),
documents and instruments executed and delivered by or on behalf of or in
support of either Borrower to any Lender or the Administrative Agent or their
respective authorized designee evidencing or otherwise relating to the Loans as
the same may from time to time be amended, modified, supplemented, extended or
renewed.
"LTP" shall have the meaning assigned to it in RECITAL B.
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"Mach One" has the meaning set forth in RECITAL A.
"Mandatory Prepayment" means any mandatory prepayment of the principal
amount of Loans made or required to be made pursuant to SECTION 2.9.
"Margin Stock" means "margin stock" as defined in Regulation U adopted
by the Federal Reserve Board (12 C.F.R. Part 221).
"Margin Regulations" means, collectively, Regulations T, U and X
adopted by the Federal Reserve Board (12 C.F.R. Parts 220, 221 and 224,
respectively).
"Material Adverse Change" means any set of circumstances or events
which (a) has or could reasonably be expected to have any material adverse
effect whatsoever upon the validity or enforceability of any Loan Document, (b)
is or could reasonably be expected to be material and adverse to the condition
(financial or otherwise), properties, business or operations of either Borrower
or STT and its Subsidiaries taken as a whole, (c) impairs materially or could
reasonably be expected to impair materially the ability of either Borrower to
pay or perform its Obligations or to avoid an Event of Default, (d) impairs
materially or could reasonably be expected to impair materially the value or
priority of the Lien of the Collateral Agent, under the Collateral Documents,
or the Administrative Agent, under the Pledge Documents, in the Collateral or
(e) impairs materially or could reasonably be expected to impair materially the
ability of the Administrative Agent, the Collateral Agent or any Lender to
enforce any of its legal remedies pursuant to the Loan Documents.
"Maturity Date" means April 30, 2004.
"MBG" means Mason, Bruce & Girard, Inc.
"Merchantable Timber" means all standing trees consisting of
commercially exploitable species which are (a) located on Timberlands (i) owned
by either Borrower or (ii) owned by others under arrangements such that the
rights of either Borrower to sever and remove such trees is indefeasible and
superior to the rights of the owner of such Timberlands, (b) free of known
diseases or defects which would otherwise render such trees not commercially
exploitable, (c) not in a location where it is commercially unfeasible to
harvest the same and, at the time of determination, could be harvested in
compliance with all applicable Requirements of Law and (d) of a size and grade
such that the harvesting and sale of same could then be accomplished consistent
with all applicable Requirements of Law and sound silvicultural practices.
"Merger" has the meaning set forth in RECITAL C.
"Merger Agreement" means that certain Plan and Agreement of Merger
dated as of January 25, 1999, among STT, STTII, STOC, STTOC, STP and STPII,
pursuant to which STTII, STTOC and STPII are to merge into STP with STP being
the surviving entity, as the same may, from time to time prior to the Closing
Date, be amended, modified or supplemented.
"Merger Documents" means the Merger Agreement, together with all other
agreement, documents and instruments executed and delivered in connection with
and in furtherance of the Merger.
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"Multiemployer Plan" shall mean a "multiemployer plan", within the
meaning of Section 4001(a)(3) of ERISA, to which either Borrower or any ERISA
Affiliate makes, is making or is obligated to make contributions or, during the
preceding three (3) calendar years, has made, or been obligated to make,
contributions.
"Net Income" means, as calculated for STP, on a consolidated basis
(including Pioneer), for any period as at any date of determination, the net
income (or loss) of STP and its Subsidiaries for such period taken as a single
accounting period.
"Net Interest Expense" means, as calculated for STP, on a consolidated
basis (including Pioneer), for any period as at any date of determination, (a)
Gross Interest Expense, less (b) interest income for that period and Rate
Contract payments received.
"Net Issuance Proceeds" means, in respect of any issuance of equity,
cash proceeds or non-cash proceeds received or receivable in connection
therewith, net of reasonable out-of-pocket costs and expenses paid or incurred
in favor of any Person other than an Affiliate of STT or either Borrower, such
costs and expenses to be consistent with standard investment banking practices
for similar issuance.
"New Subsidiary" has the meaning set forth in SECTION 7.8.
"Non-Bank Lender Tax Certificate" has the meaning set forth in SECTION
3.1(G)(II)(A).
"Note" means a Term Note or a Revolving Note.
"Notice of Borrowing" means a notice given by either Borrower to the
Administrative Agent in accordance with SECTION 2.5, substantially in the form
of EXHIBIT B, with appropriate insertions.
"Notice of Conversion/Continuation" means a notice given by either
Borrower to the Administrative Agent in accordance with SECTION 2.6,
substantially in the form of EXHIBIT E, with appropriate insertions.
"Obligations" means all loans, advances, debts, liabilities and
obligations, for monetary amounts owing, in each case on a joint and several
basis, by each Borrower to the Lenders or the Administrative Agent, whether due
or to become due, matured or unmatured, liquidated or unliquidated, contingent
or non-contingent, and all covenants and duties regarding such amounts, of any
kind or nature, present or future, whether or not evidenced by any note,
agreement or other instrument, arising under or in respect of any of the Loan
Documents or under or in respect of any Rate Contract. This term includes,
without limitation, all principal, interest (including interest that accrues
after the commencement against either Borrower of any action under the
Bankruptcy Code), fees, including, without limitation, any and all arrangement
fees, loan fees, commitment fees, agent fees and any and all other fees,
expenses, costs or other sums (including Attorney Costs) chargeable to either
Borrower under any of the Loan Documents.
"October 1998 Pioneer Valuation" means that report dated October 3,
1998 prepared by MBG and addressed to ABN AMRO, NationsBank, N.A. and First
Union National Bank as to the Timberlands owned by Pioneer located in the
States of California, Oregon and Washington,
21.
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and as to the related merchantability criteria, Timber volumes, Timber pricing,
and harvest and operating projections.
"Operating Lease Obligations" means, with respect to any operating
lease, the amount of the obligations of the lessee thereunder that, in
accordance with GAAP, would appear on a balance sheet of such Person in respect
of such operating lease or otherwise be disclosed in a note to such balance
sheet.
"Opinion of Agent's Counsel (BJLLP)" means the favorable written legal
opinion of Ball Janik, LLP, special Oregon counsel to ABN AMRO in its capacity
as Administrative Agent and Collateral Agent, addressed to the Lenders, the
Administrative Agent and the Collateral Agent, as to certain matters relating
to the Collateral located in the State of Oregon.
"Opinion of Agent's Counsel (CG)" means the favorable written legal
opinion of Cooley Godward LLP, counsel to ABN AMRO in its capacity as
Administrative Agent and Collateral Agent, addressed to the Lenders, the
Administrative Agent and the Collateral Agent, as to certain matters relating
to the Collateral located in the States of California and Washington.
"Opinion of Agent's Counsel (SPW)" means the favorable written legal
opinion of Stone, Pigman, Walther, Wittmann & Hutchinson, LLP, special
Louisiana counsel to ABN AMRO in its capacity as Administrative Agent and
Collateral Agent, addressed to the Lenders, the Administrative Agent and the
Collateral Agent, as to certain matters relating to the Collateral located in
the State of Louisiana.
"Opinion of Borrowers' Counsel (SAB)" means the favorable written
legal opinion of Sutherland, Asbill & Brennan LLP, special counsel to the
Borrowers, STT and STOC addressed to the Lenders and the Administrative Agent.
"Ordinary Course of Business" means, in respect of any transaction
involving either Borrower, the ordinary course of such Borrower's business, as
conducted by such Borrower in accordance with past practice or, in the absence
of past practice, consistent with accepted prudent practices in the timber
industry and, in each case, undertaken by such Borrower in good faith and not
for purposes of evading any covenant or restriction in any Loan Document.
"Originating Lender" has the meaning set forth in SECTION 12.11(D).
"Other Taxes" has the meaning specified in SECTION 3.1(B).
"Over Advance" has the meaning set forth in SECTION 2.9.
"Pari Passu Debt" means Indebtedness of either Borrower as to which
each of the following conditions is satisfied:
(A) such Indebtedness is Funded Debt owed to a lender
which satisfies the eligibility requirements for Eligible Assignees under this
Agreement (each such bank, financial institution or institutional investors
being referred to herein as a "Pari Passu Lender");
22.
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(B) such Indebtedness is evidenced by definitive loan
documents which (i) do not require any payments of principal thereunder prior
to the Maturity Date (as such term is defined in this Agreement and is in
effect on the date such Pari Passu Debt is first incurred) and (ii) otherwise
do not contain terms, including terms relating to financial covenants,
operating covenants, events of defaults and remedies which are more restrictive
that the terms of this Agreement, as determined in advance by the
Administrative Agent in its reasonable discretion;
(C) the Collateral Agent shall have received a fully
executed joinder agreement in the form of Exhibit A attached to each of the
Collateral Agency Agreement and the Intercreditor Agreement, pursuant to which
the prospective Pari Passu Lender agrees to be bound by the Collateral Agency
Agreement and the Intercreditor Agreement and to be entitled and subject to all
the rights and obligations of a "Pool Lender" thereunder (as such term is
described and defined in the Collateral Agency Agreement and the Intercreditor
Agreement), including terms relating to the rights and duties of the Collateral
Agent, the Intercreditor Agent, Lien priority, Lien enforcement and permitted
payments and distributions; and
(D) each of the additional conditions set forth in
SECTION 8.5(B) shall have been satisfied.
"Pari Passu Lender" has the meaning set forth in clause (a) of the
definition of "Pari Passu Debt" in this SECTION 1.1.
"Participant" has the meaning set forth in SECTION 12.11(D).
"PBGC" means the Pension Benefit Guaranty Corporation, or any
Governmental Authority succeeding to any of its principal investors under
ERISA.
"Pension Plan" means a pension plan (as defined in Section 3(2) of
ERISA) subject to Title IV of ERISA which either Borrower sponsors, maintains,
or to which it makes, is making or is obligated to make contributions, or in
the case of multiple employer plan (as described in Section 4064(a) of ERISA)
has made contributions at any time during the immediately preceding five (5)
plan years.
"Permitted Asset Disposition" has the meaning set forth in SECTION
8.2(A).
"Permitted Distribution Payment Date" has the meaning set forth in
SECTION 8.10(C).
"Permitted General Distributions" has the meaning set forth in SECTION
8.10(C).
"Permitted Liens" has the meaning set forth in SECTION 8.1.
"Permitted Pioneer Tax Distributions" has the meaning set forth in
SECTION 8.10(D).
"Permitted STP Tax Distributions" has the meaning set forth in SECTION
8.10(B).
"Permitted Title Exceptions" means, collectively, all listed as
exceptions to title in the Pro Forma Title Policy, together with any other
exceptions to title that have been approved writing by the Administrative
Agent.
23.
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"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, business or other trust,
unincorporated organization, association, corporation, institution, public
benefit corporation, firm, joint stock company, estate, entity or Governmental
Authority.
"Pioneer" shall have the meaning set forth in the PREAMBLE.
"Pioneer Operating Agreement" means the Fourth Amended and Restated
Operating Agreement of Pioneer effective as of October 9, 1998.
"Plan" means an employee benefit plan (as defined in Section 3(3) of
ERISA) which either Borrower sponsors or maintains or to which such Borrower
makes, is making, or is obligated to make contributions and includes any
Pension Plan.
"Pledge Collateral" means all Property and interests in Property, and
all proceeds thereof, covered by the Pledge Documents, now existing or
hereafter acquired, that may at any time be or become subject to a Lien pledged
or created in favor of the Administrative Agent to secure the full and complete
payment and performance by STP of the Obligations, by STT of its obligations
under the STT Guaranty and Pledge Agreement or by STOC of its obligations under
the STOC Guaranty and Pledge Agreement.
"Pledge Documents" means, collectively, (a) the STP Pledge Agreement,
the STT Guaranty and Pledge Agreement and the STOC Guaranty and Pledge
Agreement and such other agreements, assignments, documents and instruments
from time to time executed and delivered by STP, STT, or STOC pledging,
granting or otherwise evidencing or relating to any Lien granted, assigned or
transferred to the Administrative Agent in (i) STP's record and beneficial
equity interest in Pioneer and in each other Person, whether a Subsidiary, a
joint venture or otherwise, in which STP may hereafter acquire an equity
interest, (ii) STT's record and beneficial equity interest in STP and STOC and
(iii) STOC's record and beneficial equity interest in STP, in each case
pursuant to or in connection with the transactions contemplated by this
Agreement and (b) any amendments, supplements, modifications, renewals,
restatements, replacements, consolidations, substitutions and extensions of any
of the foregoing.
"Property" means any interest in any kind of property or asset,
whether real, personal or mixed, whether tangible or intangible.
"Pro Forma Title Policy" means a pro forma ALTA lenders' policy of fee
title insurance, subject to a survey exception, insuring the first priority of
the Lien granted in favor of the Collateral Agent, with such endorsements as
the Collateral Agent shall reasonably require and subject only to the Permitted
Title Exceptions.
"Pro Rata Share" means, as to any Lender at any time, the percentage
equivalent (expressed as a decimal, rounded to the ninth decimal place) at such
time of the Effective Amount of such Lender's Loans divided by the Effective
Amount of all Loans, or if no Loans are outstanding, the percentage equivalent
(expressed as a decimal, rounded to the ninth decimal place) at such time of
such Lender's aggregate Commitments divided by the Aggregate Commitments or, if
the Commitments have expired or been terminated and all Loans repaid in full,
the percentage equivalent (expressed as a decimal, rounded to the ninth decimal
place) of
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the Effective Amount of such Lender's Loans divided by the aggregate Effective
Amount of all Loans immediately before such repayment in full.
"Public Utility Holding Company Act" means the Public Utility Holding
Company Act of 1935, as amended (15 U.S.C. ss. 79 et seq.).
"Rate Contract" means an interest rate or currency swap, cap or other
agreement or arrangement designed to provide protection against fluctuations in
interest or currency exchange rates.
"Reference Lender" means ABN AMRO.
"Replacement Lender" has the meaning set forth in SECTION 3.5.
"Reportable Event" means, any of the events set forth in Section
4043(c) of ERISA or the regulations thereunder, other than any such event for
which the 30-day notice requirement under ERISA has been waived in regulations
issued by the PBGC.
"Requesting Borrower" means either Borrower requesting a Loan pursuant
to ARTICLE II.
"Required Lenders" means any combination of Lenders whose combined Pro
Rata Share (and voting interest with respect thereto) of all amounts
outstanding under this Agreement, or, in the event there are no amounts
outstanding, the Aggregate Commitments, is greater than sixty-six and
two-thirds percent (66.67%) of all such amounts outstanding or the Aggregate
Commitments, as the case may be.
"Requirement of Law" means, as to any Person, any law (statutory or
common), treaty, rule, regulation, guideline or determination of an arbitrator
or of a Governmental Authority, in each case applicable to or binding upon the
Person or any of its Property or to which the Person or any of its Property is
subject.
"Responsible Person" means the Persons identified by each Borrower on
a Designation of Responsible Persons as having authority to request, convert or
continue Loans hereunder on behalf of such Borrower.
"Revolving Commitment Percentage" means, as to any Lender, the
percentage equivalent of such Lender's Revolving Loan Commitment divided by the
Aggregate Revolving Commitment.
"Revolving Loan" means a Loan advanced to Borrowers pursuant to
SECTION 2.1(B) by Lenders under their Revolving Loan Commitments according to
their respective Revolving Commitment Percentages.
"Revolving Loan Commitment" means, as to each Lender, the amount set
forth on SCHEDULE 1 next to such Lender's name as its Revolving Loan
Commitment.
"Revolving Note" means a promissory note dated the date of issuance,
executed by the Borrowers and payable to the order of a Lender in the stated
principal amount of such Lender's
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Revolving Loan Commitment, substantially in the form of EXHIBIT A-1, and any
and all replacement, extensions, substitutions and renewals of any such
promissory note.
"SEC" means the Securities and Exchange Commission and any successor
thereto.
"Security Agreements" means collectively, the Security Agreement
executed by STP, and the Security Agreement executed by Pioneer, each dated as
of the date of this Agreement in favor of the Collateral Agent.
"Solvent" means, as to any Person at any time, that (a) the fair value
of the Property of such Person is greater than the amount of such Person's
liabilities (including disputed, contingent and unliquidated liabilities) as
such value is established and liabilities evaluated for purposes of Section
101(31) of the Bankruptcy Code; (b) the present fair saleable value of the
Property of such Person is not less than the amount that will be required to
pay the probable liability of such Person on its debts as they become absolute
and matured; (c) such Person is able to pay its debts and other liabilities
(including disputed, contingent and unliquidated liabilities) as they mature in
the normal course of business; (d) such Person does not intend to, and does not
believe that it will, incur debts or liabilities beyond such Person's ability
to pay as such debts and liabilities mature; and (e) such Person is not engaged
in a business or a transaction for which such Person's property would
constitute unreasonably small capital.
"STOC" has the meaning set forth in RECITAL B.
"STOC Guaranty and Pledge Agreement" means the Guaranty and Pledge
Agreement dated as of the date of this Agreement, executed by STOC in favor of
the Administrative Agent.
"STP" shall have the meaning set forth in THE PREAMBLE.
"STP Partnership Agreement" means the First Amended and Restated
Agreement of Limited Partnership of STP dated April 23, 1998, as the same may,
subject to SECTION 8.4, from time to time be amended, modified, supplemented or
restated.
"STP Pledge Agreement" means the Pledge Agreement dated as of the date
of this Agreement, executed by STP in favor of the Administrative Agent.
"STPII" has the meaning set forth in RECITAL A.
"STT" shall have the meaning set forth in RECITAL B.
"STT Guaranty and Pledge Agreement" means the Guaranty and Pledge
Agreement dated as of the date of this Agreement, executed by STT in favor of
the Administrative Agent
"STT Registration Statement" means the Form S-11 registration
statement under the Securities Act of 1933 filed by STT with the SEC on January
27, 1999, as amended, changed, modified or supplemented through the closing of
the IPO, and as finally declared effective by the SEC.
"STTOC" has the meaning set forth in RECITAL A.
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"STTII" has the meaning set forth in RECITAL A.
"Subsidiary" of a Person means any corporation, association,
partnership, limited liability company, joint venture or other business entity
of which more than fifty percent (50.0%) of the voting stock or other equity
interests (in the case of Persons other than corporations), is owned or
controlled directly or indirectly by the Person, or one or more of the
Subsidiaries of the Person, or a combination thereof.
"Taxes" has the meaning set forth in SECTION 3.1(A).
"Term Commitment Percentage" means, as to any Lender, the percentage
equivalent of such Lender's Term Loan Commitment divided by the Aggregate Term
Commitment.
"Term Loan" means a Loan advanced to Borrowers pursuant to SECTION
2.1(A) by Lenders under their Term Loan Commitments.
"Term Loan Commitment" means, as to each Lender, the amount set forth
on SCHEDULE 1 next to such Lender's name as its Term Loan Commitment.
"Term Note" means a promissory note dated the date of issuance,
executed by the Borrowers and payable to the order of a Lender in the stated
principal amount of such Lender's Term Loan Commitment, substantially in the
form of EXHIBIT A-2, and any and all replacement, extensions, substitutions and
renewals of any such promissory note.
"Timber" means all trees, timber to be cut from the Land or otherwise,
timber, whether severed or unsevered and including standing and down timber,
stumps and cut timber remaining on the Land or otherwise, and logs, wood chips
and other forest products, whether now located on or hereafter planted or
growing in or on the Land or otherwise or now or hereafter removed from the
Land or otherwise for sale or other disposition.
"Timberlands" means real property suitable and principally used for
timber production.
"Timberlands Mortgages" means, collectively, (i) the separate
mortgages dated as of the date of this Agreement executed by STP, as mortgager,
in favor of the Collateral Agent, as mortgagee, and duly notarized, with
respect to the Timberlands owned by STP situated in the State of Louisiana, and
(ii) deeds of trust dated as of the date of this Agreement executed by Pioneer,
as trustor, in favor of Title Company, as trustee, for the benefit of the
Collateral Agent, as beneficiary, and duly notarized, with respect to the
Timberlands owned by Pioneer situated in the States of California, Oregon and
Washington, in each case caused to be recorded in the official records of such
jurisdiction, and following the Closing, shall include, at the Collateral
Agent's and the Lenders' discretion, following the satisfactory completion of
appropriate legal, environmental and other due diligence, such additional
mortgages or deeds of trust as may be executed by either Borrower in favor of
or for the benefit of the Collateral Agent with respect to the Acquisition of
additional Land by such Borrower, in each case in form and substance
satisfactory to the Collateral Agent and the Administrative Agent and duly
recorded in the official records of the appropriate jurisdiction in which such
acquired Land is situated.
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"Timber Sales Agreements" means all timber sales agreements, log sales
agreements, purchase orders, purchase and sale agreements and other contractual
obligations, whether now existing or hereafter entered into, whereby a
Borrower, as seller, is or may become obligated to cut, harvest or otherwise
remove Timber harvested from the Land or to otherwise obtain Timber and to
sell, exchange or deliver such Timber to third Persons.
"Title Company" means Fidelity National Title Insurance Company.
"Transferee" has the meaning specified in SECTION 12.11(E).
"UCC" means the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of Illinois; provided, however, in the event
that, by reason of mandatory provisions of law, any and all of the attachment,
perfection or priority of the Lien of the Administrative Agent, for the benefit
of the Lenders and the Administrative Agent, in and to the Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of Illinois, the term "UCC" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
hereof relating to such attachment, perfection or priority and for purposes of
definitions related to such provision.
"Unfunded Pension Liability" means the excess of a Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Plan's assets, determined in accordance with the assumptions used for funding
the Pension Plan pursuant to Section 412 of the Code for the applicable plan
year.
"Updated Merchantable Timber Valuation Report" has the meaning set
forth in SECTION 7.1(G)(II).
"Updated Pioneer Valuation" means the October 1998 Pioneer Valuation,
as the same shall have been updated by MBG through March 31, 1999, which update
shall be acceptable in form and substance to Administrative Agent in its sole
and absolute discretion.
"Updated STP Valuation" means the December 1998 STP Valuation, as the
same shall have been updated by Canal through March 31, 1999, which update
shall be acceptable in form and substance to Administrative Agent in its sole
and absolute discretion.
"Value of Merchantable Timber" means, as of any date of determination,
the aggregate value of the Merchantable Timber, subject to a first priority
Timberlands Mortgage in favor of the Collateral Agent insured under an ALTA
extended lenders policy of title insurance in favor or for the benefit of the
Collateral Agent, in a form and such coverage amounts and subject to such
limits and exceptions acceptable to the Administrative Agent and the Lenders,
as determined by the Applicable Merchantable Timber Valuation Report (exclusive
of any Timber subject (a) to an Eligible Timber Agreement or (b) to a Cutting
Rights Agreement or Timber Sales Agreement which would be an Eligible Timber
Agreement but for (and to the extent that) such Cutting Rights Agreement or
Timber Sales Agreement does not satisfy the condition set forth in CLAUSE (D)
of the definition of "Eligible Timber Agreement," in each case as of such
date), less the value of that portion of such Merchantable Timber which (i)
stands on Land which has been sold, conveyed or otherwise transferred by such
Borrower, (ii) has become subject to an Eligible Timber Agreement or (iii) has
suffered a casualty, in the reasonable discretion of the
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Administrative Agent, such that it no longer constitutes Merchantable Timber,
in each case since the date of the Applicable Merchantable Timber Valuation
Report; provided that in respect of any Borrowing to finance the Acquisition of
additional Timberlands and for the period extending through the date of the
delivery of the next Annual Merchantable Timber Valuation Report or Updated
Merchantable Timber Valuation Report, as applicable, there shall also be
included in "Value of Merchantable Timber" the value of the Merchantable Timber
on the Land to be acquired as part of such Acquisition as determined based on a
Merchantable Timber appraisal or valuation reviewed by Lenders' Forestry
Consultants and acceptable to the Administrative Agent, in each case to the
extent such Merchantable Timber (and the Land on which it stands) is made
subject to a first priority Timberlands Mortgage in favor of the Collateral
Agent insured under an ALTA extended lenders policy of title insurance in favor
or for the benefit of the Collateral Agent and the Lenders.
SECTION 1.2 OTHER INTERPRETIVE PROVISIONS.
(A) ACCOUNTING TERMS. Any accounting term used in this
Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given such term in accordance with GAAP, and all financial
data required to be submitted by this Agreement shall be prepared and computed,
unless otherwise specifically provided herein, in accordance with GAAP. That
certain terms or computations are explicitly modified by the phrase "in
accordance with GAAP" shall in no way be construed to limit the foregoing. In
the event that GAAP changes during the term of this Agreement such that the
covenants contained in ARTICLE IX would then be calculated in a different
manner or with different components, (a) the parties hereto agree to amend this
Agreement in such respects as are necessary to conform those covenants as
criteria for evaluating each Borrower's financial condition to substantially
the same criteria as were effective prior to such change in GAAP and (b) the
Borrowers shall be deemed to be in compliance with the covenants contained in
the aforesaid subsections during the sixty (60) day period following any such
change in GAAP if and to the extent that the Borrowers would have been in
compliance therewith under GAAP as in effect immediately prior to such change.
(B) OTHER TERMS. All other undefined terms contained in
this Agreement shall, unless the context indicates otherwise, have the meanings
provided for by the UCC to the extent the same are used or defined therein. The
words "herein," "hereof" and "hereunder" and other words of similar import
refer to this Agreement as a whole, including the Exhibits and Schedules
attached to this Agreement, all of which are by this reference incorporated
into this Agreement, and not to any particular provision of this Agreement. The
term "including" is not limiting and means "including, without limitation," and
"including but not limited to." The term "documents" includes any and all
instruments, documents, agreements, certificates, indentures, notices and other
writings, however evidenced. The term "or" is disjunctive; the term "and" is
conjunctive. The term "shall" is mandatory; the term "may" is permissive.
Wherever from the context it appears appropriate, each term stated in either
the singular or plural shall include the singular and plural, and pronouns
stated in the masculine, feminine or neuter gender shall include the masculine,
feminine and the neuter.
(C) PERFORMANCE; TIME. Whenever any performance
obligation hereunder (other than a payment obligation) shall be stated to be
due or required to be satisfied on a day
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other than a Business Day, such performance shall be made or satisfied on the
next succeeding Business Day unless otherwise indicated. In the computation of
periods of time from a specified date to a later specified date, the word
"from" means "from and including"; the words "to" and "until" each mean "to but
excluding", and the word "through" means "to and including." If any provision
of this Agreement refers to any action taken or to be taken by any Person, or
which such Person is prohibited from taking, such provision shall be
interpreted to encompass any and all means, direct or indirect, of taking, or
not taking, such action.
(D) LAWS. References to any statute or regulation are to
be construed as including all statutory and regulatory provisions
consolidating, amending, replacing, supplementing or interpreting the statute
or regulation.
(E) ROUNDING. Any financial ratios required to be
maintained by the Borrowers pursuant to this Agreement shall be calculated by
dividing the appropriate component by the other component, carrying the result
to one place more than the number of places by which such ratio is expressed in
this Agreement and rounding the result up or down to the nearest number (with a
round-up if there is no nearest number) to the number of places by which such
ratio is expressed in this Agreement.
(F) SCHEDULES AND EXHIBITS. Any reference to an
"Article," "Section," "Schedule" or "Exhibit" shall refer to the relevant
Article or Section of or Schedule or Exhibit to this Agreement, unless
specifically indicated to the contrary.
ARTICLE II
THE CREDITS
SECTION 2.1 AMOUNTS AND TERMS OF COMMITMENTS.
(A) TERM LOAN. Upon the terms, subject to the conditions
and in reliance upon the representations and warranties of each Borrower set
forth in this Agreement and in the other Loan Documents, each Lender having a
Term Loan Commitment severally (but not jointly) agrees to make a Loan of
immediately available funds to the Borrowers upon the Closing Date in an
aggregate principal amount equal to such Lender's Term Loan Commitment.
(B) REVOLVING CREDIT FACILITY. Upon the terms, subject
to the conditions and in reliance upon the representations and warranties of
each Borrower set forth in this Agreement and in the other Loan Documents, each
Lender having a Revolving Loan Commitment severally (but not jointly) agrees to
make Revolving Loans of immediately available funds to the Borrowers, on a
revolving basis, from the Closing until the Business Day immediately preceding
the Maturity Date, in an aggregate principal amount outstanding not to exceed
at any one time the lesser of (i) an amount equal to such Lender's Revolving
Loan Commitment and (ii) an amount equal to such Lender's Revolving Commitment
Percentage of the Borrowing Base Availability. Notwithstanding anything to the
contrary in this Agreement, the aggregate principal amount of Revolving Loans
outstanding at any time shall not exceed the lesser of (1) the Aggregate
Revolving Commitment or (2) the amount equal to the Borrowing Base minus Funded
Debt other than outstanding Revolving Loans, and so long as any such
circumstance
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exists, the Lenders shall not be obligated to make any Revolving Loans. For the
purpose of determining the amount of the Borrowing Base available and the
aggregate amount of Funded Debt outstanding at any one time (in order to
determine the Borrowing Base Availability), the amount available shall be the
total amount of the Borrowing Base Availability as set forth in the most recent
Borrowing Base Certificate delivered to the Administrative Agent pursuant to
SECTION 7.1(E).
(C) LIMITATION ON EACH LENDER'S OBLIGATION WITH RESPECT
TO REVOLVING LOANS. With respect to any Borrowing of Revolving Loans requested
by either Borrower pursuant to a complying Notice of Borrowing delivered to the
Administrative Agent pursuant to SECTION 2.5, each Lender's obligation to
advance funds in the form of Revolving Loans to such Borrower shall be limited
to an amount equal to the Lender's Revolving Commitment Percentage of such
Borrowing (obtained by multiplying the Borrowing amount by the Lender's
Revolving Commitment Percentage).
(D) FUNDING OF LOANS TO THE ADMINISTRATIVE AGENT.
Following the Administrative Agent's receipt of a complying Notice of Borrowing
and the Administrative Agent's determination that the conditions precedent to a
requested Borrowing set forth in ARTICLE IV have been duly satisfied, the
Administrative Agent shall promptly notify each Lender having a Revolving Loan
Commitment of (i) the amount of the requested Borrowing and, with respect to a
Borrowing of Revolving Loans, such Lender's Revolving Commitment Percentage
thereof and (ii) the requested Funding Date, which (A) if a LIBOR Loan is
requested, shall be no earlier than the third Business Day following the date
on which the Administrative Agent so notifies such Lender and, (B) if a Base
Rate Loan is requested shall be no earlier than the following Business Day.
Except as specifically provided in the Escrow Agreement referred to in SECTION
4.1(AA) and the funds transfer memorandum referred to in SECTION 4.1(BB) with
respect to the Loans to be advanced at Closing, not later than 1:00 p.m.,
Chicago, Illinois time, on the requested Funding Date, each Lender having a
Revolving Loan Commitment shall have advanced its Loan to the Administrative
Agent at the Administrative Agent's Payment Office in immediately available
funds. No Lender shall have any liability to either Borrower for the failure of
such Lender to advance funds for any Loan unless and until each condition
precedent to the applicable Borrowing has been duly satisfied or has been
waived in writing by Required Lenders. No Borrower shall have the right to
enforce any obligation of a Lender to fund any Loan unless and until each
condition precedent to the applicable Borrowing has been duly satisfied or has
been waived in writing by Required Lenders. The Administrative Agent's
determination that the conditions precedent to any Borrowing have been duly
satisfied shall be conclusive and binding on all Lenders for purposes of
determining when the Lenders shall be obligated to advance funds to the
Administrative Agent.
(E) DISBURSEMENT OF LOANS TO THE BORROWERS. On the
requested Funding Date, the Administrative Agent shall disburse in immediately
available funds to the Designated Deposit Account of the Requesting Borrower
specified in the Notice of Borrowing an amount equal to the Loans advanced by
Lenders to the Administrative Agent's Payment Office with respect to such
Borrowing.
(F) GENERAL PROVISIONS RELATING TO LOANS. Each Loan made
by a Lender hereunder shall, at the Requesting Borrower's option in accordance
with the terms of this
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Agreement, be either in the form of a Base Rate Loan or a LIBOR Loan; provided
that in no event shall the Borrowers, collectively, maintain at any time LIBOR
Loans having, more than five (5) different Interest Periods. The Borrowers
shall repay the principal amount of the Loans in the amounts and in the manner
set forth in SECTION 2.3 and pay interest accrued on the Loans at the rates and
in the manner set forth in SECTION 2.4. Amounts borrowed by the Borrowers under
the Aggregate Revolving Commitments may be repaid and, prior to the Maturity
Date and subject to the applicable terms and conditions precedent to Borrowings
hereunder, reborrowed.
(G) PERMITTED USES OF LOAN PROCEEDS. The Borrowers shall
use the Loan proceeds only for the purposes of (a) refinancing the Existing STP
Debt and the Existing Pioneer Debt, (b) funding transaction costs in connection
with the Merger, the IPO and the financing evidenced by this Agreement and the
other Loan Documents, (c) funding working capital and other general business
needs and (d) funding permitted Acquisitions, including the acquisition of
additional Timberlands, and (e) permitted distributions. No Borrower shall use
the proceeds of Loans advanced under this Agreement to prepay or repay any
principal portion of Pari Passu Debt or any other Indebtedness, except as set
forth in clause (a) of the immediately preceding sentence.
(H) JOINT AND SEVERAL OBLIGATIONS. The obligations of
STP and Pioneer as Borrowers under this Agreement and the other Loan Documents
are joint and several and in solido, including the obligations to pay and repay
the Obligations in full as and when the same come due and payable.
SECTION 2.2 NOTES. The Term Loans made by each Lender shall be
evidenced by separate Term Notes executed by each Borrower and made payable to
the order of such Lender in the stated principal amount equal to its Term Loan
Commitment. The Revolving Loans made by each Lender shall be evidenced by
separate Revolving Notes executed by each Borrower and made payable to the
order of such Lender in the stated principal amount equal to its Revolving Loan
Commitment.
(A) NOTATIONS IN THE LENDERS' BOOKS AND RECORDS. Each
Lender shall make notations in its books and records regarding the date, amount
and maturity of each Loan made by it and the amount of each repayment or
prepayment of principal and payment of interest made by either Borrower with
respect to such Loan. Each Lender is irrevocably authorized by each Borrower to
endorse its Note and each Lender's record shall be conclusive absent manifest
error; provided, however, that the failure of a Lender to make, or an error in
making, such a notation with respect to any Loan shall not limit or otherwise
affect the Obligations of either Borrower hereunder or under any such Note to
such Lender.
SECTION 2.3 REPAYMENT OF PRINCIPAL AMOUNT OF LOANS. Subject to
the terms of this Agreement relating to optional earlier repayments of Loans
and the acceleration of maturities, the Borrowers shall repay the Lenders the
entire outstanding principal amount of the Loans, all accrued and unpaid
interest and all other unpaid Obligations outstanding under this Agreement and
the other Loan Documents on the Maturity Date.
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SECTION 2.4 PAYMENT OF INTEREST ON THE LOANS.
(A) LOANS. Subject to SECTION 2.4(C), each Loan shall
bear interest on the outstanding principal amount thereof from the date when
made, continued or converted until paid in full at a rate per annum equal to
the Base Rate or the Adjusted LIBOR, as the case may be, plus the Applicable
Margin.
(B) INTEREST PAYMENT DATES. Interest on each Loan shall
be paid in arrears on each Interest Payment Date. Interest shall also be paid
on the date of any prepayment of any Loans pursuant to this Agreement for the
portion of the Loans so prepaid and upon payment (including prepayment) in full
thereof.
(C) INTEREST UPON EVENTS OF DEFAULT. Upon the occurrence
of an Event of Default and so long as such Event of Default shall continue,
including after acceleration (whether before or after entry of judgment), the
Borrowers shall pay interest on the principal amount of each Loan then
outstanding at a rate per annum which is determined by adding two percent
(2.00%) to the Applicable Margin applicable to such Loan (the "Default Rate").
(D) LIMITATIONS ON INTEREST RATES. Notwithstanding any
provision in this Agreement, the Notes or any of the other Loan Documents, the
total liability for payments in the nature of interest shall not exceed the
applicable limits imposed by any applicable federal or state interest rate
laws. If any payments in the nature of interest, additional interest and other
charges made hereunder or under any of the Loan Documents are held to be in
excess of the applicable limits imposed by any applicable federal or state law,
the amount held to be in excess shall be considered payment of principal under
the Notes and the indebtedness evidenced thereby shall be reduced by such
amount in the inverse order of maturity so that the total liability for
payments in the nature of interest, additional interest and other charges shall
not exceed the applicable limits imposed by any applicable federal or state
interest rate laws.
SECTION 2.5 PROCEDURE FOR THE BORROWING OF REVOLVING LOANS.
(A) Each Borrowing of Revolving Loans shall be made upon
the Requesting Borrower's irrevocable written notice delivered to the
Administrative Agent in the form of a Notice of Borrowing, executed by a
Responsible Person of the Requesting Borrower, with appropriate insertions
(which Notice of Borrowing must be received by the Administrative Agent prior
to 12:00 noon, Chicago, Illinois time, (i) three (3) Business Days prior to the
requested Funding Date, in the case of LIBOR Loans, and (ii) one (1) Business
Day prior to the requested Funding Date, in the case of Base Rate Loans),
specifying:
(A) The amount of the Borrowing, which
shall be in integral multiples of One Million Dollars
($1,000,000) and, if LIBOR Loans are requested, in an
aggregate minimum principal amount of Five Million Dollars
($5,000,000) or any integral multiple of One Million Dollars
($1,000,000) in excess thereof;
(B) the requested Funding Date, which
shall be a Business Day;
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(C) whether the Borrowing is to be
comprised of LIBOR Loans or Base Rate Loans;
(D) the duration of the Interest
Period applicable to any such LIBOR Loans included in such
notice. If the Notice of Borrowing shall fail to specify the
duration of the Interest Period for any Borrowing comprised
of LIBOR Loans, such Interest Period shall be three (3)
months; and
(E) the Designated Deposit Account to
which proceeds of the Loans are to be transferred together
with wiring instructions.
(B) Upon receipt of the Notice of Borrowing, the
Administrative Agent will promptly notify each Lender having a Revolving Loan
Commitment of the amount of such Lender's Revolving Commitment Percentage of
the requested Borrowing.
(C) Each Lender having a Revolving Loan Commitment will
make the amount of its Revolving Commitment Percentage of the Borrowing
available to the Administrative Agent for the account of the Requesting
Borrower at the Administrative Agent's Payment Office by 1:00 p.m., Chicago,
Illinois time, on the Funding Date requested by the Requesting Borrower in
funds immediately available to the Administrative Agent. The proceeds of all
such Revolving Loans will then be made available to the Requesting Borrower on
the Funding Date by the Administrative Agent by wire transfer to the Designated
Deposit Account specified in the Notice of Borrowing. No Borrowing of Revolving
Loans shall be deemed made to the Requesting Borrower, and no interest shall
accrue on any such Borrowing, until the related funds have been deposited in
the Designated Deposit Account.
SECTION 2.6 CONVERSION AND CONTINUATION ELECTIONS.
(A) Either Borrower, with respect to any Loan made to
such Borrower, may, upon irrevocable written notice to the Administrative
Agent:
(I) elect to convert on any Business Day, Base
Rate Loans in an amount equal to Five Million Dollars ($5,000,000) or any
integral multiple of One Million Dollars ($1,000,000) in excess thereof into
LIBOR Loans or LIBOR Loans into Base Rate Loans; or
(II) elect to continue on any Interest Payment
Date any LIBOR Loans maturing on such Interest Payment Date (or any part
thereof in an amount equal to Five Million Dollars ($5,000,000) or any integral
multiple of One Million Dollars ($1,000,000) in excess thereof);
provided, that if the aggregate amount of LIBOR Loans shall have been reduced,
by payment, prepayment, or conversion of part thereof, to be less than
$5,000,000, such LIBOR Loans shall automatically convert into Base Rate Loans,
and on and after such date the right of such Borrower to continue such Loans
as, and convert such Loans into, LIBOR Loans shall terminate.
(B) Such Borrower shall deliver a Notice of
Conversion/Continuation in accordance with SECTION 12.2 to be received by the
Administrative Agent prior to 12:00 noon,
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Chicago, Illinois, time, at least (i) three (3) Business Days in advance of the
Conversion Date or Continuation Date, if any Loans are to be converted into or
continued as LIBOR Loans; and (ii) one (1) Business Day in advance of the
Conversion Date, if any Loans are to be converted into Base Rate Loans;
specifying:
(A) the proposed Conversion Date or
Continuation Date;
(B) the aggregate amount of Loans to be
converted or continued;
(C) the nature of the proposed conversion or
continuation; and
(D) the duration of the requested Interest
Period.
(C) If upon the expiration of any Interest Period
applicable to any LIBOR Loans, such Borrower shall have timely failed to select
a new Interest Period to be applicable to such LIBOR Loans, such Borrower shall
be deemed to have elected to convert such LIBOR Loans into Base Rate Loans.
(D) Upon receipt of a Notice of Conversion/Continuation,
the Administrative Agent will promptly notify each Lender thereof, or, if no
timely notice is provided by such Borrower, the Administrative Agent will
promptly notify each Lender of the details of any automatic conversion. All
conversions and continuations shall be made according to each Lender's
applicable Commitment Percentage of the outstanding principal amounts of the
Loans with respect to which the notice was given.
SECTION 2.7 SPECIAL PROVISIONS GOVERNING EURODOLLAR RATE LOANS.
Notwithstanding any other provision of this Agreement to the contrary,
the following provisions shall govern with respect to LIBOR Loans as to the
matters covered:
(A) DETERMINATION OF APPLICABLE INTEREST RATE. As soon
as practicable on each Interest Rate Determination Date, the Administrative
Agent shall determine (which determination shall, absent manifest error in
calculation, be final, conclusive and binding upon all parties) the interest
rate that shall apply to the LIBOR Loans for which an interest rate is then
being determined for the applicable Interest Period and shall promptly give
notice thereof (in writing or by telephone confirmed in writing) to the
Requesting Borrower and each relevant Lender.
(B) INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In
the event that the Administrative Agent shall have determined (which
determination shall be final and conclusive and binding upon all parties
hereto), on any Interest Rate Determination Date with respect to any LIBOR
Loan, that by reason of circumstances affecting the London interbank market
adequate and fair means do not exist for ascertaining the interest rate
applicable to such Loan on the basis provided for in the definition of Adjusted
LIBOR, the Administrative Agent shall on such date give notice (by
telefacsimile or by telephone confirmed in writing) to the Requesting Borrower
and each Lender of such determination, whereupon (a) no Loans may be made as,
or converted to, LIBOR Loans until such time as the Administrative Agent
notifies the Borrowers and the Lenders that the circumstances giving rise to
such notice no longer exist and (b) any Notice of
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Borrowing or Notice of Conversion/Continuation given by a Requesting Borrower
with respect to the Loans in respect of which such determination was made shall
be deemed to be rescinded by such Requesting Borrower.
(C) ILLEGALITY OR IMPRACTICABILITY OF LIBOR LOANS. In
the event that on any date any Lender shall have determined (which
determination shall be final and conclusive and binding upon all parties
hereto) that the making, maintaining or continuation of Loans bearing interest
determined by reference to the Adjusted LIBOR (a) has become unlawful as a
result of compliance by such Lender in good faith with any Requirement of Law
(or would conflict with any such Requirement of Law not having the force of law
even though the failure to comply therewith would not be unlawful) or (b) has
become impracticable, or would cause such Lender material hardship, as a result
of contingencies occurring after the date of this Agreement which materially
and adversely affect the London interbank market or the position of such Lender
in that market, then, and in any such event, such Lender shall be an "Affected
Lender" and it shall on that day give notice (by telefacsimile or by telephone
notice confirmed in writing) to the Requesting Borrower and the Administrative
Agent of such determination (which notice Administrative Agent shall promptly
transmit to each other Lender). Thereafter, (i) the obligation of the Affected
Lender to make Loans as, or to convert Loans to, LIBOR Loans shall be suspended
until such notice shall be withdrawn by the Affected Lender, (ii) to the extent
such determination by the Affected Lender relates to a LIBOR Loan then being
requested by a Requesting Borrower pursuant to a Notice of Borrowing or a
Notice of Conversion/Continuation, the Affected Lender shall make such Loan as
(or convert such Loan to, as the case may be) a Base Rate Loan, (iii) the
Affected Lender's obligation to maintain its outstanding LIBOR Loans (the
"Affected Loans") shall be terminated at the earlier to occur of the expiration
of the Interest Period then in effect with respect to the Affected Loans or
when required by law, and (iv) the Affected Loans shall automatically convert
into Base Rate Loans on the date of such termination. Notwithstanding the
foregoing, to the extent a determination by an Affected Lender as described
above relates to a LIBOR Loan then being requested by a Requesting Borrower
pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, the
Requesting Borrower shall have the option, subject to the provisions of SECTION
2.7(D), to rescind such Notice of Borrowing or Notice of
Conversion/Continuation as to all Lenders by giving notice (by telefacsimile or
by telephone confirmed in writing) to the Administrative Agent of such
rescission on the date on which the Affected Lender gives notice of its
determination as described above (which notice of rescission Administrative
Agent shall promptly transmit to each other Lender). Except as provided in the
immediately preceding sentence, nothing in this SECTION 2.7(C) shall affect the
obligation of any Lender other than an Affected Lender to make or maintain
Loans as, or to convert Loans to, LIBOR Loans in accordance with the terms of
this Agreement.
(D) COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF
INTEREST PERIODS. The Borrowers shall compensate each Lender, upon written
request by such Lender (which request shall set forth the manner and method of
computing such compensation), for all reasonable losses, expenses and
liabilities, if any (including any interest paid by such Lender to lenders of
funds borrowed by it to make or carry its LIBOR Loans and any loss, expense or
liability incurred by that Lender in connection with the liquidation or
re-employment of such funds) such that Lender may incur: (a) if for any reason
(other than a default by such Lender or due to any failure of any Lender to
fund LIBOR Loans due to illegality or impracticability under SECTION 2.7(C)) a
borrowing of any LIBOR Loan does not occur on a date specified therefor in a
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Notice of Borrowing, or a conversion to or continuation of any LIBOR Loan does
not occur on a date specified therefor in a Notice of Conversion/Continuation,
(b) if any prepayment (including any prepayment pursuant to SECTION 2.8 OR 2.9)
or other principal payment or any conversion of any of its LIBOR Loans occurs
on a date prior to the last day of an Interest Period applicable to that Loan
or (c) if any prepayment of any of its LIBOR Loans is not made on any date
specified in a notice of prepayment given by either Borrower.
(E) BOOKING OF LIBOR LOANS. Any Lender may make, carry
or transfer LIBOR Loans at, to, or for the account of any of its branch offices
or the office of an Affiliate of such Lender.
(F) ASSUMPTIONS CONCERNING FUNDING OF LIBOR LOANS.
Calculation of all amounts payable to a Lender under this SECTION 2.7 and under
SECTION 3.2 shall be made as though such Lender had actually funded each of its
relevant LIBOR Loans through the purchase of a Eurodollar deposit bearing
interest at the rate obtained pursuant to the definition of LIBOR Rate in an
amount equal to the amount of such LIBOR Loan and having a maturity comparable
to the relevant Interest Period and through the transfer of such Eurodollar
deposit from an offshore office of that Lender to a domestic office of that
Lender in the United States of America; provided, however, that each Lender may
fund each of its LIBOR Loans in any manner it sees fit and the foregoing
assumptions shall be utilized only for the purposes of calculating amounts
payable under this SECTION 2.7 and under SECTION 3.2.
(G) EURODOLLAR RATE LOANS AFTER DEFAULT. After the
occurrence of and during the continuation of an Event of Default or if a
Material Adverse Change shall have occurred and be continuing since the date of
the most recent audited consolidated financial statements of STT delivered
under SECTION 7.1(B), (a) the Borrowers may not elect to have a Loan be made or
continued as, or converted to, a LIBOR Loan after the expiration of any
Interest Period then in effect for such Loan and (b) subject to the provisions
of SECTION 2.7(d), any Notice of Borrowing or Notice of Conversion/Continuation
given by a Requesting Borrower with respect to a requested Borrowing or
conversion/continuation that has not yet occurred shall be deemed to be
rescinded by such Requesting Borrower and be deemed a request to convert or
continue Loans referred to therein as Base Rate Loans.
SECTION 2.8 OPTIONAL PREPAYMENTS. Subject to SECTION 2.7(D),
either Borrower may, at any time or from time to time, upon at least one (1)
Business Day's notice to the Administrative Agent in the case of Base Rate
Loans, or three (3) Business Days' notice to the Administrative Agent in the
case of LIBOR Loans, prepay Loans, in whole or in part, in amounts of not less
than $1,000,000. Such notice of prepayment shall specify the date and amount of
such prepayment and whether such prepayment is of Term Loans or Revolving Loans
and of Base Rate Loans or LIBOR Loans, or any combination thereof. Such notice
shall be irrevocable and the Administrative Agent shall promptly notify each
Lender thereof and of such Lender's Commitment Percentage of such prepayment.
If such notice is given by either Borrower, such Borrower shall make such
prepayment and the payment amount specified in such notice shall be due and
payable on the specified prepayment date, together with accrued interest to
such date on the principal amount prepaid and any amounts required pursuant to
SECTION 2.7(D), but otherwise without premium or penalty.
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SECTION 2.9 MANDATORY PREPAYMENTS. If at any time and for any
reason either (i) the aggregate principal amount of the Loans then outstanding
shall exceed the Aggregate Commitments or (ii) Funded Debt shall exceed the
Borrowing Base (the amount of such excess, if any, being an "Over Advance"),
whether determined based on the delivery of the most recent Borrowing Base
Certificate or otherwise, the Borrowers shall within thirty (30) Business Days
of either Borrower becoming aware of such Over Advance, whether by notice from
the Administrative Agent, the delivery of the Annual Merchantable Timber
Valuation Report, an Updated Merchantable Timber Report or otherwise, repay the
full amount of such Over Advance to the Lenders, together with all accrued and
unpaid interest thereon. Amounts prepaid in accordance with this SECTION 2.9
shall be applied first to pay Revolving Loans outstanding and then to repay
Term Loans outstanding.
SECTION 2.10 COMMITMENT FEE FOR PROVIDING REVOLVING LOAN
COMMITMENTS. In consideration of the Lenders' agreement to commit to make the
Revolving Loans available to the Borrowers as contemplated by this Agreement,
the Borrowers agree to pay to the Administrative Agent, on behalf of and for
the ratable benefit of the Lenders according to their respective Revolving
Commitment Percentage of the Aggregate Revolving Commitments, a commitment fee
in an amount equal to the Applicable Fee Rate per annum of the average daily
difference between the Aggregate Revolving Commitment and the sum of the
aggregate outstanding principal amount of Revolving Loans, due and payable
quarterly in arrears on the last Business Day of each Fiscal Quarter, with the
final such payment due and payable on the Maturity Date.
SECTION 2.11 VOLUNTARY REDUCTION OF COMMITMENTS. Upon at least
five (5) Business Days' prior written notice (or telephonic notice promptly
confirmed in writing) to the Administrative Agent, the Borrowers shall have the
right, without premium or penalty, to terminate or partially reduce the
Aggregate Revolving Commitment, provided that any such termination or partial
reduction shall permanently terminate or so reduce the Revolving Commitments of
each Lender. Any partial reduction pursuant to this SECTION 2.11 shall be
applied to the Revolving Loan Commitment of each Lender in accordance with its
ratable percentage of the Aggregate Revolving Commitments, and shall be in an
aggregate amount of $5,000,000 or in additional increments of $1,000,000.
SECTION 2.12 CALCULATION OF INTEREST AND FEES. Interest on the
Loans and all fees payable hereunder shall be computed on the basis of a
360-day year and the actual number of days elapsed in the period during which
such interest accrues. In computing interest on any Loan, the date of the
making of such Loan shall be included and the date of payment shall be
excluded; provided, however, that if any Loan is repaid on the same day on
which it is made, such day shall be included in computing interest on such
Loan. Each change in the interest rate of the Base Rate Loans based on changes
in the Base Rate and each change in the interest rate of LIBOR Loans based on
changes in the Eurodollar Reserve Percentage shall be effective on the
effective date of such change and to the extent of such change. The
Administrative Agent shall give the Borrowers prompt notice of any such change
in the Base Rate or Eurodollar Reserve Percentage; provided, however, that any
failure by the Administrative Agent to provide the Borrowers with notice
hereunder shall not affect the Lenders' right to make changes in the interest
rate of the Base Rate Loans based on changes in the Base Rate or changes in the
interest rate of LIBOR Loans based on changes in the Eurodollar Reserve
Percentage.
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SECTION 2.13 PAYMENTS. All repayments or prepayments of principal
and all payments of interest, fees, costs, expenses and other sums chargeable
to either Borrower under this Agreement, the Notes or any of the other Loan
Documents shall be in lawful money of the United States of America in
immediately available funds and delivered to the Administrative Agent, on
behalf and for the benefit of the Lenders, not later than 12:00 noon, Chicago,
Illinois time, on the date due at the Administrative Agent's Payment Office.
SECTION 2.14 PAYMENT ON NON-BUSINESS DAYS. Whenever any payment
to be made under this Agreement, the Notes or any of the other Loan Documents
shall be stated to be due on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day and such extension of time
shall in such case be included in the computation of the payment of interest
thereon.
SECTION 2.15 APPLICATION OF PAYMENTS. Except as otherwise
expressly provided in this Agreement or in any other Loan Document, all
payments shall be applied in the following order: (a) then due and payable
fees, costs and expenses; (b) then due and payable interest payments; and (c)
then due and payable principal payments and shall be apportioned among all
outstanding Loans to which such payments relate, in each case proportionately
to each Lender's respective Pro Rata Share. In addition, each Lender is
authorized to, and at its sole option may, for the benefit of the Lenders and
the Administrative Agent, make advances on behalf of either Borrower for
payment of any and all fees, expenses, charges, costs, principal and interest
incurred hereunder or under the other Loan Documents. To the extent permitted
by law, all amounts advanced by any Lender hereunder or under other provisions
of the Loan Documents shall accrue interest thereon at the Base Rate.
SECTION 2.16 DISTRIBUTION OF PAYMENTS. The Administrative Agent
shall immediately distribute to each Lender, at such address as each Lender
shall designate, such Lender's interest in all repayments and prepayments of
principal and all payments of interest, loan fees, commitment fees and other
fees, expenses and costs received by the Administrative Agent on the same day
and in the same type of funds as payment was received. In the event the
Administrative Agent does not distribute such payments on the same day
received, such payment shall accrue interest at the Federal Funds Rate, which
shall be payable by the Administrative Agent. The Administrative Agent shall
indemnify and hold the Borrowers harmless from any claim for overnight interest
by any Lender under this SECTION 2.16.
SECTION 2.17 THE ADMINISTRATIVE AGENT'S RIGHT TO ASSUME FUNDS
AVAILABLE FOR REVOLVING LOANS. Unless the Administrative Agent shall have been
notified by any Lender no later than the Business Day prior to the respective
Funding Date of any Revolving Loan that such Lender does not intend to make
available to the Administrative Agent immediately available funds equal to such
Lender's Revolving Commitment Percentage of the total principal amount of such
Revolving Loan, the Administrative Agent may assume that such Lender has
advanced funds in the amount of such Revolving Loan to the Administrative Agent
on the applicable Funding Date and the Administrative Agent may, in reliance
upon such assumption, make available to the Requesting Borrower corresponding
funds. The Administrative Agent agrees to give prompt notice to the Requesting
Borrower in the event it advances funds on behalf of a Lender under this
SECTION 2.17; provided, that failure to give such notice shall in no way limit,
restrict or otherwise affect the Borrowers' obligations or the Administrative
Agent's or any
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Lender's rights or remedies under this Agreement and the other Loan Documents.
If the Administrative Agent has made funds available to either Borrower based
on such assumption and such Revolving Loan is not in fact made available to the
Administrative Agent by such Lender, the Administrative Agent shall be entitled
to recover the corresponding amount of such Revolving Loan on demand from such
Lender. If such Lender does not promptly pay such corresponding amount upon the
Administrative Agent's demand, the Administrative Agent shall notify the
Requesting Borrower and the Requesting Borrower shall repay such Revolving Loan
to the Administrative Agent. The Administrative Agent also shall be entitled to
recover from such Lender interest on such Loan in respect of each day from the
date such Revolving Loan was made by the Administrative Agent to the Requesting
Borrower to the date such corresponding amount is recovered by the
Administrative Agent at the Federal Funds Rate, and the Administrative Agent
shall indemnify and hold harmless the Borrowers from any claim for such
interest.
SECTION 2.18 THE ADMINISTRATIVE AGENT'S RIGHT TO ASSUME PAYMENTS
WILL BE MADE BY THE BORROWERS. Unless the Administrative Agent shall have been
notified by either Borrower prior to the date on which any payment to be made
by such Borrower hereunder is due that such Borrower does not intend to remit
such payment, the Administrative Agent may, in its discretion, assume that such
Borrower has remitted such payment when so due and the Administrative Agent
may, in its discretion and in reliance upon such assumption, make available to
each Lender on such payment date an amount equal to such Lender's Pro Rata
Share of such assumed payment. If such Borrower has not in fact remitted such
payment to the Administrative Agent, each Lender shall forthwith on demand
repay to the Administrative Agent the amount of such assumed payment made
available to such Lender, together with interest thereon in respect of each
date from and including the date such amount was made available by the
Administrative Agent to such Lender to the date such amount is repaid to the
Administrative Agent at the Federal Funds Rate.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
SECTION 3.1 TAXES.
(A) Subject to SECTION 3.1(H), any and all payments by
each Borrower to the Lenders or the Administrative Agent under this Agreement
shall be made free and clear of, and without deduction or withholding for, any
and all present or future taxes, fees, duties, levies, imposts, deductions,
charges or withholdings, whatsoever imposed by any Governmental Authority,
excluding, in the case of each Lender and the Administrative Agent, such taxes
as are imposed on or measured by the net income of any Lender or the
Administrative Agent by any jurisdiction under the laws of which such Lender,
or the Administrative Agent, as the case may be, is organized or maintains a
Lending Office or any political subdivision thereof (all such non-excluded
taxes, levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes").
(B) In addition, the Borrowers shall pay any present or
future stamp or documentary taxes or any other excise or property taxes,
charges or similar levies which arise
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from any payment made hereunder or from the execution, delivery or registration
of, or otherwise with respect to, this Agreement or any other Loan Documents
(hereinafter referred to as "Other Taxes").
(C) Subject to SECTIONS 3.1(A) and 3.1(H), if any Taxes
or Other Taxes are directly asserted or imposed against any Lender or the
Administrative Agent, the Borrowers shall jointly, severally and solidarily
indemnify and hold harmless such Lender or the Administrative Agent, as the
case may be, for the full amount of the Taxes or Other Taxes (including any
Taxes or Other Taxes asserted or imposed by any jurisdiction on amounts payable
under this SECTION 3.1) paid by the Lender or the Administrative Agent and any
liability (including penalties, interest, additions to tax and expenses)
arising therefrom or with respect thereto, whether or not such Taxes or Other
Taxes were correctly or legally asserted or imposed. Payment under this
indemnification shall be made within thirty (30) days from the date the Lender
or the Administrative Agent makes written demand therefor (provided that the
Borrowers shall have the right to contest in good faith any such Taxes or Other
Taxes through appropriate proceedings). The Lender, or the Administrative Agent
in its discretion also may, but shall not be obligated to, pay such Taxes or
Other Taxes and the Borrowers will promptly pay such additional amounts
(including any penalties, interest or expenses, except for, in the event the
Lender or the Administrative Agent fails to deliver notice of such assertion of
Taxes or Other Taxes to the Borrowers within ninety (90) days after it has
received notice of such assertion or imposition of Taxes or Other Taxes, any
such penalties, interest or expenses which would not have arisen but for the
failure of the Lender or the Administrative Agent to so notify the Borrowers of
such assertion or imposition of Taxes or Other Taxes) as is necessary in order
that the net amount received by the Lender or the Administrative Agent after
the payment of such Taxes or Other Taxes (including any Taxes on such
additional amount) shall equal the amount the Lender or the Administrative
Agent would have received had not such Taxes or Other Taxes been asserted or
imposed.
(D) If either Borrower shall be required by law to
deduct or withhold any Taxes or Other Taxes from or in respect of any sum
payable hereunder to any Lender or the Administrative Agent, then, subject to
SECTION 3.1(H):
(I) the sum payable shall be increased as
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this SECTION 3.1) such Lender or
the Administrative Agent, as the case may be, receives an amount equal to the
sum it would have received had no such deduction or withholding been made;
(II) such Borrower shall make such deduction or
withholding; and
(III) such Borrower shall pay the full amount
deducted to the relevant taxation authority or other authority in accordance
with applicable law.
(E) Within thirty (30) days after the date of any
payment by either Borrower of Taxes or Other Taxes, such Borrower, upon the
Administrative Agent's request, shall furnish to the Administrative Agent the
original or a certified copy of a receipt evidencing payment thereof, or other
evidence of payment satisfactory to the Administrative Agent.
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(F) If either Borrower fails to pay any Taxes or Other
Taxes when due to the appropriate taxing authority or fail to furnish to the
Administrative Agent the required receipts or other required documentary
evidence, the Borrowers shall jointly, severally and solidarily indemnify the
Lenders and the Administrative Agent for any incremental Taxes or Other Taxes,
interest or penalties that may become payable by any of the Lenders and the
Administrative Agent as a result of any such failure.
(G) Each Lender which is a foreign person (i.e., a person
other than a United States person for United States federal income tax
purposes) agrees that:
(I) in the case of any Lender which is a "bank"
within the meaning of Section 881(c)(3)(A) of the Code,
(A) it shall, no later than the Closing
Date (or, in the case of a Lender which becomes a party hereto pursuant to
SECTION 12.11 after the Closing Date, the date upon which the Lender becomes a
party hereto) deliver to the Borrowers through the Administrative Agent two (2)
accurate and complete signed originals of IRS Form 4224 or any successor
thereto ("Form 4224"), or two accurate and complete signed originals of IRS
Form 1001 or any successor thereto ("Form 1001"), as appropriate, in each case
indicating that the Lender is on the date of delivery thereof entitled to
receive payments of principal, interest and fees under this Agreement free from
withholding of United States federal income tax;
(B) if at any time the Administrative
Agent or such Lender makes any changes necessitating a new Form 4224 or Form
1001, it shall within thirty (30) days after such change becomes effective
deliver to the Borrowers through the Administrative Agent in replacement for,
or in addition to, the forms previously delivered by it hereunder, two accurate
and complete signed originals of Form 4224, or two accurate and complete signed
originals of Form 1001, as appropriate, in each case indicating that the Lender
is on the date of delivery thereof entitled to receive payments of principal,
interest and fees under this Agreement free from withholding of United States
federal income tax;
(II) in the case of any Lender other than a
Lender described in clause (i) above,
(A) it shall, no later than the Closing
Date (or, in the case of a Lender which becomes a party hereto pursuant to
SECTION 12.11 after the Closing Date, the date upon which the Lender becomes a
party hereto) deliver to the Borrowers through the Administrative Agent two (2)
accurate and complete signed originals of a certificate substantially in the
form of EXHIBIT H hereto (any such certificate, a "Non-Bank Lender Tax
Certificate") and two accurate and complete signed originals of IRS Form W-8 or
any successor thereto ("Form W-8") certifying to such Lender's legal
entitlement (assuming compliance by the Borrowers with the terms of this
Agreement) to an exemption whereby the Lender is on the date of delivery
thereof entitled to receive payments of principal, interest and fees under this
Agreement free from withholding of United States Federal income tax;
(B) if at any time the Administrative
Agent or such Lender makes any changes necessitating a new Form W-8, it shall
within thirty (30) days after such
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change becomes effective deliver to the Borrowers through the Administrative
Agent in replacement for, or in addition to, the forms previously delivered by
it hereunder, two accurate and complete signed originals of Form W-8 certifying
to such Lender's legal entitlement (assuming compliance by the Borrowers with
the terms of this Agreement) to an exemption whereby the Lender is on the date
of delivery thereof entitled to receive payments of principal, interest and
fees under this Agreement free from withholding of United States federal income
tax;
(III) it shall, before or within thirty (30) days
after the occurrence of any event (including the passing of time but excluding
any event mentioned in (i) or (ii), above) requiring a change in or renewal of
the most recent Form 4224, Form 1001 or Form W-8 previously delivered by such
Lender, deliver to the Borrowers through the Administrative Agent two accurate
and complete original signed copies of Form 4224, Form 1001 or Form W-8 in
replacement for the forms previously delivered by the Lender; and
(IV) it shall, promptly upon the Borrowers' or
the Administrative Agent's reasonable request to that effect, deliver to the
Borrower or the Administrative Agent (as the case may be) such other forms or
similar documentation as may be required from time to time by any applicable
law, treaty, rule or regulation in order to establish such Lender's tax status
for withholding purposes.
(H) The Borrowers will not be required to pay any
additional amounts in respect of United States federal income tax pursuant to
SECTION 3.1(D) to the Administrative Agent or any Lender for the account of any
Lending Office of such Lender:
(I) if the obligation to pay such additional
amounts would not have arisen but for a failure by such Lender to comply with
its obligations under SECTION 3.1(G) in respect of such Lending Office; or
(II) if such Lender shall have delivered to the
Borrowers a Form 4224, Form 1001 or Form W-8 in respect of such Lending Office
pursuant to SECTION 3.1(G), and such Lender shall not at any time be entitled
to exemption from deduction or withholding of United States federal income tax
in respect of payments by either Borrower hereunder for the account of such
Lending Office for any reason other than a change in United States law or
regulations or in the official interpretation of such law or regulations by any
Governmental Authority charged with the interpretation or administration
thereof (whether or not having the force of law) after the date of delivery of
such form.
(I) If, at any time, the Borrowers request any Lender to
deliver any forms or other documentation in addition to those required pursuant
to SECTION 3.1(G)(IV), then the Borrowers shall, on demand of such Lender
through the Administrative Agent, reimburse such Lender for any costs and
expenses (including reasonable Attorney Costs) reasonably incurred by such
Lender in the preparation or delivery of such forms or other documentation.
(J) If either Borrower is required to pay additional
amounts to any Lender or the Administrative Agent pursuant to SECTION 3.1(D),
then such Lender shall use its reasonable best efforts (consistent with legal
and regulatory restrictions) to change the jurisdiction of its
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Lending Office so as to eliminate any such additional payment by the Lender
which may thereafter accrue if such change in the judgment of such Lender is
not otherwise disadvantageous to such Lender.
SECTION 3.2 INCREASED COSTS. If any Lender shall determine that,
due to either (a) the introduction of or any change (other than any change by
way of imposition of or increase in the Eurodollar Reserve Percentage included
in the calculation of the LIBOR) in or in the interpretation of any Requirement
of Law or (b) the compliance with any guideline or request from any central
bank or other Governmental Authority (whether or not having the force of law),
there shall be any increase in the cost to such Lender of agreeing to make or
making, funding or maintaining any LIBOR Loans, then the Borrowers shall be
liable for, and shall from time to time, upon demand therefor by such Lender,
pay to such Lender such additional amounts as are sufficient to compensate such
Lender for such increased costs.
SECTION 3.3 CAPITAL REQUIREMENTS. If any Lender shall determine
that any change after the date of this Agreement in any law, rule, regulation
or guideline adopted pursuant to or arising out of the July 1988 report of the
Basle Committee on Banking Regulations and Supervisory Practices entitled
"International Convergence of Capital Measurement and Capital Standards," or
the adoption after the date hereof of any other Requirement of Law regarding
capital adequacy, or any change after the date of this Agreement in any of the
foregoing or in the enforcement or interpretation or administration of any of
the foregoing by any Governmental Authority charged with the enforcement or
interpretation or administration thereof, or compliance by any Lender (or any
Lending Office of the Lender) or the Lender's holding company with any request
or directive regarding capital adequacy (whether or not having the force of
law) of any such Governmental Authority, has the effect of reducing the rate of
return on the Lender's capital or on the capital of the Lender's holding
company, if any, as a consequence of the maintaining of any of its Commitments
or the making or maintaining any Loan under this Agreement to a level below
that which the Lender or the Lender's holding company could have achieved but
for such adoption, change or compliance (taking into consideration the Lender's
policies and the policies of the Lender's holding company with respect to
capital adequacy) by an amount deemed by the Lender to be material, then, upon
written demand by the Lender, the Borrowers shall pay to the Lender, from time
to time such additional amount or amounts as will compensate the Lender or the
Lender's holding company for any such reduction suffered. Without affecting its
rights under this SECTION 3.3 or any other provision of this Agreement, the
Lender agrees that if there is any increase in any cost to or reduction in any
amount receivable by the Lender with respect to which the Borrowers would be
obligated to compensate the Lender pursuant to this SECTION 3.3, the Lender
shall use reasonable efforts to select an alternative Lending Office which
would not result in any such increase in any cost to or reduction in any amount
receivable by the Lender; provided, however, that the Lender shall not be
obligated to select an alternative Lending Office if the Lender determines that
(a) as a result of such selection the Lender would be in violation of any
Requirement of Law, or would incur additional costs or expenses, or (b) such
selection would be inadvisable for regulatory reasons.
SECTION 3.4 CERTIFICATES OF LENDERS. Any Lender claiming
reimbursement or compensation pursuant to this ARTICLE III or SECTION 2.7(D)
shall deliver to the Borrowers (with a copy to the Administrative Agent) a
certificate setting forth in reasonable detail the amount
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payable and the basis therefor to the Lender hereunder. Such certificate shall
be conclusive and binding on the Borrowers in the absence of manifest error.
SECTION 3.5 SUBSTITUTION OF LENDERS. Upon the receipt by the
Borrowers from any Lender of a claim for compensation pursuant to SECTIONS
2.7(D), 3.1, 3.2 or 3.3, the Borrowers may: (a) request such Lender to use its
best efforts to obtain a replacement bank or financial institution satisfactory
to the Borrowers to acquire and assume all or part of such Lender's Loans and
Commitments (a "Replacement Lender"), (b) request one more of the other Lenders
to acquire and assume all or part of such Lender's Loans and Commitments or (c)
designate a Replacement Lender. Any such designation of a Replacement Lender
under clause (a) or (c) shall be subject to the prior written consent of the
Administrative Agent (which consent shall not be unreasonably withheld or
delayed).
SECTION 3.6 SURVIVAL. The agreements and obligations of the
Borrowers in SECTION 2.7(D) and this ARTICLE III shall survive the payment of
all other Obligations.
ARTICLE IV
CONDITIONS PRECEDENT TO CLOSING AND THE MAKING OF LOANS
SECTION 4.1 CONDITIONS PRECEDENT TO THE CLOSING. The Closing
shall occur upon the prior satisfaction of each of the conditions precedent set
forth in this SECTION 4.1, as determined by the Lenders and the Administrative
Agent (all Loan Documents and other documents to be delivered to the
Administrative Agent or any Lender pursuant to this SECTION 4.1 shall be
subject to prior approval as to form and substance (including as to results) by
the Lenders and the Administrative Agent); provided, that all of such
conditions in this SECTION 4.1 shall have been satisfied by May 31, 1999 unless
such date shall have been extended by the written consent of all Lenders.
(A) CORPORATE DOCUMENTS. The Administrative Agent shall
have received originals of each of the following:
(I) CERTIFICATE OF THE SECRETARY (STP).
Certificate executed by the secretary or assistant secretary of STP, or of
STOC, in its capacity as STP's sole general partner, on behalf of the STP,
dated the Closing Date, certifying (A) that such company has the authority to
execute, deliver and perform its obligations under each of the Loan Documents
and the Merger Documents to which it is a party, (B) that attached behind
EXHIBIT A to such certificate is a true, correct and complete copy of (1) the
STP Partnership Agreement then in full force and effect, (2) the certificate of
limited partnership of the STP certified by the Secretary of State of the State
of Delaware as of a date not more than thirty (30) Business Days prior to the
Closing Date, and (3) any other organizational documents of STP then in full
force and effect, (C) that attached behind EXHIBIT B to such certificate is a
true, correct and complete copy of the resolutions adopted by STOC, in its
capacity as general partner of STP, then in full force and effect authorizing
the execution, delivery and performance by STP of each of the Loan Documents
and each of the Merger Documents to which it is a party, ratifying the
execution, delivery and performance by STP of the Loan Documents and the Merger
Documents to which it is a party and the consummation of the Merger, (D) that
attached behind EXHIBIT C to such
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certificate is a certificate of the Secretary of State of the States of
Delaware, Louisiana and the state in which is located STP's chief executive
office, in each case dated as of a date not more than thirty (30) Business Days
prior to the Closing Date, stating that STP is in good standing in such states,
(E) the name(s) of the officer(s) of STP authorized to execute Loan Documents
and the Merger Documents on behalf of STP, together with a sample of the true
signatures of such officer(s), and (F) that the Lenders and the Administrative
Agent may conclusively rely on such certificate unless and until STP shall have
delivered to the Administrative Agent a further certificate canceling or
amending such prior certificate.
(II) CERTIFICATE OF THE SECRETARY (PIONEER).
Certificate executed by the secretary or assistant secretary of Pioneer, or of
STOC, as STP's sole general partner, on behalf of STP, as Pioneer's manager,
dated the Closing Date, certifying (A) that Pioneer has the authority to
execute, deliver and perform its obligations under each of the Loan Documents
to which it is a party, (B) that attached behind EXHIBIT A to such certificate
is a true, correct and complete copy of (1) the Pioneer Operating Agreement
then in full force and effect, (2) the certificate of formation of Pioneer
certified by the Secretary of State of the State of Oregon as of a date not
more than thirty (30) Business Days prior to the Closing Date and (3) any other
organizational documents of Pioneer then in full force and effect, (C) that
attached behind EXHIBIT B to such certificate is a true, correct and complete
copy of the resolutions adopted by STP, in its capacity as manager of Pioneer,
then in full force and effect authorizing the execution, delivery and
performance by Pioneer of each of the Loan Documents to which it is a party,
(D) that attached behind EXHIBIT C to such certificate is a certificate of the
Secretary of State of the States of California, Oregon, Washington and the
state in which Pioneer maintains its chief executive office, in each case dated
as of a date not more than thirty (30) Business Days prior to the Closing Date,
stating that Pioneer is in good standing in such states, (E) the name(s) of the
officer(s) of Pioneer authorized to execute Loan Documents on behalf of
Pioneer, together with a sample of the true signatures of such officer(s), and
(F) that the Lenders and the Administrative Agent may conclusively rely on such
certificate unless and until Pioneer shall have delivered to the Administrative
Agent a further certificate canceling or amending such prior certificate.
(III) CERTIFICATE OF THE SECRETARY (STT).
Certificate executed by the secretary or assistant secretary of STT, dated the
Closing Date, certifying (A) that STT has the authority to execute, deliver and
perform its obligations under each of the Loan Documents and Merger Documents
to which it is a party, (B) that attached behind EXHIBIT A to such certificate
is a true, correct and complete copy of (1) the bylaws of STT then in full
force and effect, (2) the certificate of incorporation of STT certified by the
Secretary of State of the State of Georgia as of a date not more than thirty
(30) Business Days prior to the Closing Date, and (3) any other organizational
documents of STT then in full force and effect, (C) that attached behind
EXHIBIT B to such certificate is a true, correct and complete copy of the
resolutions adopted by the Board of Directors of STT then in full force and
effect authorizing the execution, delivery and performance by STT of each of
the Loan Documents and the Merger Documents to which it is a party, and the
consummation of the Merger and the IPO, (D) that attached behind EXHIBIT C to
such certificate is a certificate of the Secretary of State of the State of
Georgia and of the state in which is located STT's chief executive office, in
each case dated as of a date not more than thirty (30) Business Days prior to
the Closing Date, stating that STT is in good standing in such states, (E) the
name(s) of the officers of STT authorized to execute the Loan Documents on
behalf of
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STT, together with a sample of the true signatures of such officers and (F)
that the Lenders and the Administrative Agent may conclusively rely on such
certificate unless and until STT shall have delivered to the Administrative
Agent a further certificate canceling or amending such prior certificate.
(IV) CERTIFICATE OF THE SECRETARY (STOC).
Certificate executed by the secretary or assistant secretary of STOC, dated the
Closing Date, certifying (A) STOC has the authority to execute, deliver and
perform its obligations under each of the Loan Documents and Merger Documents
to which it is a party, (B) that attached behind EXHIBIT A to such certificate
is a true, correct and complete copy of (1) the bylaws of STOC in full force
and effect, (2) the certificate of incorporation of STOC certified by the
Secretary of State of the State of Delaware as of a date not more than thirty
(30) Business Days prior to the Closing Date, and (3) any other organizational
documents of STOC then in full force and effect, (C) that attached behind
EXHIBIT B to such certificate is a true, correct and complete copy of the
resolutions adopted by STOC then in full force and effect authorizing the
execution, delivery and performance by STOC (in its individual capacity) of
each of the Loan Documents to which it is a party, authorizing the execution,
delivery and performance by STOC (in its capacity as general partner of STP (in
STP's individual capacity)) of each of the Loan Documents and Merger Documents
to which STP is a party, and authorizing the execution, delivery and
performance by STOC (in its capacity as general partner of STP (in STP's
capacity as the manager of Pioneer)), and the consummation of the Merger and
the IPO, (D) that attached behind EXHIBIT C to such certificate is a
certificate of the Secretary of State of the State of Delaware and of the state
in which is located STOC's chief executive office, in each case dated as of a
date not more than thirty (30) Business Days prior to the Closing Date, stating
that STOC is in good standing in such states, (E) the name(s) of the officer(s)
of STOC authorized to execute Loan Documents and Merger Documents on behalf of
STOC (in its individual capacity or in its capacity as general partner of STP
(in STP's individual capacity or in STP's capacity as manager of Pioneer), as
the case may be), together with a sample of the true signatures of such
officer(s), and (F) that the Lenders and the Administrative Agent may
conclusively rely on such certificate unless and until STOC shall have
delivered to the Administrative Agent a further certificate canceling or
amending such prior certificate.
(B) LOAN DOCUMENTS. The Administrative Agent shall have
received originals of each of the following Loan Documents:
(I) THIS AGREEMENT. This Agreement, duly
executed by each Borrower, each of the Lenders and the Administrative Agent,
together with all completed SCHEDULES to this Agreement.
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(II) NOTES.
(A) Separate Term Notes dated the
Closing Date, duly executed by each Borrower to each of the Lenders in the
stated principal amount of such Lender's Term Loan Commitment;
(B) Separate Revolving Notes dated the
Closing Date, duly executed by each Borrower to each of the Lenders in the
stated principal amount of such Lender's Revolving Loan Commitment.
(III) DESIGNATIONS OF RESPONSIBLE PERSONS.
Separate Designations of Responsible Persons, duly executed by an authorized
officer of each Borrower.
(IV) COLLATERAL DOCUMENTS. The following
Collateral Documents:
(A) TIMBERLANDS MORTGAGES. The separate
Timberlands Mortgages, each duly executed by the appropriate Borrower, as
mortgagor or trustor, as the case may be, and the Collateral Agent, as
mortgagee, or by the Title Company, as trustee, as the case may be, and duly
notarized, together with legal descriptions of the Land attached respectively
thereto as EXHIBIT A, which Timberlands Mortgages shall concurrently with the
Closing be caused by the Title Company to be recorded in the official records
of the respective jurisdiction in which such Land is located, with written or
verbal confirmation of such recordation to the Administrative Agent by the
Title Company to follow immediately thereafter.
(B) SECURITY AGREEMENTS. The Security
Agreements, duly executed by the appropriate Borrower and the Collateral Agent,
together with all completed schedules to each Security Agreement.
(V) PLEDGE DOCUMENTS. The following Pledge
Documents:
(A) STP PLEDGE AGREEMENT. The STP
Pledge Agreement, duly executed by STP and the Administrative Agent, together
with all completed schedules and exhibits to the STP Pledge Agreement,
including the notice of pledge agreement, the acknowledgment and the initial
transaction statement, and the original certificate(s) of membership interest
evidencing all of STP's membership interest in Pioneer, together with a
membership interest power executed in blank for each certificate.
(B) STT GUARANTY AND PLEDGE AGREEMENT.
The STT Guaranty and Pledge Agreement, duly executed by STT and the
Administrative Agent, together with all completed schedules and exhibits to the
STT Guaranty and Pledge Agreement, including the notice of pledge agreement,
the acknowledgment and the initial transaction statement, and the original
stock certificate(s) of STOC and the certificate(s) of partnership interest
evidencing all of STT's stock interest in STOC and limited partnership interest
in STP, together with a stock power or a partnership interest power, as
applicable, executed in blank for each certificate.
(C) STOC GUARANTY AND PLEDGE
AGREEMENT. The STOC Guaranty and Pledge Agreement, duly executed by STOC and
the Administrative Agent, together with all completed schedules and exhibits to
the STOC Guaranty and Pledge
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Agreement, including the notice of pledge agreement, the acknowledgment and the
initial transaction statement, and the original certificate(s) of general
partnership interest evidencing all of STOC's general partnership interests in
STP, together with a general partnership interest power executed in blank for
each certificate.
(D) LIMITED GUARANTIES BY BROOMS. A
Limited Guaranty, duly executed by Thomas P. Broom and a Limited Guaranty duly
executed by Christopher J. Broom, each dated as of the date hereof, unless in
either case the delivery thereof is waived by the Administrative Agent.
(VI) FINANCING STATEMENTS. The Financing
Statements, naming and duly executed by STP, Pioneer, STT and STOC, as the case
may be, as debtor, and the Collateral Agent or the Administrative Agent, as the
case may be, as secured party, including a description of the personal property
Collateral granted or pledged by STP, Pioneer, STT and STOC, as the case may be
(and in the case of farm product and fixture filings, a legal description of
the real property where the timber or fixtures are located), which Financing
Statements shall concurrently with the Closing be caused to be filed with the
Governmental Authorities indicated on SCHEDULE 3.
(VII) ENVIRONMENTAL INDEMNITY. The Environmental
Indemnity, duly executed by the Borrowers and STT, jointly and severally and
solidarily, in favor of the Lenders, the Administrative Agent and the
Collateral Agent, together with all completed schedules to the Environmental
Indemnity.
(VIII) COLLATERAL AGENCY AGREEMENT. The Collateral
Agency Agreement, duly executed by the Collateral Agent and each of the
Lenders.
(IX) INTERCREDITOR AGREEMENT. The Intercreditor
Agreement, duly executed by the Intercreditor Agent and the Pool Lenders (as
defined therein).
(C) OPINIONS OF COUNSEL. The Administrative Agent shall
have received each of the following originally executed legal opinions, dated
the Closing Date:
(I) Opinion of Borrowers' Counsel (SAB) in form
and substance acceptable to the Administrative Agent;
(II) Opinion of Agent's Counsel (CG) in form and
substance acceptable to the Administrative Agent;
(III) Opinion of Agent's Counsel (SPW) in form
and substance acceptable to the Administrative Agent; and
(IV) Opinion of Agent's Counsel (BJLLC) in form
and substance acceptable to the Administrative Agent.
(D) PAY-OFF LETTERS. The Agent shall have received
separate pay-off letters executed by ABN AMRO in its separate capacities as the
agent for the lenders in respect of the Existing STP Debt, the Existing STT
Debt and the Existing STTII Debt and by First Union
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National Bank in its capacity as the agent for the lenders in respect of the
Existing Pioneer Debt, setting forth the then outstanding amount of the
Existing STP Debt, Existing STT Debt, the Existing STTII Debt and the Existing
Pioneer Debt, as applicable, the amount of any repayments or prepayments of the
Existing STP Debt, Existing STT Debt, Existing STTII Debt or Existing Pioneer
Debt scheduled or reasonably expected to occur between the date of such letter
and May 11, 1999 and the reasonably contemplated accruals of unpaid interest as
of such date; and stating that upon receiving a request for a final pay-off
amount from the Administrative Agent in contemplation of the closing of the IPO
(which request is contemplated to be made promptly after the Administrative
Agent receives notice from the Borrowers that the STT Registration Statement
has been declared effective by the SEC), such agent shall provide a final
pay-off amount for the identified closing date of the IPO, together with a per
diem for accruals of interest thereafter; and stating that upon obtaining
confirmation of receipt by wire transfer of such final payment amount such
agent shall instruct the Escrow Agent, as the escrow holder under the Escrow
Agreement, to record and file all requests for reconveyance, UCC terminations
and other documents or instruments reasonably requested by the Collateral Agent
to effect the termination of all Liens securing the Existing STP Debt, the
Existing STT Debt, the Existing STTII Debt and the Existing Pioneer Debt.
(E) MERGER DOCUMENTS. The Administrative Agent shall
have received copies, certified by the Borrowers, of all of the duly and fully
executed Merger Documents, including all bring-downs and all amendments and
modifications thereto.
(F) IPO DOCUMENTS. The Agent shall have received a
certificate executed by a Responsible Person of each Borrower, that (i) the STT
Registration Statement attached thereto as Exhibit A is final and complete,
including all post-effective amendments, (ii) the SEC has declared the STT
Registration Statement effective (giving the date and time the STT Registration
was declared effective), (iii) the prospectus of STT attached thereto as
Exhibit B is final and complete, including all post-effective supplements, and
(iv) that Underwriter's Agreement between STT and the underwriters for the IPO
and dated substantially concurrent with the SEC's declaring the STT
Registration Statement effective, is final and complete.
(G) CONSUMMATION OF THE MERGER. The Agent shall have
received a file-stamped conformed copy of the Merger Agreement, as filed with
the Secretary of State of the State of Delaware.
(H) CONSUMMATION OF THE IPO. The IPO shall have closed
and the Administrative Agent shall have received confirmation from (i) ABN
AMRO, in its separate capacities as the agent for the lenders in respect of the
Existing STT Debt, that it has received confirmation of receipt of a wire
transfer of immediately available funds to be applied to and sufficient to
repay in full the Existing STT Debt, (ii) the Escrow Agent that the Escrow
Agent has received into escrow pursuant to the Escrow Agreement immediately
available funds an amount equal to the remainder of the Net Issuance Proceeds
of the IPO, which amounts shall have been contributed as equity by STT to STP
to be used, along with the proceeds of the initial funding of Loans under this
Agreement, to repay the Existing STTII Debt, Existing STP Debt and the Existing
Pioneer Debt in full, apportioned according to the amounts set forth in the
Funds Transfer Memorandum referred in SECTION 4.1(BB).
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(I) BORROWING BASE AVAILABILITY. After giving effect to
the application of the Net Issuance Proceeds and the proceeds of the Loans in
accordance with the terms of this Agreement, the Borrowing Base Availability
shall be not less than $40,000,000.
(J) GOVERNMENTAL CONSENTS. The Administrative Agent
shall have received written confirmation that all consents, approvals, orders
and authorizations, and all registrations, declarations and filings with, and
expirations of waiting periods imposed by, any Governmental Authority necessary
for the consummation of the Merger and the IPO contemplated by the Merger
Documents have been obtained.
(K) THIRD PARTY CONSENTS. The Administrative Agent shall
have received written confirmation that all consents, approvals and
authorizations from third Persons required under any material agreement,
contract or other document necessary for the consummation of the Merger and the
IPO or the grant in the Loan Documents of any Lien in favor of the Collateral
Agent or the Administrative Agent have been obtained.
(L) TIMBER VALUATIONS. The Administrative Agent shall
have received (i) the Updated Pioneer Valuation and the Updated STP Valuation,
and (ii) a report, certified by the chief financial officer of each Borrower as
being true and correct, stating the harvest of Timber from the Timberlands
owned by it from the effective date of the Updated Pioneer Valuation or the
Updated STP Valuation, as applicable, through the Closing Date, specifying the
volume of Merchantable Timber harvested during the period by species, parcel
and acreage; provided, however, if either or both of the Updated Pioneer
Valuation and the Updated STP Valuation have not been completed by the Closing
Date, the Administrative Agent shall have received a report, certified by the
chief financial officer of the applicable Borrower as being true and correct,
stating the harvest of Timber from the Timberlands owned by such Borrower,
which information would have been otherwise reflected in the Updated Pioneer
Valuation or the Updated STP Valuation, as applicable, from the effective date
of the October 1998 Pioneer Valuation or the December 1998 STP Valuation, as
applicable, through the Closing Date, specifying the volume of Merchantable
Timber harvested during the period by species, parcel and acreage. The Updated
Pioneer Valuation and the Updated STP Valuation, or the October 1998 Pioneer
Valuation or the December 1998 STP Valuation, as applicable, as so adjusted by
harvest through the Closing Date (with the value of such harvest being derived
from the average price per block determined in the Updated Pioneer Appraisal or
the Updated STP Valuation, as applicable) shall demonstrate the Timberlands
owned by the Borrowers to have a minimum aggregate Value of Merchantable Timber
of $500,000,000 and all of the assets owned by the Borrowers to have a minimum
aggregate market value of $600,000,000.
(M) SENIOR MANAGEMENT AND BOARD OF DIRECTORS OF STT AND
STOC. The senior management, board of directors of STT and STOC shall be as set
forth in the STT Registration Statement as initially filed with the SEC on
January 27, 1999, except for any changes in such senior management or boards of
directors as shall be approved in writing by the Administrative Agent.
(N) FINANCIAL STATEMENTS. The Administrative Agent shall
have received a certificate of an authorized officer of STOC, as the general
partner of STP, having responsibility for financial matters, including the
preparation of financial statements, attaching copies of the
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pro-forma consolidated statements of income and cash flows for five (5) years
of projected operations for each Borrower, assuming the consummation of the
Merger and the IPO.
(O) HARVEST PLAN. The Administrative Agent shall have
received the Harvest Plan, which Harvest Plan shall have been reviewed and
approved by the Administrative Agent.
(P) ENVIRONMENTAL REVIEW. The Administrative Agent shall
have received such environmental assessments and information with respect to
the Land as the Administrative Agent shall reasonably require, in each case,
satisfactory in scope, form and with results acceptable to the Administrative
Agent, including an assessment of endangered and threatened species, disease,
infestation, fire damage, contamination and other regulatory issues which could
have a material adverse effect on the harvestability or the value of
Merchantable Timber located on the Timberlands owned by either Borrower and
other Timber related matters.
(Q) MATERIAL AGREEMENTS. The Administrative Agent shall
have received copies of all material agreements, contracts, instruments and
other documents of each Borrower, or under which either Borrower has rights, or
by which any Property of either Borrower is bound, including, all Cutting
Rights Agreement, Timber Sales Contracts, Harvesting Contracts, supply
agreements, royalty contracts, real and personal property leases, easements,
rights-of-way, road use, trackage and other access agreements and arrangements,
mineral leases, hunting leases, management fee agreements, evidences of
indebtedness, processing, distribution or warehousing contracts, and permits.
(R) ACCESS RIGHTS AND SERVITUDES. The Administrative
Agent shall have received satisfactory evidence that all material access
rights, rights-of-way and other servitudes and rights appurtenant to the Land
have been obtained, including such access rights as are necessary for the
uninterrupted and orderly operation of the Business consistent with the Harvest
Plan.
(S) ENTITLEMENTS. The Administrative Agent shall have
received copies of or other satisfactory evidence each Borrower has obtained
all governmental entitlements necessary or useful to enable such Borrower to
operate the Business consistent with the Harvest Plan, including all
agreements, authorization, licenses, permits and other entitlements (and
applications for the same) relating to mineral rights and access to and the use
of minerals and other natural resources (subject to the reservation of mineral
rights in favor of the predecessor owners of the Bel-Quatre Timberlands).
(T) TITLE POLICY. The Administrative Agent shall have
received an irrevocable and unconditional commitment by the Title Company to
issue an ALTA lenders' policy of title insurance (the "Actual Title Policy")
having an effective date that is the date of recordation of the Timberlands
Mortgages in the official records of the respective jurisdictions, in exactly
the same form as the Pro Forma Title Policy.
(U) INSURANCE. The Administrative Agent shall have
received the certificates evidencing the insurance coverages and limits
maintained by the Borrowers in compliance with the insurance requirements set
forth in ARTICLE VI.
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(V) NO MATERIAL ADVERSE CHANGE. There shall have
occurred no Material Adverse Change since December 31, 1998.
(W) UCC SEARCHES. The Administrative Agent shall have
received certified copies, dated as of a recent date, of form UCC-3 or UCC-11,
as appropriate, requests for copies or information as the Administrative Agent
shall request, accompanied by written evidence (including UCC termination
statements) that the Liens indicated in any such financing statements either
constitute a Permitted Lien or have been or in connection with the Closing will
be terminated or released.
(X) NO LITIGATION. There shall not have been instituted
or overtly threatened any litigation or proceeding in or before any
Governmental Authority to which either Borrower is, or is threatened with
becoming, a party and which could reasonably be expected to result in a
Material Adverse Change.
(Y) THE BORROWERS' BRING-DOWN CERTIFICATE. The
Administrative Agent shall have received a certificate dated the Closing Date,
executed by the president or a vice president of STOC as the general partner of
STP, (i) on behalf of the STP in its individual capacity, and (ii) on behalf of
STP in its capacity as sole member of Pioneer, certifying that:
(A) no Default or Event of Default has
occurred and is continuing; and
(B) the representations and warranties
of each Borrower contained in ARTICLE V of this Agreement are
true, accurate and complete in all material respects (except
for such representations and warranties made as of a
specified date which shall be true, accurate and complete in
all material respects as of such date), taking into account
the consummation of the Merger and the IPO, as of the Closing
Date.
(Z) ARRANGERS/AGENT FEE LETTER. ABN AMRO shall have
received the Arrangers/Agent Fee Letter, duly executed by the Borrowers,
together with the payment of such fees as are set forth in the Fee Letter to be
paid at Closing (the payment of which shall be deemed a concurrent condition).
(AA) ESCROW AGREEMENT. The Administrative Agent shall
have received the Escrow Agreement duly executed by the Escrow Agent, each
Borrower, the Collateral Agent, the Administrative Agent, ABN AMRO in its
separate capacity as the agent for the lenders in respect of the Existing STTII
Debt and as the agent for the lenders in respect of the Existing STP Debt, and
First Union National Bank in its capacity as the agent for the lenders in
respect of the Existing Pioneer Debt, in form and substance satisfactory to
Administrative Agent.
(BB) FUNDS TRANSFER MEMORANDUM. The Administrative Agent
shall have received a funds transfer memorandum dated the Closing Date,
executed by STT, STOC, STP, Pioneer and the Administrative Agent setting forth
the sources and uses of cash as at the Closing in order to consummate the
Merger, the IPO and the funding of the initial Loans under this Agreement.
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(CC) FEES AND COSTS. The Administrative Agent shall have
received an amount equal to the aggregate of the Administrative Agent's good
faith estimate of all Attorney Costs and other disbursements incurred by ABN
AMRO (including in its capacity as the Administrative Agent) in connection with
the Closing of the transactions contemplated hereunder, including the
negotiation and preparation of this Agreement and each of the other Loan
Documents (the payment of which shall be deemed a concurrent condition), which
payment shall be subject to post-Closing adjustment following receipt by the
Administrative Agent of all final invoices.
(DD) OTHER DOCUMENTS. The Administrative Agent or the
Lenders shall have received such other documents and information from the
Borrowers as the Lenders may reasonably request.
SECTION 4.2 THE MAKING OF LOANS. The obligation of the Lenders
to make further advances of any Loans after the initial funding of Loans on the
Closing Date is subject to the satisfaction of the following further conditions
precedent:
(A) The Administrative Agent shall have received a
Notice of Borrowing, with appropriate insertions, executed by a Responsible
Person of the Requesting Borrower.
(B) No event shall have occurred and be continuing or
would result from the making of any Loan on such Funding Date which constitutes
a Default or an Event of Default under this Agreement.
(C) The Administrative Agent shall have received such
other instruments and documents as it may have reasonably requested from the
Borrowers in connection with the requested Borrowing.
(D) A Material Adverse Change shall not have occurred
and be continuing since the date of the most recent audited consolidated
financial statements of STT delivered under SECTION 7.1(B).
ARTICLE V
THE BORROWERS' REPRESENTATIONS AND WARRANTIES
As of the Closing Date and after giving effect to the Merger and the
IPO, each Borrower hereby represents and warrants to each Lender and the
Administrative Agent as follows, and agrees that each of said warranties and
representations shall be deemed to continue so long as any of the Commitments
shall be available hereunder or any Loan or other payment Obligation shall
remain unpaid or unsatisfied, and shall be deemed to have been brought down and
apply anew to the making of each Loan.
SECTION 5.1 ORGANIZATION, POWER AND AUTHORITY OF THE BORROWERS.
(A) STP. STP is a limited partnership duly formed and
validly existing under the laws of the State of Delaware, is duly qualified to
do business and is in good standing in each jurisdiction where the nature of
its business requires such qualification and where the failure to
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so qualify could, with reasonable likelihood, cause or result in a Material
Adverse Change, including each state listed in ITEM 5.1 to the DISCLOSURE
SCHEDULE, and has full power and authority and holds all material requisite
governmental licenses, permits and other approvals and entitlements to enter
into and perform its respective obligations under this Agreement, the Notes,
and each of the other Loan Documents to which it is a party and each of the
Merger Documents to which it is a party, and to own and hold under lease its
Property and to conduct its business substantially as currently conducted by it
and such business as contemplated to be conducted by it upon and following the
consummation of the transactions contemplated by the Merger Documents and the
Loan Documents.
(B) PIONEER. Pioneer is a limited liability company duly
formed and validly existing under the laws of the State of Oregon, is duly
qualified to do business and is in good standing in each jurisdiction where the
nature of its business requires such qualification and where the failure to so
qualify could, with reasonable likelihood, cause or result in a Material
Adverse Change, including each state listed in ITEM 5.1 to the DISCLOSURE
SCHEDULE, and has full power and authority and holds all material requisite
governmental licenses, permits and other approvals and entitlements to enter
into and perform its respective obligations under this Agreement, the Notes,
and each of the other Loan Documents to which it is a party and each of the
Merger Documents to which it is a party, and to own and hold under lease its
Property and to conduct its business substantially as currently conducted by it
and such business as contemplated to be conducted by it upon and following the
consummation of the transactions contemplated by the Merger Documents and the
Loan Documents.
SECTION 5.2 ORGANIZATION, POWER AND AUTHORITY OF THE BORROWERS'
SUBSIDIARIES. As of the Closing the only Subsidiary of STP is Pioneer and
Pioneer has no Subsidiaries. As to and in respect of any bring-down of the
representation and warranty set forth in this SECTION 5.2 subsequent to such
time, if either Borrower shall have, subject to SECTION 7.8, organized, formed
or otherwise acquired a Subsidiary, the following shall supersede and replace
the preceding sentence: Each of the Borrowers' Subsidiaries are duly organized
and validly existing under the laws of the jurisdiction of its incorporation or
formation, is duly qualified to do business and is in good standing in each
jurisdiction where the nature of its business requires such qualification and
where the failure to so qualify could, with reasonable likelihood, cause or
result in a Material Adverse Change, including each state listed in ITEM 5.2 to
the DISCLOSURE SCHEDULE, and has full power and authority and holds all
requisite governmental licenses, permits and other approvals and entitlements
to enter into and perform its obligations under each of the Loan Documents to
which it is a party, and to own and hold under lease its Properties and to
conduct its business substantially as currently conducted by it and such
business as contemplated to be conducted by it.
SECTION 5.3 LOAN DOCUMENTS AUTHORIZED; BINDING OBLIGATIONS. The
execution, delivery and performance of this Agreement, and each of the other
Loan Documents, in each case to which it is a party, have been duly authorized
by all necessary and proper action on the part of each Borrower. The execution,
delivery and payment of the Notes have been duly authorized by all necessary
and proper action on the part of each Borrower. The Loan Documents constitute
legally valid and binding obligations of each Borrower, enforceable against
such Borrower in accordance with their respective terms, except as enforcement
thereof may be limited by bankruptcy, insolvency or other laws affecting the
enforcement of creditors'
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rights generally and by general principles of equity, including concepts of
materiality, reasonableness, good faith and fair dealing (regardless whether
considered in a proceeding at law or in equity and the availability of the
remedy of specific performance).
SECTION 5.4 NO CONFLICT. The execution, delivery and performance
of this Agreement and each of the other Loan Documents, in each case to which
either Borrower is a party, and the execution, delivery and payment of the
Notes by the Borrowers will not contravene any provision of the STP Partnership
Agreement, the Pioneer Operating Agreement, or any other organizational
documents of either Borrower, and will not (a) to the best of either Borrower's
knowledge, after Due Inquiry, contravene, conflict with or violate any material
Requirement of Law, (b) contravene, conflict or violate any applicable order,
writ, judgment, injunction, decree, determination or award of any Governmental
Authority by which either Borrower or any of its Property or assets may be
bound or affected or (c) violate or result in the breach of, or constitute a
default under any loan or credit agreement, indenture or other document (which
documents are, in the aggregate, material) to which either Borrower is a party
or by which either Borrower or any of its Property or assets may be bound or
affected. No Borrower is in violation or breach of or default under any
material Requirement of Law, order, writ, judgment, injunction, decree,
determination or award or any contract, agreement, lease, license, indenture or
other instrument to which it is a party or by which it or any of its Property
is bound, the non-compliance with which, the violation or breach of which or
the default under which could, with reasonable likelihood, cause or result in a
Material Adverse Change.
SECTION 5.5 CAPITAL STRUCTURE. ITEM 5.5 of the DISCLOSURE
SCHEDULE sets forth each of the record and, to the best of each Borrower's
knowledge, after Due Inquiry, beneficial holders of partnership interests or
membership interests, as the case may be, in the Borrowers (including voting
interests of each such Person), by class and number and including the
percentage of each class owned or to be owned by such Person as of the Closing
Date. Except as set forth in ITEM 5.5 of the DISCLOSURE SCHEDULE, there are no
options, warrants, rights to purchase or similar rights covering the
partnership interests or membership interests, as the case may be, in either
Borrower.
SECTION 5.6 FINANCIAL CONDITION. All balance sheets, all
statements of operations, of partners' or members' equity and of changes in
cash flow, and other financial data (other than projections) furnished to the
Administrative Agent for the purposes of or in connection with this Agreement
or any of the other Loan Documents have been and will be prepared in accordance
with GAAP consistently applied throughout the periods involved and will present
fairly the financial condition of the entities involved as of the dates thereof
and the result of their operations for the periods covered thereby (except that
interim financial statements shall be subject to year-end adjustments and may
not have footnotes). All projections which have been furnished to the
Administrative Agent for purposes of or in connection with this Agreement were
prepared in good faith on the basis of the assumptions stated therein, which
assumptions were, in the opinion of the management of each Borrower, fair in
the light of conditions existing at the time of delivery of such forecasts; and
at the time of delivery, the management of each Borrower believed that the
forecasts of its future financial performance set forth in the projections were
reasonable and attainable.
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SECTION 5.7 NO MATERIAL ADVERSE CHANGE. Since the date of the
most recent audited consolidated financial statements of STT furnished to the
Administrative Agent pursuant to SECTION 7.1(B) there has been no Material
Adverse Change.
SECTION 5.8 OWNERSHIP OF PROPERTIES. From and after the Closing
Date, each Borrower, as applicable, owns good and marketable title, in the case
of real property, and merchantable title, in the case of personal property, to
the Collateral, free and clear of Liens except for Permitted Liens.
SECTION 5.9 LITIGATION. Except as disclosed in ITEM 5.9 of the
DISCLOSURE SCHEDULE, there are no claims, actions, suits, proceedings or other
litigation pending or, to the best of either Borrower's knowledge, overtly
threatened against either Borrower or any of either Borrower's Property at law
or in equity before any Governmental Authority or, to the best of either
Borrower's knowledge, any investigation by any Governmental Authority of either
Borrower's affairs or Properties which could, if adversely determined, with
reasonable likelihood, cause or result in a Material Adverse Change. Other than
any liability incident to the litigation or proceedings disclosed in ITEM 5.9
of the DISCLOSURE SCHEDULE and other as otherwise disclosed on ITEM 8.5 of the
DISCLOSURE SCHEDULE, no Borrower has contingent liabilities which are material
and which are not provided for or disclosed in the most recent financial
statements delivered to the Administrative Agent pursuant to SECTION 7.1(a) or
7.1(B).
SECTION 5.10 MATERIAL DOCUMENTS; THIRD PARTY CONSENTS. No
Borrower is a party to, nor is all or any portion of the Land subject to, any
Timber Sales Agreement or Cutting Rights Agreement relating to the Timberlands,
whether written or oral, except as disclosed in ITEM 5.10 of the DISCLOSURE
SCHEDULE. Except as further set forth on ITEM 5.10 of the DISCLOSURE SCHEDULE,
no approval, authorization or consent of any Person under any such document is
required to be obtained by either Borrower in order to make or consummate the
transactions contemplated by the Loan Documents, except as has already been
obtained.
SECTION 5.11 NO GOVERNMENT CONSENTS NEEDED. Except as set forth
on ITEM 5.11 of the DISCLOSURE SCHEDULE and for the filing of the Financing
Statements, the recording of the Timberlands Mortgages, not yet due tax returns
and reports or such of the foregoing as have already been filed, recorded,
registered, or otherwise obtained, no certificate, authorization, permit
consent, approval, order, license, exemption from, or filing or registration or
qualification with, any Governmental Authority is or will be required to
authorize, or is otherwise required in connection with:
(A) the execution and delivery by each Borrower of, and
the payment and performance by each Borrower of its obligations under the
Merger Documents and the Loan Documents; and
(B) the creation of the Liens described in and granted
by each Borrower pursuant to the Loan Documents.
SECTION 5.12 SOLVENCY. Each Borrower is Solvent.
SECTION 5.13 MANAGEMENT AND LABOR AGREEMENTS. Except as set forth
on ITEM 5.13 to the DISCLOSURE SCHEDULE, there are no agreements relating to
the payment of management fees
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to any direct or indirect holder of an equity interest in either Borrower and
there are no collective bargaining agreements or other similar material labor
agreements covering any employees of either Borrower. A true and complete copy
of each such agreement has been furnished to the Administrative Agent.
SECTION 5.14 ERISA COMPLIANCE. Except as specifically disclosed
in ITEM 5.14 of the DISCLOSURE SCHEDULE:
(A) Each Plan is in compliance in all material respects
with the applicable provisions of ERISA, the Code and other federal or state
law. Each Plan which is intended to qualify under Section 401(a) of the Code
has received a favorable determination letter from the IRS and to the best
knowledge of either Borrower, nothing has occurred which would cause the loss
of such qualification. Each Borrower and each ERISA Affiliate have made all
required contributions to any Plan subject to Section 412 of the Code, and no
application for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code has been made with respect to any Plan.
(B) There are no pending or, to the best knowledge of
either Borrower, threatened claims, actions or lawsuits, or actions by any
Governmental Authority, with respect to any Plan which has resulted or could
reasonably be expected to cause or result in a Material Adverse Change. There
has been no prohibited transaction or violation of the fiduciary responsibility
rules with respect to any Plan which has resulted or could reasonably be
expected to cause or result in a Material Adverse Change.
(C) (i) No ERISA Event has occurred or is reasonably
expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability;
(iii) neither Borrower nor any ERISA Affiliate has incurred, or reasonably
expects to incur, any liability under Title IV of ERISA with respect to any
Pension Plan (other than premiums due and not delinquent under Section 4007 of
ERISA); (iv) neither Borrower nor any ERISA Affiliate has incurred, or
reasonably expects to incur, any liability (and no event has occurred which,
with the giving of notice under Section 4219 of ERISA, would result in such
liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer
Plan; (v) neither Borrower nor any ERISA Affiliate has engaged in a transaction
that could be subject to Section 4069 or 4212(c) of ERISA; (vi) neither
Borrower nor any ERISA Affiliate has any liability with respect to "expected
post retirement benefit obligations" within the meaning of Statement of
Financial Accounting Standards No. 106; and (vii) "no prohibited transaction"
(as defined in Section 406 of ERISA and Section 4975 of the Code) that has
resulted or could, with reasonable likelihood, cause or result in a Material
Adverse Change has occurred with respect to any Plan.
SECTION 5.15 MARGIN REGULATIONS. No Borrower owns any "margin
security" as that term is defined in the Margin Regulations, and the proceeds
of the Loans will be used only for the purposes contemplated in this Agreement
hereunder. None of the Loans will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security, for the purpose of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of the Margin
Regulations.
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SECTION 5.16 TAXES. All material federal, state and local tax
returns, reports and statements required to be filed by each Borrower have been
filed with the appropriate Governmental Authorities and all Charges and other
impositions shown thereon to be due and payable by either Borrower have been
paid prior to the date on which any fine, penalty, interest or late charge may
be added thereto for nonpayment thereof, or any such fine, penalty, interest,
late charge or loss has been paid, or such Borrower is contesting its liability
therefor in good faith and has fully reserved all such amounts in the financial
statements delivered to the Administrative Agent and the Lenders pursuant to
SECTIONS 7.1(A) and 7.1(B). Proper and accurate amounts have been withheld by
each Borrower from its employees for all periods in full and complete
compliance with the tax, social security and unemployment withholding
provisions of applicable federal, state, local and foreign law and such
withholdings have been timely paid to the respective Governmental Authorities.
SECTION 5.17 INTELLECTUAL PROPERTY RIGHTS. Each Borrower
possesses and owns all necessary intellectual property rights and all licenses
or sublicenses of intellectual property which are material to the conduct of
its business as contemplated by the Merger Documents and the Loan Documents.
Each Borrower conducts its business without infringement or, to the best of
either Borrower's knowledge, after Due Inquiry, claim of infringement of any
intellectual property right of others, except where such infringement or claim
of infringement could not, with reasonable likelihood, cause or result in a
Material Adverse Change. There is no infringement or, to the best of either
Borrower's knowledge, after Due Inquiry, claim of infringement by others of any
intellectual property owned, licensed or sublicensed by either Borrower.
SECTION 5.18 OTHER REGULATIONS. Neither Borrower is: (a) a
"public utility company" or a "holding company," or an "affiliate" or a
"subsidiary company" of a "holding company," or an "affiliate" of such a
"subsidiary company," as such terms are defined in the Public Utility Holding
Company Act or (b) an "investment company," or an "affiliated person" of, or a
"promoter" or "principal underwriter" for, an "investment company," as such
terms are defined in the Investment Company Act.
SECTION 5.19 YEAR 2000. Each of the Borrowers, STT and STOC has
reviewed the areas within its business and operations which could be adversely
affected by, and has developed or is developing a program to address on a
timely basis, the "Year 2000 Problem" (that is, the risk that computer
applications used by STP and its Subsidiaries (including Pioneer), STT and STOC
may be unable to recognize and perform properly date-sensitive functions
involving certain dates prior to and any date on or after December 31, 1999),
and has made related appropriate inquiry of material suppliers, vendors and
customers. Based on such review and program, the Borrowers believe that the
"Year 2000 Problem" will not cause or result in a Material Adverse Change.
SECTION 5.20 NATURE OF REPRESENTATIONS AND WARRANTIES. Each
Borrower certifies to each Lender and the Administrative Agent that all
representations and warranties made by it in this Agreement and all other Loan
Documents are true, correct and complete in all material respects. Each request
by a Borrower for a Borrowing and each continuation of a LIBOR Loan into
another LIBOR Loan and each conversion of a LIBOR Loan into a Base Rate Loan or
a Base Rate Loan into a LIBOR Loan shall constitute an affirmation that all
such representations and warranties remain true, correct and complete in all
material respects. Each representation
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and warranty made in this Agreement, in any other Loan Document, and in any
other document delivered to any Lender or the Administrative Agent by either
Borrower, shall be deemed to have been relied upon by the Lenders and the
Administrative Agent notwithstanding any investigation, inspection or inquiry
theretofore or thereafter made by or on behalf of the any Lender or the
Administrative Agent, or any funding of Loans by the Lenders.
ARTICLE VI
INSURANCE
SECTION 6.1 INSURANCE BY THE BORROWERS AND SERVICES. Each
Borrower shall procure at its own expense and maintain in full force and effect
at all times on and after the Closing Date and continuing throughout the term
of this Agreement insurance policies with responsible insurance companies,
authorized to do business in the states and countries in which such Borrower
has operations, with a Best Insurance Reports rating of "A-" or better and an
financial size category of "IX" or higher, or, if not rated by Best, a Standard
& Poor's rating of BBB or higher (and other companies acceptable to the
Administrative Agent).
SECTION 6.2 GENERAL INSURANCE REQUIREMENTS. Each Borrower shall
maintain in full force at all times so long as any Commitment shall be
available hereunder or any Loan or other Obligation shall remain unpaid or
unsatisfied, all of the following:
(A) WORKERS' COMPENSATION INSURANCE. Workers'
compensation insurance as required by applicable state laws.
(B) EMPLOYER'S LIABILITY INSURANCE. Employer's liability
insurance with a $1,000,000 minimum limit per accident.
(C) GENERAL LIABILITY INSURANCE. Liability insurance on
an occurrence basis against claims filed anywhere in the world and occurring
anywhere in the world for personal injury (including bodily injury and death)
and property damage. Such insurance shall provide coverage for
products-completed operations, blanket contractual, explosion, collapse and
underground coverage, broad form property damage, personal injury insurance,
and the hostile fire exception to the pollution liability exclusion with a
$1,000,000 minimum limit per occurrence for combined bodily injury and property
damage.
(D) AUTOMOBILE LIABILITY INSURANCE. Automobile liability
insurance against claims for personal injury (including bodily injury and
death) and property damage covering all owned, leased non-owned and hired motor
vehicles, including loading and unloading, with a $1,000,000 minimum limit per
occurrence for combined bodily injury and property damage and containing
appropriate no-fault insurance provisions wherever applicable.
(E) EXCESS INSURANCE. Excess liability insurance on an
occurrence basis covering claims in excess of the underlying insurance
described in the foregoing SECTIONS 6.2(B), (C) and (D), with a $5,000,000
minimum limit per occurrence, provided that aggregate limits of liability, if
any, shall apply separately to claims occurring with respect to the Property.
The amounts of insurance required in the foregoing SECTIONS 6.2(B), (C), (D)
and this SECTION 6.2(E) may be satisfied by such Borrower purchasing coverage
in the amounts specified or by any
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combination of primary and excess insurance, so long as the total amount of
insurance meets the requirements specified above.
(F) STANDING TIMBER. The Administrative Agent
acknowledges that as of the date of this Agreement, insurance covering standing
Timber is not available on commercially reasonable terms and therefore the
Lenders are not requiring the Borrowers to purchase such insurance at this
time.
SECTION 6.3 ENDORSEMENTS. All policies of liability insurance
required to be maintained by each Borrower under SECTION 6.2, other than
employer's liability, shall be endorsed as follows:
(A) to provide a severability of interest or cross
liability clause;
(B) to name each Lender and the Administrative Agent and
their respective officers, agents and employees as additional insureds; and
(C) to provide that the insurance required in CLAUSE
(B), above, shall be primary and not excess to or contributing with any
insurance or self-insurance maintained by the additional insureds.
SECTION 6.4 CONDITIONS.
(A) The Administrative Agent shall have the right to
join either Borrower in adjusting any loss in excess of $2,500,000. All
policies (other than in respect to liability or workers compensation insurance)
shall insure the interests of the Lenders and the Administrative Agent,
regardless of any breach or violation by such Borrower of warranties,
declarations or conditions contained in such policies, any action or inaction
of such Borrower or others, or any foreclosure relating to the Property covered
by such policies or any change in ownership of all or any portion of the
Property covered by such policies (the foregoing may be accomplished by the use
of the Lenders Loss Payable Endorsement required above).
(B) All policies of insurance required to be maintained
pursuant to this ARTICLE VI shall be endorsed so that if at any time should
they be canceled, or coverage be reduced which affects the interests of the
Lenders or the Administrative Agent, such cancellation or reduction shall not
be effective as to the Lender or the Administrative Agent for sixty (60) days,
except for non-payment of premium which shall be for ten (10) days, after
receipt by the Administrative Agent of written notice from such insurer of such
cancellation or reduction.
(C) Each Borrower shall require that all independent
loggers and such Persons as such Borrower shall engage to perform harvesting
operations on the Timberlands shall maintain liability coverage insurance
consistent with industry standards for the applicable region.
SECTION 6.5 EVIDENCE OF INSURANCE. On the Closing Date and on an
annual basis prior to each policy anniversary, each Borrower shall furnish the
Administrative Agent with (a) approved certification of all required insurance
and (b) a schedule of the insurance policies held by or for the benefit of each
Borrower and required to be in force by the provisions of this ARTICLE VI. Such
certification shall be executed by each insurer or by an authorized
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representative of each insurer where it is not practical for such insurer to
execute the certificate itself. Such certification shall identify the
underwriters, the type of insurance, the insurance limits and the policy term
and shall specifically list the special provisions enumerated for such
insurance required by this ARTICLE VI. Upon the request of the Administrative
Agent, the Borrowers will promptly furnish the Administrative Agent with copies
of all insurance policies, binders and cover notes or other evidence of such
insurance relating to the insurance required to be maintained by either
Borrower. The schedule of insurance shall include the name of the insurance
company, policy number, type of insurance, major limits of liability and
expiration date of the insurance policies.
SECTION 6.6 FAILURE TO MAINTAIN INSURANCE. In the event either
Borrower fails to take out or maintain the full insurance coverage required by
this ARTICLE VI, the Administrative Agent may (but shall not be obligated to)
take out policies of insurance to protect the Administrative Agent's and the
Lenders' interest and pay the premiums on the same. All amounts so advanced
thereof by the Administrative Agent shall become an additional obligation of
each Borrower to the Administrative Agent, and either Borrower shall forthwith
pay such amounts to the Administrative Agent, together with interest thereon at
the rate charged on past-due payments on Base Rate Loans from the date so
advanced. The insurance purchased under this provision may, but need not, also
protect the Borrowers' interest.
ARTICLE VII
AFFIRMATIVE COVENANTS OF THE BORROWER
Each Borrower hereby covenants and agrees that, so long as any
Commitment shall be available hereunder or any Loan or other payment Obligation
shall remain unpaid or unsatisfied, unless Required Lenders shall otherwise
waive compliance in writing:
SECTION 7.1 RECORDS AND REPORTS. Each Borrower shall maintain a
system of accounting administered in accordance with sound business practices
to permit preparation of financial statements in conformity with GAAP, and
deliver to the Administrative Agent and each Lender:
(A) QUARTERLY BORROWER-PREPARED FINANCIAL STATEMENTS. As
soon as practicable and in any event, commencing with the Fiscal Quarter ending
June 30, 1999, within forty-five (45) days after the end of each Fiscal
Quarter, a consolidated (and consolidating) balance sheet of STP, as at the end
of such period and the related consolidated (and as to statements of income
only, consolidating) statements of income, partners' equity and cash flows of
STP and its Subsidiaries (including Pioneer) prepared for such Fiscal Quarter
and for such Fiscal Year to date, setting forth in each case in comparative
form the figures for the corresponding periods of the previous Fiscal Year, all
in reasonable detail and certified by the chief financial officer of each
Borrower that they (i) are complete and fairly present the financial condition
of STP and its Subsidiaries (including Pioneer) as at the dates indicated and
the results of its operations and changes in their cash flow for the periods
indicated, (ii) disclose all liabilities of STP and its Subsidiaries (including
Pioneer) that are required to be reflected or reserved against under GAAP,
whether liquidated or unliquidated, fixed or contingent and (iii) have been
prepared in accordance with GAAP, subject to the absence of footnotes and
changes
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resulting from audit and normal year-end adjustments; provided, that the
delivery of STT's Quarterly Report on Form 10 -Q prepared in compliance with
the requirements therefor and filed with the SEC shall be deemed to satisfy the
requirements of this SECTION 7.1(A) if such Quarterly Report complies with the
timing and information requirements of this SECTION 7.1(A);
(B) ANNUAL AUDITED FINANCIAL STATEMENTS. As soon as
practicable and in any event within ninety (90) days after the end of each
Fiscal Year, a consolidated (and consolidating) balance sheet as at the end of
such year and the related consolidated (and, as to statements of income only,
consolidating) statements of income, partners' equity and cash flows of STP and
its Subsidiaries (including Pioneer) and prepared for such Fiscal Year, setting
forth in each case, in comparative form the figures for the previous year, all
in reasonable detail and (i) in the case of such financial statements,
accompanied by a report thereon of Arthur Andersen LLP or other independent
public accountants of recognized national standing selected by the Borrowers
and reasonably satisfactory to the Administrative Agent, which report shall not
contain an adverse opinion, a disclaimer of opinion or be qualified or limited
because of a restricted or limited examination by such accountant of any
material portion of either Borrower's records and shall state that such
financial statements present fairly the financial position of each Borrower as
at the dates indicated and the results of its operations and changes in its
financial position for the periods indicated in conformity with GAAP applied on
a basis consistent with prior years (except as otherwise stated therein) and
that the examination by such accountants in connection with such consolidated
financial statements has been made in accordance with generally accepted
auditing standards and (ii) in the case of such consolidating financial
statements, certified by the chief financial officer of each Borrower;
provided, that the delivery within the time period specified in this SECTION
7.1(B) of STT's Annual Report on Form 10-K for such fiscal year (together with
STT's annual report to shareholders prepared pursuant to Rule 14a-3 under the
Securities Exchange Act of 1934, as amended) prepared in accordance with the
requirements therefor, together with the Accountants' Statement described in
SECTION 7.1(C), shall be deemed to satisfy the requirements of this SECTION
7.1(B) if such Annual Report complies with the timing and information
requirements of this SECTION 7.1(B);
(C) ACCOUNTANTS' STATEMENT. Together with each delivery
of financial statements pursuant to SECTION 7.1(B), a written statement by the
independent public accountants giving the report thereon (i) stating that their
audit examination has included a review of the terms of this Agreement and the
Notes as they relate to accounting matters, (ii) stating whether, in connection
with their audit examination, any condition or event which constitutes a
Default or an Event of Default as they relate to accounting matters has come to
their attention, and if such a condition or event has come to their attention,
specifying the nature and period of existence thereof; provided that such
accountants shall not be liable by reason of any failure to obtain knowledge of
any such Default or Event of Default that would not be disclosed in the course
of their audit examination, and (iii) stating that based on their audit
examination nothing has come to their attention which causes them to believe
that either or both the information contained in the certificates as they
relate to accounting matters delivered therewith pursuant to SECTION 7.1(B), is
not correct or that the matters set forth in the Compliance Certificates
delivered therewith for the applicable Fiscal Year are not stated in accordance
with the terms of this Agreement; provided, that the delivery of the opinion
prepared by Borrowers' independent public accountants in connection with STT's
Annual Report on Form 10-K for such fiscal year
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shall be deemed to satisfy the requirements of this SECTION 7.1(C) to the
extent such opinion or report complies with the timing and information
requirements of this SECTION 7.1(C);
(D) COMPLIANCE CERTIFICATE. As soon as practicable and
in any event within forty-five (45) days after the end of each Fiscal Quarter,
a Compliance Certificate dated as of the last day of such Fiscal Quarter, duly
executed by the chief financial officer of each Borrower, with appropriate
insertions satisfactory to the Administrative Agent, which Compliance
Certificate for the fourth Fiscal Quarter in each Fiscal Year shall also
include a certification by each Borrower that, based on the one year financial
forecasts furnished to the Administrative Agent pursuant to SECTION 7.1(H), the
Borrowers will be able to comply with its financial covenants set forth in
ARTICLE IX during the current Fiscal Year;
(E) BORROWING BASE CERTIFICATE. As soon as practicable
and in any event within forty-five (45) days after the end of each Fiscal
Quarter, a Borrowing Base Certificate dated as of the last day of such Fiscal
Quarter, duly executed by the chief financial officer of each Borrower with
appropriate insertions satisfactory to the Administrative Agent, which
Borrowing Base Certificate shall be subject to review and approval by the
Lenders' Forestry Consultants;
(F) QUARTERLY TIMBER REPORT. As soon as practicable and
in any event within forty-five (45) days after the end of each Fiscal Quarter,
a certificate duly executed by the chief financial officer of each Borrower, in
substantially the form of EXHIBIT I, certifying and setting forth a complete
report of all Timber harvesting operations and material Cutting Rights
Agreements for such Fiscal Quarter, which report will be in a form reasonably
acceptable to the Administrative Agent and shall require such information as
the Administrative Agent shall reasonably require, which information may
include the following:
(I) a summary of activity, including a
breakdown of harvesting under stumpage agreements and under other types of
agreements, under (A) all outstanding timber cutting contracts or log sale
agreements or auctions or sales of logs conducted orally on Timberlands whereby
either Borrower as seller, is or may become obligated to cut, harvest or
otherwise remove Timber and to sell or deliver such Timber to third Persons,
and (B) all Cutting Rights Agreements and Timber Sales Agreements;
(II) the total amount of Timber cut since the
Closing Date and during the previous Fiscal Quarter classified (A) by
Timberlands parcel, (B) by species and (C) by total volumes removed and acreage
disposed of;
(III) all sales, exchanges and other dispositions
of acreage or land during the previous Fiscal Quarter;
(IV) all proceeds received and revenues
generated by each Timberlands parcel by such cutting, harvesting, sale,
exchange or other disposition during the previous Fiscal Quarter and any other
receipts from operation of the Timberlands such as wood use fees;
(V) a summary of operating costs incurred in
each Timberlands parcel by such cutting, harvesting or removal during the
previous Fiscal Quarter; and
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(VI) a summary of the status of Timber
harvesting and similar permits applied for and received by either Borrower.
(G) MERCHANTABLE TIMBER VALUATION REPORTS.
(I) As soon as practicable, and in any event
within forty-five (45) days after the end of each Fiscal Year, a written
valuation ("Merchantable Timber Valuation Report") prepared by an independent
timber appraiser of recognized standing, acceptable to the Administrative Agent
(which may be the Lenders' Forestry Consultants), as to the value of the
Merchantable Timber standing on the Land subject to a Timberlands Mortgage,
which Merchantable Timber Valuation Report, if prepared by any Person other
than Lenders' Forestry Consultants, shall be subject to the review and approval
of Lenders' Forestry Consultants.
(II) As soon as practicable and in any event
within forty-five (45) days after the end of each Fiscal Quarter, a written
report prepared by an independent timber appraiser of recognized standing,
acceptable to the Administrative Agent, updating the most recently delivered
Merchantable Timber Valuation Report (the "Updated Merchantable Timber
Valuation Report"), which update report shall be subject to the review and
approval of Lenders' Forestry Consultants; provided, that if the Administrative
Agent shall not have received the Updated Pioneer Valuation or the Updated STP
Valuation prior to the Closing Date, the Borrowers shall deliver to the
Administrative Agent and each Lender, immediately upon receipt by Borrower, the
Updated Pioneer Valuation or the Updated STP Valuation, as applicable.
(H) FINANCIAL FORECASTS. No later than forty-five (45)
days prior to the end of any Fiscal Year, a one (1) year (prepared on a
quarterly basis) budget and business plan and a budget and business plan for
the Fiscal Years remaining through December 31, 2004, each including a pro
forma balance sheet and statements of income and cash flows and showing
projected operating revenues, expenses and debt service of each Borrower and
the volume of harvesting anticipated to be done under stumpage agreements and
under other types of agreements;
(I) OTHER REPORTS. Promptly upon receipt thereof, copies
of all reports submitted to either Borrower by independent public accountants
in connection with each annual, interim or special audit of the financial
statements of such Borrower made by such accountants, including any comment
letter submitted by such accountants to management in connection with their
annual audit;
(J) NOTICES. Promptly upon any officer of either
Borrower obtaining knowledge (i) of any condition or event which constitutes a
Default or an Event of Default under this Agreement, (ii) that any Person has
given any notice to either Borrower or taken any other action with respect to a
claimed default or event or condition of the type referred to in SECTION
10.1(C), (iii) of the institution of any litigation or investigation (or overt
threat to institute) by any Person, including any Governmental Authority
involving any alleged (regardless of whether insured) liability of either
Borrower, or the Borrowers in the aggregate, equal to or greater than
$5,000,000 or any adverse determination in any litigation involving a potential
liability of either Borrower, or the Borrowers in the aggregate, equal to or
greater than $5,000,000 or (iv) of any Material Adverse Change, a certificate
of a Responsible Person of such
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Borrower specifying the notice given or action taken by such Person and the
nature of such claimed Default, Event of Default, event or condition and what
action such Borrower has taken, is taking and proposes to take with respect
thereto;
(K) ERISA. With reasonable promptness, notice of the
occurrence of any of the following events affecting either Borrower or any
ERISA Affiliate (but in no event more than ten (10) days after such event), and
a copy of any notice with respect to such event that is filed with a
Governmental Authority and any notice delivered by a Governmental Authority to
either Borrower or any ERISA Affiliate with respect to such event:
(I) an ERISA Event;
(II) a material increase in the Unfunded Pension
Liability of any Pension Plan;
(III) the adoption of, or the commencement of
contributions to, any Plan subject to Section 412 of the Code by either
Borrower or any ERISA Affiliate;
(IV) the adoption of any amendment to a Plan
subject to Section 412 of the Code, if such amendment results in a material
increase in contributions or Unfunded Pension Liability;
(V) a "prohibited transaction" (as defined in
Section 406 of ERISA and Section 4975 of the Code) that would result in any
material liability to either Borrower or any ERISA Affiliate; or
(VI) any challenge by the IRS to the tax
qualification of any Pension Plan under Section 401 or 501 of the Code; and
(L) SEC FILING. Within five (5) Business Days of the
filing thereof with the SEC, copies of any registration statements, prospecti,
10-Ks, 8-Ks, 10-Qs and all other documents or information filed with the SEC by
or on behalf of either Borrower, STT or STOC or any third Person into whom any
one or more of the foregoing Persons have been merged or consolidated if such
third Person is the surviving entity;
(M) OTHER INFORMATION. With reasonable promptness, such
other reports, information and data, including lists of Property and accounts,
budgets, agreements with insurers, forecasts, federal, state and foreign tax
returns and reports, with respect to either Borrower as from time to time may
be reasonably requested by the Administrative Agent or any Lender.
All financial statements of each Borrower to be delivered by such
Borrower pursuant to this SECTION 7.1 will be complete and correct and present
fairly the financial condition of such Borrower as of the date thereof; will
disclose all liabilities of such Borrower that are required to be reflected or
reserved against under GAAP, whether liquidated or unliquidated, fixed or
contingent; and will have been prepared in accordance with GAAP (subject, in
the case of interim financial statements, to year-end adjustments). Each
Borrower hereby agrees that each time it submits a financial statement, such
Borrower shall be deemed to represent and warrant to
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the Lenders that such financial statement complies with all of the preceding
requirements set forth in this paragraph.
Statements of financial performance required to be provided by the
Borrowers to the Administrative Agent pursuant to this SECTION 7.1 shall (i)
include a statement that the Year 2000 remediation efforts of the Borrowers,
STT and STOC are proceeding as scheduled and no Material Adverse Change is
expected to result from the "Year 2000 Problem" (within the meaning of such
term set forth in SECTION 5.19) or such remediation efforts and (ii) indicate
whether an auditor, regulator or third party consultant has issued a management
letter or other communication regarding the Year 2000 exposure, program or
progress of either Borrower, STT or STOC.
SECTION 7.2 MAINTENANCE OF RIGHTS AND PROPERTIES. The Borrower
shall:
(A) MAINTENANCE OF EXISTENCE AND RIGHTS. Maintain and
preserve in full force and effect its existence as a limited partnership, in
the case of STP, or a limited liability company, in the case of Pioneer, and
all rights, licenses, leases, qualifications, privileges, franchises and other
authority adequate for the conduct of its business except where the lapsing of
any of the foregoing could not, with reasonable likelihood, cause or result in
a Material Adverse Change; and
(B) MAINTENANCE OF PROPERTIES. Maintain, preserve and
protect its properties, assets, equipment and facilities in good order and
working repair and condition (taking into consideration ordinary wear and tear)
and from time to time make, or cause to be made, all needful and proper
repairs, renewals and replacements thereto.
SECTION 7.3 TAXES AND OTHER LIABILITIES. Each Borrower shall
promptly pay and discharge all Charges when due and payable, except (a) such as
may be paid thereafter without penalty or (b) such as may be contested in good
faith by appropriate proceedings and for which an adequate reserve has been
established and is maintained in accordance with GAAP. Each Borrower shall
promptly notify the Administrative Agent of any material challenge, contest or
proceeding pending by or against such Borrower before any taxing authority.
SECTION 7.4 INSPECTION OF BOOKS AND RECORDS. Each Borrower shall
from time to time during normal business hours and upon reasonable notice
(except that if an Event of Default shall have occurred and be continuing, no
such notice is required) permit the Administrative Agent or any Lender or any
of their respective representatives, to visit all of its offices, places of
business and any property owned or leased by it to discuss its financial
matters with its officers and independent public accountant (and each Borrower
hereby authorizes such independent public accountant to discuss such Borrower's
financial matters with the Administrative Agent or such Lender or its
representatives whether or not any representative of such Borrower is present)
and to examine (and, at the expense of such Borrower, photocopy extracts from)
any of its books or other corporate records or to inspect any of such
Borrower's or any of its Subsidiaries' places of business or property. The
Borrowers shall pay any fees of such independent public accountant incurred in
connection with the Administrative Agent's or such Lender's exercise of its
rights pursuant to this SECTION 7.4.
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SECTION 7.5 MARKETING OF TIMBER. Each Borrower shall use
commercially reasonable efforts to market and sell the Timber owned by such
Borrower, subject to all of the requirements and conditions of this Agreement
and the other Loan Documents, consistent with sound forestry management.
SECTION 7.6 COMPLIANCE WITH LAWS. Each Borrower shall exercise
due diligence in order to comply with the requirements of all applicable
Requirements of Laws, non-compliance with which could, with reasonable
likelihood, cause or result in a Material Adverse Change; provided, however,
that either Borrower may appeal or contest any act, regulation, judgment,
order, decree or direction in any reasonable manner which shall not, in the
opinion of Required Lenders, adversely affect the Lenders' rights hereunder or
adversely affect the priority of the Administrative Agent's or any Lender's
Lien in, on and to any of the Collateral.
SECTION 7.7 INTEREST RATE PROTECTION. The Borrowers shall have
in place not later than thirty (30) days following the Closing, and maintain
for such time as any principal balance of the Loans shall remain outstanding, a
Rate Contract capping for a period of not less than forty-eight (48) months the
Borrowers' interest rate risk during each Fiscal Year on notional amounts equal
to not less than $100,000,000 at an all-in fixed rate of interest per annum not
to exceed eight and one-half of one percent (8.5 %).
SECTION 7.8 NEW SUBSIDIARIES. In the event that STT, STOC, STP
or Pioneer (or any New Subsidiary, as defined below) forms, purchases or
acquires (whether for consideration or otherwise) any Subsidiary other than
those Persons which are, as of the Closing Date, Subsidiaries of any of them (a
"New Subsidiary"), then the Person which has so formed, acquired or purchased
such New Subsidiary shall (at its own expense), within thirty (30) days of the
date of such formation, acquisition or purchase, deliver to the Administrative
Agent the following documents (which shall be in form and substance reasonably
acceptable to the Administrative Agent): (A) a pledge agreement by such Person
in favor of Administrative Agent pledging all of such Person's equity interests
in the New Subsidiary, (B) a guaranty by the New Subsidiary of all of the
Obligations and (C) opinions of counsel, reasonably acceptable to
Administrative Agent, as to the validity and enforceability of such foregoing
agreements.
SECTION 7.9 AGREEMENTS. Each Borrower shall perform, within all
required time periods (after giving effect to any applicable grace periods),
all of its obligations and enforce all of its rights under each agreement to
which it is a party, including any leases to which it is a party, where the
failure to so perform and enforce could, with reasonable likelihood, cause or
result in a Material Adverse Change. No Borrower shall terminate or modify any
provision of any agreement to which either Borrower is a party with respect to
which such termination or modification could, with reasonable likelihood, cause
or result in a Material Adverse Change.
SECTION 7.10 SUPPLEMENTAL DISCLOSURE. From time to time (in the
event that such information is not otherwise delivered by either Borrower to
the Administrative Agent or the Lenders pursuant to this Agreement), so long as
there are Obligations outstanding hereunder, each Borrower shall disclose to
the Administrative Agent in writing any material matter hereafter arising
which, if existing or occurring at the date of this Agreement, would have been
required to be set forth or described by
68.
<PAGE> 79
either Borrower under the terms of this Agreement or any of the other Loan
Documents or which is necessary to correct any information set forth or
described by either Borrower hereunder or thereunder or in connection herewith
which has been rendered materially inaccurate thereby.
SECTION 7.11 FURTHER ASSURANCES. In addition to the obligations
and documents which this Agreement expressly requires each Borrower to execute,
acknowledge, deliver and perform, such Borrower shall execute and acknowledge
(or cause to be executed and acknowledged) and deliver to the Administrative
Agent all documents, and take all actions, that may be reasonably requested by
the Administrative Agent or the Lenders from time to time to confirm the rights
created or now or hereafter intended to be created under the Loan Documents, to
protect and further the validity, priority and enforceability of the Liens
created under the Collateral Documents, to subject to the Liens created under
the Collateral Documents any Property intended by the terms of any Loan
Document to be covered by the Collateral Documents, or otherwise to carry out
the purposes of the Loan Documents and the transactions contemplated hereunder
and thereunder.
ARTICLE VIII
NEGATIVE COVENANTS OF THE BORROWERS
Each Borrower hereby agrees that, so long as any Lender shall have any
Commitment hereunder, or any Loan or other payment Obligation shall remain
unpaid or unsatisfied, unless the Required Lenders waive compliance in writing:
SECTION 8.1 LIMITATION ON LIENS. No Borrower shall, nor shall it
permit any of its Subsidiaries to, directly or indirectly, make, create, incur,
assume or suffer to exist any Lien upon or with respect to any part of their
Property, whether now owned or hereafter acquired, other than the following
(collectively, the "Permitted Liens"):
(A) Liens created under any Loan Document in favor of
the Collateral Agent, the Administrative Agent or any Lender;
(B) Liens created in favor of the Collateral Agent
securing Pari Passu Debt permitted under SECTION 8.5(B);
(C) the Permitted Title Exceptions;
(D) other Liens existing as of the Closing Date
disclosed on ITEM 8.1 of the DISCLOSURE SCHEDULE;
(E) Liens for taxes, fees, assessments or other
governmental Charges which are not delinquent or remain payable without
penalty, or to the extent that non-payment thereof is permitted by SECTION 7.3;
provided that no notice of lien has been filed or recorded under the Code;
(F) Liens (other than any Lien imposed by ERISA and
other than on the Collateral) consisting of pledges or deposits required in the
Ordinary Course of Business in connection with workers' compensation,
unemployment insurance and other social security legislation;
69.
<PAGE> 80
(G) Liens securing Capital Lease Obligations on Property
subject to such capital leases; provided that such capital leases are permitted
under SECTION 8.8(B);
(H) carriers', warehousemen's, mechanics', loggers',
landlords', materialmen's, repairmen's or other similar Liens (whether arising
by operation of law, contract or otherwise) arising in the Ordinary Course of
Business which are not delinquent or remain payable without penalty or which
are being contested in good faith and by appropriate proceedings, which
proceedings have the effect of preventing the forfeiture or sale of the
Property subject thereto;
(I) access easements, road use rights, utility easements
and other similar easements, licenses, servitudes and permits relating to the
Land granted to Governmental Authorities and other Persons which do not
materially impair the use or worth of the Land;
(J) any interest or title of a lessor under an operating
lease;
(K) any money judgment, writ or warrant of attachment or
similar process entered or filed against either Borrower or any Subsidiary if
the judgment it secures shall, within thirty (30) days after the entry thereof,
have been discharged or execution thereof stayed pending appeal, or shall have
been discharged within thirty (30) days after the expiration of such stay;
(L) Liens securing (i) the non-delinquent performance of
bids, trade contracts (other than for borrowed money) or statutory obligations,
(ii) Contingent Obligations in respect of surety and appeal bonds, and (iii)
other non-delinquent obligations of a like nature, in each case incurred in the
Ordinary Course of Business; provided all such Liens in the aggregate could not
(even if enforced), with reasonable likelihood, cause or result in a Material
Adverse Change; and
(M) Liens arising solely by virtue of any contractual or
statutory or common law provision relating to banker's liens, rights of set-off
or similar rights and remedies as to deposit accounts or other funds maintained
with a creditor depository institution; provided that (i) such deposit account
is not a dedicated cash collateral account and is not subject to restrictions
against access by either Borrower in excess of those set forth by regulations
promulgated by the Federal Reserve Board, and (ii) such deposit account is not
intended by either Borrower or any of its Subsidiaries to provide collateral to
the depository institution.
SECTION 8.2 DISPOSITION OF ASSETS. No Borrower shall, nor shall
it permit any of its Subsidiaries to, directly or indirectly, sell, assign,
lease, convey, transfer or otherwise dispose of (whether in one or a series of
transactions) any Property or enter into any agreement to do any of the
foregoing, except:
(A) Dispositions of Property, including Dispositions of
Land or Timber, in each case which are made for not less than fair market
value, so long as such Disposition does not (after giving effect to any
prepayments made by either Borrower prior to, or concurrently with, such
Disposition) create an Over Advance (each a "Permitted Asset Disposition");
(B) Dispositions of used, worn-out or surplus equipment
in the Ordinary Course of Business;
70.
<PAGE> 81
(C) Dispositions of equipment to the extent that such
equipment is exchanged for credit against the purchase price of similar
replacement equipment, or the proceeds of such sale are reasonably promptly
applied to the purchase price of such replacement equipment; and
(D) Leases, entered into in the Ordinary Course of
Business, of houses and of other improvements not material to the operation of
either Borrower's Business, leases of portions of the Land that are not
suitable for Timber production or that are not being used for Timber production
as of the date of this Agreement, leases for hunting, fishing or other
recreational purposes, and leases for purposes of growing and harvesting crops
other than Timber.
SECTION 8.3 CONSOLIDATIONS AND MERGERS. No Borrower shall, nor
shall it permit any of its Subsidiaries to, merge or consolidate or enter into
any similar arrangement with or into, directly or indirectly, whether by
operation of law or otherwise, or convey, transfer, lease or otherwise dispose
of (whether in one transaction or in a series of transactions) all or
substantially all of its assets (whether now owned or hereafter acquired) to or
in favor of any Person, except (a) a merger of a wholly-owned Subsidiary of
either Borrower into such Borrower with such Borrower being the surviving
entity, (b) a merger of a wholly-owned Subsidiary of either Borrower into
another wholly-owned Subsidiary of such Borrower or (c) a merger of Pioneer
into STP, with STP being the surviving entity; provided, that prior to such
merger becoming effective the Borrowers shall have executed and delivered such
agreements, documents and instruments, including amendments to or restatements
of the Timberlands Mortgages and other Collateral Documents, and such
endorsements to the Actual Title Policy as the Administrative Agent reasonably
requires and to otherwise cooperate with the Administrative Agent to assure the
continuing post-merger perfection and priority of the Liens granted to Pioneer
under the Collateral Documents.
SECTION 8.4 ACQUISITIONS; LOANS AND INVESTMENTS. Except as may
be permitted by SECTION 8.4 or 8.9, no Borrower shall, nor shall it permit any
of its Subsidiaries to, make any Acquisition or enter into any agreement to
make any Acquisition, or make, purchase or acquire any Investment in, any
Person or make any advance, loan, extension of credit or capital contribution
to any Person, including any Affiliate of either Borrower, or make any
commitment with respect to any of the foregoing, except for:
(A) the following Acquisitions of Timberlands:
(I) Acquisitions of Timberlands located within
the United States of America that do not involve or require the incurrence of
additional Indebtedness by either Borrower to fund or finance the purchase
price thereof; provided, that (A) such Timberlands shall, immediately upon
their acquisition, become additional Collateral securing the Obligations
hereunder, subject to a validly created, duly perfected first priority Lien in
favor of the Collateral Agent arising under the Collateral Documents, including
such new Timberlands Mortgages, security agreements or other Collateral
Documents as the Collateral Agent shall reasonably require to effect the
creation and perfection of the Collateral Agent's Lien on such Collateral, and
(B) the Collateral Agent shall have received such endorsements to the Actual
Title Policy, such additional extended ALTA lenders' policies of title
insurance (in form substantially comparable to the Actual Title Policy) or such
other confirmation as the Collateral Agent shall
71.
<PAGE> 82
reasonably require to confirm the first priority status of the Collateral
Agent's Lien on all of the Collateral (both existing and new), subject only to
Permitted Title Exceptions; and
(II) Acquisitions of Timberlands located within
the United States of America, which Acquisitions involve or require the
incurrence of additional Indebtedness by one or both Borrowers to fund or
finance the purchase price thereof, which additional Indebtedness may be
incurred under the Borrowing Base Availability then in effect, after giving
effect to the incurrence of such additional Indebtedness, without resulting in
an Over Advance; provided, that (A) any Indebtedness incurred to fund or
finance such Acquisition shall be in the form of Loans hereunder, Pari Passu
Debt permitted under SECTION 8.5(B) or unsecured Indebtedness permitted under
SECTION 8.5(H); (B) such Timberlands shall, immediately upon their acquisition,
become additional Collateral securing the Obligations hereunder, subject to a
validly created, duly perfected first priority Lien in favor of the Collateral
Agent arising under the Collateral Documents, including such new Timberlands
Mortgages, security agreements or other Collateral Documents as the Collateral
Agent shall reasonably required to effect the creation and perfection of the
Collateral Agent's Lien on such Collateral; (C) the Collateral Agent shall have
received such amendments or modifications to the existing Timberlands Mortgages
as deemed necessary or reasonably advisable by the Collateral Agent to continue
and confirm the first priority status of the Collateral Agent's Lien on such
existing Collateral; and (D) the Collateral Agent shall have received such
endorsements to the Actual Title Policy, such additional extended ALTA lenders'
policies of title insurance (in form substantially comparable to the Actual
Title Policy) or such other confirmation as the Collateral Agent shall
reasonably require to confirm the first priority status of the Collateral
Agent's Lien on all of the Collateral (both existing and new), subject only to
Permitted Title Exceptions; and
(III) Acquisitions of Timberlands located within
the United States of America, which Acquisitions shall involve or require the
incurrence of additional Indebtedness by one or both Borrowers to fund or
finance the purchase price thereof, which additional Indebtedness may not be
incurred under the Borrowing Base Availability then in effect without resulting
in an Over Advance; provided, that (A) prior to such Acquisition, the
Administrative Agent shall have received an appraisal as to the Timberlands to
be acquired and the related merchantability criteria, Timber volumes, Timber
pricing, and harvest and operating projections, which appraisal shall be in
form and substance acceptable to the Administrative Agent in its sole and
absolute discretion; (B) any Indebtedness incurred to fund or finance such
Acquisition shall be in the form of Loans hereunder, Pari Passu Debt permitted
under SECTION 8.5(B) or unsecured Indebtedness permitted under SECTION 8.5(H);
and (C) after giving effect to the addition of the Value of Merchantable Timber
located on such acquired Timberlands to the Borrowing Base, there shall be
sufficient availability under the Borrowing Base Availability to incur such
Loans or Pari Passu Debt, as applicable; (D) such Timberlands shall,
immediately upon their acquisition, become additional Collateral securing the
Obligations hereunder, subject to a validly created, duly perfected first
priority Lien in favor of the Collateral Agent arising under the Collateral
Documents, including such new Timberlands Mortgages, security agreements or
other Collateral Documents as the Collateral Agent shall reasonably require to
effect the creation and perfection of the Collateral Agent's Lien on such
Collateral; (E) the Collateral Agent shall have received such amendments or
modifications to the existing Timberlands Mortgages as deemed necessary or
reasonably advisable by the Collateral Agent to continue and confirm the first
priority status of the Collateral Agent's Lien on such existing Collateral; and
(F) the Collateral
72.
<PAGE> 83
Agent shall have received such endorsements to the Actual Title Policy, such
additional extended ALTA lenders' policies of title insurance (in form
substantially comparable to the Actual Title Policy) or such other confirmation
as the Collateral Agent shall reasonably require to confirm the first priority
status of the Collateral Agent's Lien on all of the Collateral (both existing
and new), subject only to Permitted Title Exceptions;
(B) investments in Cash Equivalents;
(C) extensions of credit in the form of Contingent
Obligations to the extent expressly permitted by SECTION 8.5;
(D) Investments of the net issuance proceeds of new cash
equity raised by STP subsequent to the Closing; provided that such net issuance
proceeds are invested in the Business;
(E) Investments in the form of any Rate Contract entered
into with any counterparty pursuant to SECTION 7.7; and
(F) Investments set forth on ITEM 8.4 of the DISCLOSURE
SCHEDULE.
Notwithstanding anything to the contrary contained in this Agreement, (1) any
and all Acquisitions that are not in the Ordinary Course of Business and not
related to the Business shall require the prior written consent of all Lenders,
and (2) Acquisitions of Timberlands outside of the United States of America
shall require the prior written consent of Required Lenders. Without limiting
the generality of the foregoing, the exception for Acquisitions of Timberlands
under CLAUSE (A) above, is intended to include the acquisition of other
ancillary assets related to and to be used in the Business comprising a
nonmaterial portion of the aggregate, all-in purchase price for such
Acquisition. For purposes of the preceding sentence, "nonmaterial" shall mean
having an allocated purchase price of less than both (1) $5,000,000 and (2)
five percent (5.0%) of the aggregate, all-in purchase price for such
Acquisition.
SECTION 8.5 LIMITATION ON INDEBTEDNESS. No Borrower shall, nor
shall it permit any of its Subsidiaries to, create, incur, assume, suffer to
exist, or otherwise become or remain directly or indirectly liable with respect
to, any Indebtedness, including any Contingent Obligation, except:
(A) Indebtedness incurred pursuant to this Agreement,
the Notes and the other Loan Documents;
(B) Pari Passu Debt; provided, that the Borrowers shall
have delivered to thE Administrative Agent a certificate of the chief financial
officer of each Borrower certifying that, after the incurrence thereof, (i) the
Financial Covenants set forth in ARTICLE IX shall be satisfied on the last day
of the Fiscal Quarter most recently ended on a pro forma basis as if such Pari
Passu Debt was incurred on such last day, and (ii) no Default or Event of
Default shall have occurred and be continuing;
(C) Indebtedness incurred pursuant to any Rate Contract
entered into with any counterparty pursuant to SECTION 7.7;
73.
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(D) accounts payable to trade creditors for goods and
services and current operating liabilities (not the result of the borrowing of
money) incurred in the Ordinary Course of Business in accordance with customary
terms and paid within the specified time, unless contested in good faith by
appropriate proceedings and reserved for in accordance with GAAP;
(E) Indebtedness existing on the Closing Date and set
forth in ITEM 8.5 of the DISCLOSURE SCHEDULE;
(F) endorsements for collection or deposit in the
Ordinary Course of Business;
(G) Indebtedness incurred in connection with capitalized
leases and operating leases permitted pursuant to SECTION 8.8; and
(H) In addition to the other Indebtedness permitted
under this SECTION 8.5, unsecured Indebtedness in the aggregate principal
amount outstanding at any time not to exceed $1,000,000.
SECTION 8.6 TRANSACTIONS WITH AFFILIATES. No Borrower shall, nor
shall it permit any of its Subsidiaries to, enter, directly or indirectly, into
or be a party to any agreement or transaction (including the purchase, sale,
lease or exchange of any Property or the rendering of any services) with any
Affiliate of either Borrower, except (a) as set forth on ITEM 8.6 to the
DISCLOSURE SCHEDULE and (b) in the Ordinary Course of Business and upon fair
and reasonable terms that are approved by the holders of the applicable
Borrower's partnership or membership interests, as the case may be, fully
disclosed to the Administrative Agent and no less favorable to such Borrower
than would obtain in a comparable arm's length transaction with a Person not an
Affiliate of such Borrower.
SECTION 8.7 USE OF PROCEEDS. The Borrowers shall use the Loan
proceeds only for the purposes described in SECTION 2.1(G) and in no event
shall use any portion of such proceeds, directly or indirectly, (a) to purchase
or carry Margin Stock, (b) to repay or otherwise refinance indebtedness of
either Borrower or others incurred to purchase or carry Margin Stock, (c) to
extend credit for the purpose of purchasing or carrying any Margin Stock or (d)
to acquire any security in any transaction that is subject to Section 13 or 14
of the Securities Exchange Act of 1934, as amended.
SECTION 8.8 LEASE OBLIGATIONS. No Borrower shall, nor shall it
permit any of its Subsidiaries to, create or suffer to exist any obligations
for the payment of rent for any Property under lease or agreement to lease,
except for:
(A) operating leases entered into after the Closing
Date; provided, that the Operating Lease Obligations during any Fiscal Year
shall not exceed $1,000,000 in the aggregate; and
(B) capital leases entered into after the Closing Date
to finance the acquisition of equipment; provided that the aggregate annual
rental payments for all such Capital Lease Obligations shall not exceed
$1,000,000 in any Fiscal Year.
74.
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SECTION 8.9 CAPITAL EXPENDITURES. No Borrower shall, nor shall
it permit any of its Subsidiaries to, make or commit to make Capital
Expenditures during any Fiscal Year in the aggregate for STP on a consolidated
basis (including Pioneer) in excess of $5,000,000.
SECTION 8.10 RESTRICTED DISTRIBUTIONS. No Borrower shall, nor
shall it suffer or permit any of its Subsidiaries (other than a wholly-owned
Subsidiary of either Borrower) to, declare or make any distribution or payment
or other distribution of assets, properties, cash, rights, obligations or
securities on account of any partnership interest, membership interest or other
equity interest in such Person or purchase, redeem or otherwise acquire for
value any partnership interest, membership interest or other equity interest in
such Person or any warrants, rights or options to acquire such partnership
interests, membership interests or other equity interests, now or hereafter
outstanding provided, that, and subject expressly to the following terms and
conditions:
(A) STP shall be permitted to redeem any partnership
interests of STP (i) if the sole consideration for such redemption is an
exchange of such partnership interests for shares of common stock in STT, or
(ii) if the consideration for such redemption is cash and no Over Advance,
Default or Event of Default shall have occurred or be continuing or shall
result after giving effect to such redemption;
(B) STP shall be permitted to declare and make
distributions to any limited partners of STP in respect of income taxes
actually payable by any such limited partners of STP (or by the members of such
limited partners) in respect of and attributable to STP, as if STP were the tax
reporting entity, calculated at and based on the federal and state statutory
rates applicable to type of taxable income (the "Permitted STP Tax
Distributions"), subject to the following conditions: (1) Permitted STP Tax
Distributions may not be made more frequently than once per Fiscal Quarter on a
date reasonably close to the April 15, June 15, September 15 and January 15
dates for the payment of estimated income taxes and (2) the aggregate amount of
all such Permitted STP Tax Distributions shall not exceed $1,000,000;
(C) STP shall further be permitted to declare and make
distributions to the holders of the partnership interests in STP, in accordance
with the terms of the STP Partnership Agreement (the "Permitted General
Distributions"), subject to the following conditions: (1) Permitted General
Distributions shall not be payable any more frequently than once per Fiscal
Quarter (each such payment date being a "Permitted Distribution Payment Date")
and (2) no Permitted General Distribution shall be made in respect of a Fiscal
Quarter unless both (A) the Administrative Agent shall have received not less
than five (5) Business Days prior to the making of such Permitted General
Distribution each of the Borrowing Base Certificate, the Borrowing Base
certification and the Compliance Certificate (together with the accompanying
company-prepared financial statements for such Fiscal Quarter) and (B) no Over
Advance, Default or Event of Default shall then exist or result from the making
of such Permitted General Distribution;
(D) Pioneer shall be permitted to declare and make
distributions to STP to allow STP to make distributions in respect of income
taxes actually payable by any limited partners of STP (or by the members of
such limited partners) in respect of and attributable to Pioneer, as if Pioneer
were the tax reporting entity, calculated at and based on the federal and
75.
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state statutory rates applicable to type of taxable income (the "Permitted
Pioneer Tax Distributions"), subject to the following conditions: (1) Permitted
Pioneer Tax Distributions may not be made more frequently than one per Fiscal
Quarter on a date reasonably close to the April 15, June 15, September 15 and
January 15 dates for the payment of estimated income taxes and (2) the
aggregate amount of all such Permitted Pioneer Tax Distributions shall not
exceed $1,000,000; and
(E) Pioneer shall be permitted to declare and make
distributions to STP, provided that no Default or Event of Default shall then
exist or result from the making of such distribution.
SECTION 8.11 MODIFICATION OF CERTAIN AGREEMENTS. No Borrower
shall, without the prior written approval of Required Lenders, such approval to
be given in Required Lenders' sole and absolute discretion, amend, supplement,
modify or waive compliance with or consent to any amendment, supplement or
other modification of or waiver of compliance with any of the terms or
provisions contained in, or applicable to the STP Partnership Agreement, the
Pioneer Operating Agreement or any other material organizational documents of
either Borrower, except that Required Lenders' prior approval shall not be
required for any amendment, supplement, modification or waiver which does not,
either individually or in the aggregate with other amendments, supplements,
modifications or waivers, in any material way adversely affect either
Borrower's ability to pay and perform the Obligations or the Administrative
Agent's, the Collateral Agent's or any Lender's rights or remedies under any of
the Loan Documents; provided, that, the Administrative Agent's prior approval
shall be required for any amendments, supplements or modifications to the STP
Partnership Agreement during the period commencing on the date of this
Agreement through and including the Closing Date.
SECTION 8.12 MAINTENANCE OF BUSINESS. No Borrower shall engage in
any business other than the Business and other activities normally associated
with the operation of the Business.
SECTION 8.13 ERISA. No Borrower shall, or shall not suffer or
permit any of its ERISA Affiliates to: (a) engage in a "prohibited transaction"
(as defined in Section 406 of ERISA and Section 4975 of the Code) or violation
of the fiduciary responsibility rules with respect to any Plan which has
resulted or could reasonably be expected to result in a Material Adverse Change
in liability of either Borrower; (b) engage in a transaction that could be
subject to Section 4069 or 4212(c) of ERISA; or (c) incur any obligation to
contribute to a Pension Plan required by a collective bargaining agreement or
as a consequence of the acquisition of an ERISA Affiliate, unless such Borrower
shall notify the Administrative Agent in writing that it intends to incur such
obligation.
SECTION 8.14 NO USE OF ANY LENDER'S NAME. No Borrower shall use
or authorize any other Person to use any Lender's name or marks in any press
releases, signage, publication or other publicity or medium, including any
prospectus (but excluding any necessary or appropriate filings or submissions
to Governmental Authorities, including the filing of this Agreement with the
SEC solely as an exhibit evidencing an existing material agreement of either
Borrower), without the Administrative Agent's and such Lender's advance written
authorization.
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SECTION 8.15 ACCOUNTING CHANGES. No Borrower shall (i) make any
significant change in accounting treatment or reporting practices, except as
required or permitted by GAAP, or (ii) change its Fiscal Year without the prior
approval of the Administrative Agent.
ARTICLE IX
FINANCIAL COVENANTS OF THE BORROWERS
The Borrowers covenant and agree that so long as any Loans shall be
outstanding hereunder or any Commitment shall be available hereunder, unless
Required Lenders shall otherwise consent in writing, the Borrowers shall
perform, all of the following financial covenants. Notwithstanding anything to
the contrary in this Agreement, for any computation of any financial covenant
contained in this ARTICLE IX which includes in its computation the results from
any of the Fiscal Quarters set forth below, the result used for such Fiscal
Quarters shall be deemed to be the following:
<TABLE>
<CAPTION>
DEEMED DEEMED
FISCAL QUARTER DEEMED CAPITAL INTEREST DEEMED
ENDING EBITDDA EXPENDITURES EXPENSE DISTRIBUTIONS
<S> <C> <C> <C> <C>
September 30, 1998 $28,170,000 $787,000 $5,200,000 $3,892,000
December 31, 1998 $11,934,000 $400,000 $5,200,000 $3,892,000
March 31, 1999 $6,877,000 $176,000 $5,200,000 $3,892,000
</TABLE>
SECTION 9.1 MINIMUM INTEREST COVERAGE RATIO. The Borrowers shall
not permit the Interest Coverage Ratio, as measured as of the last day of each
Fiscal Quarter, to be less than the following:
<TABLE>
<CAPTION>
Minimum Interest
Fiscal Quarters Coverage Ratio
--------------- --------------
<S> <C>
Closing Date - March 31, 2000 2.00 to 1.00
April 1, 2000 - June 30, 2000 2.25 to 1.00
July 1, 2000 and thereafter 2.50 to 1.00
</TABLE>
SECTION 9.2 MAXIMUM LEVERAGE RATIO. The Borrowers shall not
permit the Leverage Ratio at any time to be greater than the following:
<TABLE>
<CAPTION>
Maximum Leverage
Fiscal Quarters Ratio
--------------- -----
<S> <C>
Closing Date - June 30, 2000 6.00 to 1.00
July 1, 2000 - September 30, 2001 5.50 to 1.00
October 1, 2001 and thereafter 5.00 to 1.00
</TABLE>
77.
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SECTION 9.3 MINIMUM FIXED CHARGE COVERAGE RATIO. The Borrowers
shall not permit the Fixed Charge Coverage Ratio, as measured as of the last day
of each Fiscal Quarter, to be less than the following:
<TABLE>
<CAPTION>
Minimum Fixed
Fiscal Quarters Charge Ratio
--------------- ------------
<S> <C>
Closing Date - June 30, 2000 1.00 to 1.00
July 1, 2000 and thereafter 1.25 to 1.00
</TABLE>
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
SECTION 10.1 EVENTS OF DEFAULT. The occurrence of any one or more of
the following shall constitute an Event of Default hereunder:
(A) INSTALLMENTS OF PRINCIPAL. Any Borrower shall fail to
pay any scheduled installment of principal under this Agreement or any of the
Notes on the date such installment shall become due and payable; or
(B) OTHER PAYMENTS. Any Borrower shall fail to pay any
installment of interest on any Loan or fail to pay any of the other Obligations
of either Borrower to the Lenders or the Administrative Agent arising under this
Agreement, the Notes or any of the other Loan Documents on the date as the same
shall become due and payable, whether by acceleration or otherwise, and such
failure shall not have been cured within three (3) Business Days thereafter; or
(C) CROSS DEFAULTS. Any Borrower shall (i) fail to make
any payment in respect of any Indebtedness (including Pari Passu Debt) having an
aggregate principal amount (including undrawn committed or available amounts and
including amounts owing to all creditors under any combined or syndicated credit
arrangement) of more than $5,000,000 when due (whether by scheduled maturity,
required prepayment, acceleration, demand, or otherwise) and such failure
continues after the applicable grace or notice period, if any, specified in the
document relating thereto on the date of such failure; or (ii) fail to perform
or observe any other material condition or covenant, or any other event shall
occur or condition exist, under any agreement or instrument relating to any such
Indebtedness, and such failure continues after the applicable grace or notice
period, if any, specified in the document relating thereto on the date of such
failure if the effect of such failure, event or condition is to cause, or to
permit the holder or holders of such Indebtedness or beneficiary or
beneficiaries of such Indebtedness (or a trustee or agent on behalf of such
holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to
be declared to be due and payable prior to its stated maturity (or any
Contingent Obligation to become payable or cash collateral in respect thereof to
be demanded); or
(D) REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. Any
representation or warranty made by or on behalf of either Borrower in this
Agreement or in any other Loan Document or any statement or certificate at any
time given in writing pursuant hereto
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or thereto or in connection herewith or therewith shall be false, misleading or
incomplete in any material respect when made; or
(E) SPECIFIC DEFAULTS. Any Borrower shall fail or neglect
to perform, keep or observe any term, covenant or agreement contained in ARTICLE
VIII or ARTICLE IX; or
(F) OTHER DEFAULTS. Subject to SECTIONS 10.1(A), (B), (D)
and (E), either Borrower shall fail or neglects to perform, keep or observe any
other term, covenant, provision or agreement contained in this Agreement or in
any of the other Loan Documents or any other document or agreement executed by
such Borrower in connection herewith or therewith and the same has not been
cured to Required Lenders' satisfaction within ten (10) calendar days after
either Borrower shall become aware thereof, whether by written notice from the
Administrative Agent or any Lender or otherwise, or should reasonably have been
aware thereof; provided, that if such Default is not reasonably susceptible to
cure within ten (10) days, then such Borrower shall have such additional time as
it reasonably takes to effect such cure, but in no event longer than thirty (30)
days from the occurrence of such Default, so long as such Borrower promptly
commences and diligently pursues such cure; or
(G) INSOLVENCY; VOLUNTARY PROCEEDINGS. Either Borrower, a
Subsidiary of either Borrower, STT or STOC (i) ceases or fails to be Solvent, or
generally fails to pay, or admits in writing its inability to pay, its debts as
they become due, subject to applicable grace periods, if any, whether at stated
maturity or otherwise; (ii) except as permitted under SECTION 8.3, voluntarily
liquidates, dissolves or ceases to conduct its business in the ordinary course;
(iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes
any action to effectuate or authorize any of the foregoing; or
(H) INVOLUNTARY PROCEEDINGS. (i) Any involuntary
Insolvency Proceeding is commenced or filed against either Borrower, a
Subsidiary of either Borrower, STT or STOC, or any writ, judgment, warrant of
attachment, execution or similar process, is issued or levied against a
substantial part of either Borrower's, either Borrower's Subsidiary's, STT's or
STOC's Properties, and any such proceeding or petition shall not be dismissed,
or such writ, judgment, warrant of attachment, execution or similar process
shall not be released, vacated or fully bonded within sixty (60) days after
commencement, filing or levy; (ii) either Borrower, a Subsidiary of either
Borrower, STT or STOC admits the material allegations of a petition against it
in any Insolvency Proceeding, or an order for relief (or similar order under
non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) either Borrower,
a Subsidiary of either Borrower, or STT or STOC acquiesces in the appointment of
a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession
(or agent therefor), or other similar Person for itself or a substantial portion
of its Property or business; or
(I) MONETARY JUDGMENTS. One or more final
(non-interlocutory) judgments, orders or decrees shall be entered against either
Borrower involving in the aggregate a liability (not covered by independent
third-party insurance) as to any single or related series of transactions,
incidents or conditions, in excess of $5,000,000 and the same shall remain
unsatisfied, unvacated and unstayed pending appeal for a period of thirty (30)
days after the entry thereof; or
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(J) NON-MONETARY JUDGMENTS. Any non-monetary judgment,
order or decree shall be rendered against either Borrower which does or would
reasonably be expected to cause or result in a Material Adverse Change, and
there shall be any period of thirty (30) consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; or
(K) COLLATERAL. Any of the Loan Documents shall for any
reason other than the satisfaction in full of the Obligations thereunder cease
to be, or be asserted by either Borrower not to be, a legal, valid and binding
obligation of such Borrower, enforceable in accordance with its terms, or any of
the Liens purported to be created by any of the Collateral Documents with
respect to any material portion of the Collateral shall for any reason, other
than the satisfaction in full of the Obligations thereunder, cease to be, or be
asserted by either Borrower not to be, a first priority, validly perfected Lien
(subject to the Permitted Title Exceptions); or
(L) ERISA. (i) An ERISA Event shall occur with respect to
a Pension Plan or Multiemployer Plan which has resulted or could reasonably be
expected to result in liability of either Borrower under Title IV of ERISA to
the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in
excess of $5,000,000; (ii) the aggregate amount of Unfunded Pension Liability
among all Pension Plans at any time exceeds $5,000,000; or (iii) either Borrower
or any ERISA Affiliate shall fail to pay when due, after the expiration of any
applicable grace period, any installment payment with respect to its withdrawal
liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate
amount in excess of $5,000,000; or
(M) CHANGE OF CONTROL. Any Change of Control shall have
occurred; or
(N) EVENT OF DEFAULT UNDER INTERCREDITOR AGREEMENT. Any
"Event of Default" under as defined in the Intercreditor Agreement shall have
occurred.
SECTION 10.2 WAIVER OF DEFAULT. Any Event of Default may be waived
only with the written consent of Required Lenders; except that an Event of
Default under any of SECTIONS 10.1(A), 10.1(B), 10.1(G) or 10.1(H) may only be
waived with the written consent of all Lenders. Any Event of Default so waived
shall be deemed to have been cured and not to be continuing; but no such waiver
shall be deemed a continuing waiver or shall extend to or affect any subsequent
like default or impair any rights arising therefrom.
SECTION 10.3 REMEDIES. Upon the occurrence and during the
continuance of any Default or Event of Default, the Lenders shall have no
obligation to advance money or extend any additional credit to or for the
benefit of either Borrower, whether in the form of Loans or otherwise. In
addition, upon the occurrence and during the continuance of an Event of Default,
the Lenders or the Administrative Agent, on behalf and for the ratable benefit
of the Lenders, may, at the option of Required Lenders, do any one or more of
the following, all of which are hereby authorized by each Borrower:
(A) Make advances of Loans after the occurrence of any
Event of Default, without thereby waiving their right to demand payment of the
Obligations under this Agreement, the Notes or any of the other Loan Documents,
or any other rights or remedies described in this
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Agreement, and without liability to make any other or further advances,
notwithstanding the Administrative Agent's or any Lender's previous exercise of
any such rights and remedies;
(B) Declare all or any of the Obligations of each
Borrower under this Agreement, the Notes, the other Loan Documents and any other
instrument executed by either Borrower pursuant to the Loan Documents to be
immediately due and payable, and upon such declaration such obligations so
declared due and payable shall immediately become due and payable; provided that
if such Event of Default is under Sections 10.1(g) or (H), then all of the
Obligations shall become immediately due and payable forthwith without the
requirement of any notice or other action by the Lenders or the Administrative
Agent; provided, further, that the declaration to accelerate the Obligations may
be rescinded upon the written election of Required Lenders;
(C) Terminate this Agreement (and the Commitments of the
Lenders set forth herein) as to any future liability or obligation of the
Lenders, but without affecting the Lenders' rights in and to Liens in and on the
Collateral; and
(D) Exercise, or cause the Collateral Agent to exercise,
as applicable, in addition to all other rights and remedies granted hereunder,
any and all rights and remedies granted under the Collateral Documents, the
Pledge Documents and other Loan Documents or otherwise available at law or in
equity.
SECTION 10.4 SET-OFF.
(A) RIGHTS OF SET-OFF. Regardless of the adequacy of any
Collateral but subject to SECTION 10.4(B), during the continuance of an Event of
Default, any deposits or other sums credited by or due from any Lender to either
Borrower may be set-off against the Obligations and any and all other
liabilities, direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising, of such Borrower to the Lenders.
(B) THE ADMINISTRATIVE AGENT'S CONSENT TO SET-OFF
REQUIRED. Each Lender agrees that it shall not, and that it shall not attempt
to, exercise any right of set-off, banker's lien or similar remedy against any
of the Property of either Borrower without the prior written consent of the
Administrative Agent.
SECTION 10.5 SHARING OF PAYMENTS. If, other than as expressly
provided elsewhere herein, any Lender shall receive from either Borrower or any
other source whatsoever on account of the Loans made by it any payment (whether
voluntary, involuntary, through the exercise of any right of set-off, bankers'
lien, counterclaim, cross-action, enforcement of any claim evidenced by this
Agreement or any of the other Loan Documents or by proof thereof in any case
under the Bankruptcy Code or similar proceeding or otherwise) which is in excess
of its respective Commitment Percentage of payments on account of the Loans
obtained by all the Lenders with respect to such Loans, such Lender shall
forthwith (a) notify the Administrative Agent of such fact and (b) make such
dispositions and arrangements with each other Lender with respect to such
excess, either by way of distribution until the amount of such excess has been
exhausted, assignment of claims, subrogation or otherwise, as shall result in
each such Lender receiving in respect of the amounts due such Lender, under this
Agreement its ratable share of
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such payments; provided, however, that if all or any part of such excess payment
is thereafter recovered from such Lender, such disposition and arrangements
shall be rescinded and the amount restored to the extent of such recovery, but
without interest.
SECTION 10.6 RIGHTS AND REMEDIES CUMULATIVE. The Lenders' and the
Administrative Agent's rights and remedies under this Agreement shall be
cumulative. The Lenders and the Administrative Agent shall have all other rights
and remedies not inconsistent herewith as provided by law or in equity. No
exercise by any Lender or the Administrative Agent of one right or remedy shall
be deemed an election. No delay by any Lender or the Administrative Agent shall
constitute a waiver, election or acquiescence by such party.
ARTICLE XI
THE ADMINISTRATIVE AGENT
SECTION 11.1 APPOINTMENT AND AUTHORIZATION. Each Lender hereby
appoints, designates and authorizes ABN AMRO as and to be the Administrative
Agent of such Lender under this Agreement and under each of the other Loan
Documents and each Lender irrevocably authorizes ABN AMRO as the Administrative
Agent for such Lender to take such action on its behalf under and subject to the
provisions of this Agreement and each other Loan Document and to exercise such
powers and perform such duties as are expressly delegated to the Administrative
Agent by the terms of this Agreement or any other Loan Document, together with
such powers as are reasonably incidental thereto. Notwithstanding any provision
to the contrary contained elsewhere in this Agreement or in any other Loan
Document, the Administrative Agent shall not have any duties or
responsibilities, except those expressly set forth herein, nor shall the
Administrative Agent have or be deemed to have any fiduciary relationship with
any Lender, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this Agreement or any other Loan
Document or otherwise exist against the Administrative Agent in such respective
capacities.
SECTION 11.2 DELEGATION OF DUTIES. The Administrative Agent may
execute any of their respective duties under this Agreement or any other Loan
Document by or through agents, or attorneys-in-fact and shall be entitled to
advice of counsel concerning all matters pertaining to such duties. The
Administrative Agent shall not be responsible for the negligence or misconduct
of any agent or attorney-in-fact that it selects with reasonable care.
SECTION 11.3 EXCULPATORY PROVISIONS. None of the Administrative
Agent-Related Persons shall (a) be liable for any action taken or omitted to be
taken by any of them under or in connection with this Agreement or any other
Loan Document (except for its or such Person's own gross negligence or willful
misconduct), or (b) be responsible in any manner to any of the Lenders for any
recital, statement, representation or warranty made by either Borrower or any
Affiliate of either Borrower or any of their respective Affiliates or any
officer thereof, contained in this Agreement or in any other Loan Document, or
in any certificate, report, statement or other document referred to or provided
for in, or received by the Administrative Agent under or in connection with this
Agreement or any other Loan Document, or for the value of any Collateral or the
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement, the Notes or any other Loan Document, or for any failure of either
Borrower or any other party to
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any Loan Document to perform its obligations hereunder or thereunder. No
Administrative Agent-Related Person shall be under any obligation to any Lender
to ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of either Borrower or
any of its Affiliates. Neither NationsBank, N.A. as the "Syndication Agent" nor
Societe Generale, as the "Documentation Agent" shall have any right, power,
obligation, responsibility, duty or liability under this Agreement other than
those applicable to all Lenders as such and, without limiting the foregoing,
shall not have or be deemed to have any fiduciary relationship with any Lender.
Each Lender acknowledges that it has not relied, and will not rely, on
NationsBank, N.A. or Societe Generale in deciding to enter into this Agreement
or in taking or not taking any action hereunder.
SECTION 11.4 RELIANCE BY THE ADMINISTRATIVE AGENT.
(A) The Administrative Agent shall be entitled to rely,
and shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, statement or other document or conversation believed by any of them to
be genuine and correct and to have been signed, sent or made by the proper
Person or Persons, and upon advice and statements of legal counsel (including
counsel to the Borrowers), independent accountants and other experts selected by
the Administrative Agent. The Administrative Agent may deem and treat the payee
of any Note as the owner thereof for all purposes unless a completed and fully
executed Assignment and Acceptance shall have been delivered to the
Administrative Agent. The Administrative Agent shall be fully justified in
failing or refusing to take any action under this Agreement or any other Loan
Document unless it shall first receive such advice or concurrence of the
Required Lenders or all Lenders, as it deems appropriate and, if it so requests,
it shall first be indemnified to its satisfaction by the Lenders against any and
all liability and expense (except those incurred solely as a result of the
Administrative Agent's, as the case may be, gross negligence or willful
misconduct) which may be incurred by it by reason of taking or continuing to
take any such action. The Administrative Agent shall in all cases be fully
protected in acting, or in refraining from acting, under this Agreement, the
Notes or any of the other Loan Document in accordance with a request or consent
of the Required Lenders or all Lenders, as may be required, and such request and
any action taken or failure to act pursuant thereto shall be binding upon all of
the Lenders and all future holders of the Notes.
(B) For purposes of determining compliance with the
conditions precedent specified in ARTICLE IV, each Lender that has executed this
Agreement or shall hereafter execute and deliver an Assignment and Acceptance in
accordance with SECTION 12.11(A) shall be deemed to have consented to, approved
or accepted or to be satisfied with each document or other matter either sent by
the Administrative Agent to such Lender for consent, approval, acceptance or
satisfaction, or required thereunder to be consented to or approved by or
acceptable or satisfactory to the Lender.
SECTION 11.5 NOTICE OF DEFAULT. The Administrative Agent shall not
be deemed to have knowledge or notice of the occurrence of any Default or Event
of Default, except, as to the Administrative Agent only, with respect to
defaults in the payment of principal, interest and fees required to be paid to
the Administrative Agent on behalf and for the benefit of the Lenders,
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unless the Administrative Agent shall have received written notice from a Lender
or either Borrower referring to this Agreement, describing such Default or Event
of Default and stating that such notice is a "notice of default". In the event
that the Administrative Agent receives such a notice, the Administrative Agent
shall give notice thereof to the Lenders. The Administrative Agent shall take
such action with respect to such Default or Event of Default as shall be
requested by the Required Lenders or all Lenders, as appropriate; provided,
however, that unless and until the Administrative Agent shall have received any
such request, the Administrative Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default or
Event of Default as it shall deem in the best interest of the Lenders or as the
Administrative Agent shall believe necessary to protect the Lenders' interests
in the Collateral.
SECTION 11.6 CREDIT DECISION. Each Lender expressly acknowledges
that none of the Administrative Agent-Related Persons has made any
representation or warranty to it and that no act by the Administrative Agent
hereinafter taken, including any review of the affairs of either Borrower or any
of their respective Affiliates, shall be deemed to constitute any representation
or warranty by the Administrative Agent to any Lender. Each Lender represents to
the Administrative Agent that it has, independently and without reliance upon
the Administrative Agent or any other Lender and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, property, financial and
other condition and creditworthiness of each Borrower and its Affiliates, and
all applicable bank regulatory laws relating to the transactions contemplated
thereby, and made its own decision to enter into this Agreement and extend
credit to the Borrowers under and pursuant to this Agreement. Each Lender also
represents that it will, independently and without reliance upon the
Administrative Agent and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Loan Documents, and to make such investigations as it deems necessary
to inform itself as to the business, prospects, operations, property, financial
and other condition and creditworthiness of each Borrower and its Affiliates.
Except for notices, reports and other documents expressly herein required to be
furnished to the Lenders by the Administrative Agent hereunder, the
Administrative Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the business, prospects,
operations, property, financial and other condition or creditworthiness of each
Borrower or any of its Affiliates, which may come into the possession of any
Administrative Agent-Related Person.
SECTION 11.7 INDEMNIFICATION. Whether or not the transactions
contemplated hereby shall be consummated, the Lenders agree to and shall
indemnify upon demand the Administrative Agent-Related Persons (to the extent
not reimbursed by or on behalf of either Borrower or any guarantor of the
Obligations and without limiting the obligation of such Person to do so),
severally and ratably (based on each Lender's Pro Rata Share) from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs (including Attorneys Costs), expenses and disbursements
of any kind whatsoever which may at any time (including at any time following
the repayment of the Loans and the termination or resignation of the related
Administrative Agent) be imposed on, incurred by or asserted against any such
Person in such capacity, but not as Lenders, in any way relating to or arising
out of this Agreement, any of the other Loan Documents or any document
contemplated by or referred to
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herein or therein or the transactions contemplated hereby or thereby or any
action taken or omitted by any such Person under or in connection with any of
the foregoing; provided, however, that no Lender shall be liable for the payment
of any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from such
Person's gross negligence or willful misconduct. Without limitation of the
foregoing, each Lender shall reimburse the Administrative Agent upon demand for
its ratable share of any costs or other out-of-pocket expenses (including
Attorney Costs) incurred by the Administrative Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement,
any other Loan Document, or any document contemplated by or referred to herein
to the extent that such Person is not reimbursed for such expenses by or on
behalf of the Borrowers. Without limiting the generality of the foregoing, if
the IRS or any other Governmental Authority of the United States or other
jurisdiction asserts a claim that the Administrative Agent did not properly
withhold tax from amounts paid to or for the account of any Lender (because the
appropriate form was not delivered, was not properly executed, or because such
Lender failed to notify the Administrative Agent of a change in circumstances
which rendered the exemption from, or reduction of, withholding tax ineffective,
or for any other reason), such Lender shall indemnify the Administrative Agent
fully for all amounts paid, directly or indirectly, by the Administrative Agent
as tax or otherwise, including penalties and interest, and including any taxes
imposed by any jurisdiction on the amounts payable to the Administrative Agent
under this SECTION 11.7, together with all costs and expenses (including
Attorney Costs). The obligation of the Lenders in this SECTION 11.7 shall
survive the payment of all Obligations.
SECTION 11.8 THE ADMINISTRATIVE AGENT IN INDIVIDUAL CAPACITY. ABN
AMRO and its Affiliates and its successors as the Administrative Agent, may make
loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory or other business with either Borrower and the Borrowers'
respective Affiliates (including acting as the Intercreditor Agent or the
Collateral Agent) as though ABN AMRO (or such successors) were not the
Administrative Agent hereunder and under the other Loan Documents and without
notice to or consent of the Lenders. With respect to its Loans, ABN AMRO shall
have the same rights and powers under this Agreement as any other Lender and may
exercise the same as though it were not the Administrative Agent and the terms
"Lender" and "Lenders" shall include ABN AMRO in its individual capacity.
SECTION 11.9 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative
Agent may resign as Administrative Agent upon thirty (30) days' notice to the
Lenders and Required Lenders may at any time remove the Administrative Agent.
The Administrative Agent shall be removed or shall resign as the Administrative
Agent under this Agreement and the other Loan Documents, the Required Lenders
shall appoint from among the Lenders a successor Administrative Agent for the
Lenders, which successor agent, shall be approved by the Borrowers (which
consent shall not be unreasonably withheld or delayed), whereupon such successor
agent, shall succeed to the rights, powers and duties of the Administrative
Agent, as the case may be, and the term "Administrative Agent" shall mean such
successor agent, effective upon its appointment, and the former Administrative
Agent's rights, powers and duties as Administrative Agent shall be terminated,
without any other or further act or deed on the part of such former
Administrative
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Agent or any of the parties to this Agreement or any holders of the Notes. After
any retiring Administrative Agent's removal or resignation as Administrative
Agent, the provisions of this SECTION 11.9 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was a Administrative Agent,
as the case may be, under this Agreement and the other Loan Documents. Further,
if any Administrative Agent no longer has any Loans or Commitments hereunder,
such Administrative Agent shall immediately resign and shall be replaced, and
have the benefits, as set forth in this SECTION 11.9.
SECTION 11.10 COLLATERAL MATTERS.
(A) The Administrative Agent is authorized on behalf of
all the Lenders, without the necessity of any notice to or further consent from
the Lenders, from time to time to take any action with respect to any Collateral
or the Collateral Documents which may be necessary to perfect and maintain
perfected the security interest in and Liens upon the Collateral granted
pursuant to the Collateral Documents.
(B) The Lenders irrevocably authorize the Administrative
Agent, at its option and in its discretion, to release any Lien granted to or
held by the Administrative Agent upon any Collateral (i) upon termination of the
Commitments and payment in full of all Loans and all other Obligations payable
under this Agreement and under any other Loan Document; (ii) constituting
property sold or to be sold or disposed of as part of or in connection with any
Disposition permitted under SECTION 8.2; or (iii) if approved, authorized or
ratified in writing by the Required Lenders or all the Lenders, as the case may
be, as provided in Section 12.1(f). Upon request by the Administrative Agent at
any time, the Lenders will confirm in writing the Administrative Agent's
authority to release particular types or items of Collateral pursuant to this
SECTION 11.10(B). Required Lenders may also deliver written directions to the
Administrative Agent not to take any specific action permitted by this SECTION
11.10(B) and, following receipt of such notice, but subject to the other terms
of this ARTICLE XI, the Administrative Agent shall cease from taking such
action.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 AMENDMENTS AND WAIVERS. No amendment, modification or
waiver of any provision of this Agreement or any other Loan Document, and no
consent with respect to any departure by either Borrower therefrom, shall be
effective unless the same shall be in writing and signed by Required Lenders and
acknowledged by the Administrative Agent, and then such waiver shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no such waiver, amendment, or consent shall,
unless in writing and signed by all the Lenders and acknowledged by the
Administrative Agent, do any of the following:
(A) increase or extend the Commitment of any Lender (or
reinstate any Commitment terminated pursuant to SECTION 10.3) or subject any
Lender to any additional obligations;
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(B) postpone or delay any date fixed for any payment of
principal, interest, fees or other amounts due to the Lenders (or any of them)
hereunder or under any Loan Document (including in respect of any Mandatory
Prepayment);
(C) reduce the principal of, or the rate of interest
specified herein on any Loan, or of any fees or other amounts payable hereunder
or under any Loan Document;
(D) change the definition of Required Lenders or the
percentage of the Commitments or of the aggregate unpaid principal amount of the
Loans which shall be required for the Lenders or any of them to take any action
hereunder;
(E) amend SECTIONS 8.4, 11.7 or this SECTION 12.1;
(F) release all or any substantial part of the
Collateral, except as otherwise may be provided in the Collateral Documents or
except where the consent of the Required Lenders only is specifically provided
for;
(G) release any guarantor of the Obligations;
(H) change the definition or calculation of the Borrowing
Base; or
(I) change the definition of "Required Voting Parties"
under the Intercreditor Agreement.
and, provided further that no amendment, modification, waiver or consent shall,
unless in writing and signed by the Administrative Agent in addition to the
Required Lenders or all the Lenders, as the case may be, affect the
corresponding rights or duties of the Administrative Agent under this Agreement
or any other Loan Document.
SECTION 12.2 NOTICES.
(A) All notices, requests and other communications
provided for hereunder shall be in writing (including, unless the context
expressly otherwise provides, by facsimile transmission, provided that any
matter transmitted by either Borrower by facsimile (i) shall be immediately
confirmed by a telephone call to the recipient at the number specified on the
applicable signature page hereof, and (ii) shall be followed promptly by a hard
copy original thereof) and mailed, faxed or delivered, to the address or
facsimile number specified for notices on the applicable signature page hereof;
or, as directed to the Borrowers or the Administrative Agent, to such other
address as shall be designated by such party in a written notice to the other
parties, and as directed to each other party, at such other address as shall be
designated by such party in a written notice to the Borrowers and the
Administrative Agent.
(B) All such notices, requests and communications shall,
when transmitted by overnight delivery, or faxed, be effective when delivered
for overnight (next day) delivery, or transmitted by facsimile machine,
respectively, or if delivered, upon delivery, except that notices pursuant to
ARTICLE II or ARTICLE XI shall not be effective until actually received by the
Administrative Agent.
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(C) Each Borrower and the Lenders acknowledge and agree
that any agreement of the parties to receive certain notices by telephone and
facsimile is for their mutual benefit and convenience. Any party shall be
entitled to rely on the authority of any Person purporting to be a Person
authorized by any other party to give such notice and the party relying on such
authorization shall not have any liability to any other Person on account of any
action taken or not taken by such party in reliance upon such telephonic or
facsimile notice. The obligation of the Borrowers to repay the Loans shall not
be affected in any way or to any extent by any failure by the Administrative
Agent to receive written confirmation of any telephonic or facsimile notice or
the receipt by the Administrative Agent of a confirmation which is at variance
with the terms understood by the Administrative Agent to be contained in the
telephonic or facsimile notice.
SECTION 12.3 NO WAIVER BY ADMINISTRATIVE AGENT OR THE LENDERS. No
failure or delay on the part of any Lender or the Administrative Agent, in the
exercise of any power, right or privilege under this Agreement, the Notes or any
of the other Loan Documents shall impair such power, right or privilege or be
construed to be a waiver of any default or acquiescence therein, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.
SECTION 12.4 ENTIRE AGREEMENT; CONSTRUCTION.
(A) This Agreement, the Notes and each of the other Loan
Documents dated as of the date hereof, taken together, constitute and contain
the entire agreement among the Borrowers, the Lenders and the Administrative
Agent and supersede any and all prior agreements, negotiations, correspondence,
understandings and communications among the parties, whether written or oral,
respecting the subject matter hereof.
(B) This Agreement is the result of negotiations between
and has been reviewed by each Borrower and each Lender executing this Agreement
as of the Closing Date, the Administrative Agent and their respective counsel;
accordingly, this Agreement shall be deemed to be the product of the parties
hereto, and no ambiguity shall be construed in favor of or against the
Borrowers, the Lenders or the Administrative Agent. The Borrowers, the Lenders
and the Administrative Agent each severally agrees that it intends the literal
words of this Agreement and the other Loan Documents and that no parole evidence
shall be necessary or appropriate to establish either Borrower's, any Lender's
or the Administrative Agent's actual intentions.
SECTION 12.5 INDEMNIFICATION. To the fullest extent permitted by
law, each Borrower agrees to protect, indemnify, defend and hold harmless each
Lender and the Administrative Agent, and each of their respective directors,
officers, employees and agents and any Person who controls any of them within
the meaning of the federal, state and foreign securities laws (each an
"Indemnitee") from and against any liabilities, losses, obligations, damages,
penalties, expenses or costs of any kind or nature and from any suits,
judgments, claims or demands (including in respect of or for Attorney Costs and
other reasonable fees and other disbursements of counsel for and consultants of
such Indemnitees in connection with any investigative, administrative or
judicial proceeding, whether or not such Indemnitees shall be designated a party
thereto) based on any federal, state, local or foreign law or other statutory
regulation, including securities,
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environmental and commercial law or other statutory regulation, which arises
under common law or at equitable cause or on contract or otherwise on account of
or in connection with any matter or thing or any action or failure to act by
Indemnitees, or any of them, arising out of or relating to the Loan Documents or
any agreement or instrument executed pursuant to the Loan Documents, including
any (a) use or proposed use of the proceeds of the Loans, (b) any action taken
or omitted by any such Person under or in connection with any of the foregoing,
and (c) in respect of any investigation, litigation or proceeding, including any
Insolvency Proceeding or appellate proceeding, whether or not such Indemnitee is
named or identified as a potentially responsible person or a party in or to any
such investigation, litigation or proceeding, except to the extent such
liability arises from the willful misconduct or gross negligence of any of the
Indemnitees (collectively, the "Indemnified Matters"). Upon receiving knowledge
of any suit, claim or demand asserted by any Person that any Lender or the
Administrative Agent believes is covered by this indemnity, such Lender or the
Administrative Agent, as the case may be, shall give the applicable Borrower
notice of the matter and an opportunity to defend it, at such Borrower's sole
cost and expense, with legal counsel of such Borrower's choice, which legal
counsel shall be reasonably satisfactory to the Administrative Agent and each
affected Lender. The Administrative Agent and each affected Lender may also
require such Borrower to defend the matter. The obligations of each Borrower
under this SECTION 12.5 shall survive the payment and performance of the
Obligations and the termination of this Agreement. To the extent that the
undertaking to indemnify, pay and hold harmless set forth in this SECTION 12.5
may be unenforceable because it is violative of any law or public policy, each
Borrower shall contribute the maximum portion which it is permitted to pay and
satisfy under applicable law to the payment and satisfaction of all Indemnified
Matters incurred by the Indemnitees.
SECTION 12.6 COSTS AND EXPENSES. The Borrowers shall, whether or
not the transactions contemplated hereby shall be consummated:
(A) subject to SECTION 4.1(Z), pay or reimburse ABN AMRO
and NationsBank, N.A., and its affiliate NationsBanc Montgomery Securities LLC
(including in its capacity as the syndication agent), within thirty (30) days
after demand for all reasonable costs and expenses incurred by ABN AMRO
(including in its capacity as the Administrative Agent) and NationsBank, N.A.,
and its affiliate NationsBanc Montgomery Securities LLC (including in its
capacity as the syndication agent) in connection with the development,
preparation, delivery, administration and execution of, and any amendment,
supplement, waiver or modification to (in each case, whether or not
consummated), this Agreement, any other Loan Document and any other documents
prepared in connection herewith (including any commitment letter and related
documents preceding this Agreement) or therewith, and the consummation of the
transactions contemplated hereby and thereby, including the reasonable Attorney
Costs incurred by ABN AMRO (including in its capacity as the Administrative
Agent) and NationsBank, N.A., and its affiliate NationsBanc Montgomery
Securities LLC (including in its capacity as the syndication agent) with respect
hereto and thereto;
(B) pay or reimburse the Administrative Agent and,
following the occurrence of an Event of Default, each Lender within thirty (30)
days after demand for all costs and expenses incurred by them in connection with
the enforcement, attempted enforcement, or preservation of any rights or
remedies (including in connection with any "workout" or restructuring regarding
the Loans, and including in any Insolvency Proceeding or appellate
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proceeding) under this Agreement, any other Loan Document, and any such other
documents, including Attorney Costs incurred by the Administrative Agent or any
Lender, and the reasonable allocated cost of internal legal services and all
disbursements of internal counsel of the Administrative Agent or any Lender; and
(C) pay or reimburse ABN AMRO (including in its capacity
as the Administrative Agent) within thirty (30) days after demand for all
reasonable audit, appraisal, appraisal review, environmental inspection and
review, search and filing, registration and recording and other similar costs,
fees and expenses, including the fees and expertise of Lenders' Forestry
Consultants, incurred or sustained by ABN AMRO (including in its capacity as the
Administrative Agent) in connection with the matters referred to under clauses
(A) and (B) of this SECTION 12.6.
SECTION 12.7 RELIANCE BY THE LENDERS. All covenants, agreements,
representations and warranties made herein by each Borrower shall,
notwithstanding any investigation by the Lenders or the Administrative Agent be
deemed to be material to and to have been relied upon by the Lenders and the
Administrative Agent.
SECTION 12.8 MARSHALLING; PAYMENTS SET ASIDE. Neither the Lenders
nor the Administrative Agent, as the holder of any Lien as security for the
Obligations, shall be under any obligation to marshal any assets in favor of
either Borrower or any other Person or against or in payment of any or all of
the Obligations. To the extent that (a) either Borrower makes a payment or
payments to the Lenders or the Administrative Agent, or (b) the Lenders or the
Administrative Agent, on behalf and for the benefit of itself and the Lenders,
enforces its or their Liens or exercises its or their rights of set-off, and
such payment or payments or the proceeds of such enforcement or set-off or any
part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, receiver or any
other party under the Bankruptcy Code or under any other similar federal or
state law, common law or equitable cause, then to the extent of such recovery
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or set-off had not occurred.
SECTION 12.9 NO SET-OFFS BY THE BORROWERS. All sums payable by
each Borrower pursuant to this Agreement, the Notes or any of the other Loan
Documents shall be payable without notice or demand and shall be payable in
United States Dollars without set-off, counter claim or reduction of any manner
whatsoever.
SECTION 12.10 SUCCESSORS AND ASSIGNS. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that no Borrower may assign
or transfer any of its rights or obligations under this Agreement without the
prior written consent of the Administrative Agent and each Lender.
SECTION 12.11 ASSIGNMENTS, PARTICIPATIONS, ETC.
(A) Any Lender may, with the written consent of the
Borrowers (at all times other than during the existence of an Event of Default
in which event the Borrowers' consent shall not be required) and the
Administrative Agent (and written notice to each other Lender),
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which consents shall not be unreasonably withheld, at any time assign and
delegate to one or more Eligible Assignees (provided that no written consent of
the Borrowers or the Administrative Agent shall be required in connection with
any assignment and delegation by any Lender to a Lender Affiliate of such
Lender) (each an "Assignee") all, or any ratable part of all, of the Loans, the
Commitments and the other rights and obligations of such Lender hereunder, in a
minimum amount of $5,000,000; provided, however, that (i) the Borrowers and the
Administrative Agent may continue to deal solely and directly with such Lender
in connection with the interest so assigned to an Assignee until (A) written
notice of such assignment, together with payment instructions, addresses and
related information with respect to the Assignee, shall have been given to the
Borrowers and the Administrative Agent by such Lender and the Assignee; (B) such
Lender and its Assignee shall have delivered to the Borrowers and the
Administrative Agent an Assignment and Acceptance substantially in the form of
EXHIBIT G ("Assignment and Acceptance") together with any Note or Notes subject
to such assignment and (C) the assignor Lender or Assignee has paid to the
Administrative Agent a processing fee of $3,500; provided that no processing fee
shall be charged for any assignment to a Lender or a Lender Affiliate, and
further provided that the Borrowers shall not pay any fees or costs in
connection with such assignment.
(B) From and after the date that the Administrative Agent
notifies the assigning Lender that it has received an executed Assignment and
Acceptance and payment of the above-referenced processing fee, (i) the Assignee
thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment and
Acceptance, shall have the rights and obligations of a Lender under the Loan
Documents, and (ii) the assignor Lender shall, to the extent that rights and
obligations hereunder and under the other Loan Documents have been assigned by
it pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Loan Documents, provided that such
assignor Lender shall retain a surviving individual interest under ARTICLE III
and SECTIONS 12.5 and 12.6 of this Agreement.
(C) Within five (5) Business Days after its receipt of
notice from the Administrative Agent that the Administrative Agent has received
an executed Assignment and Acceptance and payment of the processing fee, the
Borrowers, as applicable, shall execute and deliver to the Administrative Agent
new Notes on the same terms and conditions as the original Notes evidencing such
Assignee's assigned Loans and Commitments and, if the assignor Lender has
retained a portion of its Loans and its Commitments, replacement Notes in the
principal amount of the Loans retained by the assignor Lender (such Notes to be
in exchange for, but not in payment of, the Notes held by such Lender).
Immediately upon each Assignee's making its processing fee payment under the
Assignment and Acceptance, this Agreement, shall be deemed to be amended to the
extent, but only to the extent, necessary to reflect the addition of the
Assignee and the resulting adjustment of the Commitments arising therefrom. The
Commitments allocated to each Assignee shall reduce such Commitments of the
assigning Lender pro tanto.
(D) Any Lender may at any time sell to one or more
commercial banks or other Persons not Affiliates of either Borrower (a
"Participant") participating interests in any Loans, the Commitment of that
Lender or the other interests of that Lender (the "Originating Lender")
hereunder and under the other Loan Documents; provided, however, that (i) the
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Originating Lender's obligations under this Agreement shall remain unchanged,
(ii) the Originating Lender shall remain solely responsible for the performance
of such obligations, (iii) the Borrowers and the Administrative Agent shall
continue to deal solely and directly with the Originating Lender in connection
with the Originating Lender's rights and obligations under this Agreement and
the other Loan Documents, and (iv) no Lender shall transfer or grant any
participating interest under which the Participant shall have rights to approve
any amendment to, or any consent or waiver with respect to, this Agreement or
any other Loan Documents, except to the extent such amendment, consent or waiver
would require unanimous consent of the Lenders as described in clauses (A), (C)
and (D) of the first proviso to SECTION 12.1. In the case of any such
participation, the Participant shall be entitled to the benefit of SECTIONS 2.7,
3.1, 3.3, 3.6, 12.1 (but solely with respect to those matters set forth in
clauses (A), (C) and (D) thereof requiring the consent of all Lenders), and 12.5
as though it were also a Lender hereunder, and if amounts outstanding under this
Agreement are due and unpaid, or shall have been declared or shall have become
due and payable upon the occurrence of an Event of Default, each Participant
shall be deemed to have the right of set-off in respect of its participating
interest in amounts owing under this Agreement to the same extent as if the
amount of its participating interests were owing directly to it as a Lender
under this Agreement.
(E) Each Lender agrees to take normal and reasonable
precautions and exercise due care to maintain the confidentiality of all
information identified as "confidential" by either Borrower and provided to it
by either Borrower, or by the Administrative Agent on such Borrower's behalf, in
connection with this Agreement or any other Loan Document, and neither it nor
any of its Affiliates shall use any such information for any purpose or in any
manner other than pursuant to the terms contemplated by this Agreement, except
to the extent such information (i) was or becomes generally available to the
public other than as a result of a disclosure by the Lender, or (ii) was or
becomes available on a non-confidential basis from a source other than a
Borrower, provided that such source is not bound by a confidentiality agreement
with either Borrower known to the Lender; provided, however, that any Lender may
disclose such information (A) at the request or pursuant to any requirement of
any Governmental Authority to which the Lender is subject or in connection with
an examination of such Lender by any such Governmental Authority; (B) pursuant
to subpoena or other court process; (C) when required to do so in accordance
with the provisions of any applicable Requirement of Law; and (D) to such
Lender's independent auditors and other professional advisors, provided that
such auditors and professional advisors are not presently, nor have been in the
past, direct competitors of either Borrower and such auditors and professional
advisors shall be required to similarly protect the confidentiality of such
information. Notwithstanding the foregoing, each Borrower authorizes each Lender
to disclose to any Participant or Assignee (each, a "Transferee") and to any
prospective Transferee, in each case, other than any Transferees or prospective
Transferees that are presently, or have been in the past, direct competitors of
either Borrower, such financial and other information in such Lender's
possession concerning the Borrowers which has been delivered to the
Administrative Agent or the Lenders pursuant to this Agreement or which has been
delivered to the Administrative Agent or the Lenders by or on behalf of either
Borrower in connection with the Lenders' credit evaluation of either Borrower
prior to entering into this Agreement; provided that, unless otherwise agreed by
the Borrowers, such Transferee agrees in writing to such Lender to keep such
information confidential to the same extent required of the Lenders hereunder.
For purposes of this SECTION 12.11(E), the Administrative Agent and the Lenders
acknowledge and agree that all budgets, forecasts and pro forma financial
statements
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delivered by the Borrowers to the Administrative Agent or any Lender, including
without limitation, all information, statements or documents delivered by the
Borrowers pursuant to CLAUSES (H) and (I) of SECTION 7.1, shall be deemed to be
identified by the Borrowers as "confidential" when delivered, irrespective of
whether such information, statements or documents are marked confidential by the
Borrowers when delivered to the Administrative Agent or any Lender.
(F) Notwithstanding any other provision contained in this
Agreement or any other Loan Document to the contrary, any Lender may assign all
or any portion of the Loans or Notes held by it to any Federal Reserve Bank or
the United States Treasury as collateral security pursuant to Regulation A of
the Board of Governors of the Federal Reserve System and any Operating Circular
issued by such Federal Reserve Bank, provided that any payment in respect of
such assigned Loans or Notes made by either Borrower to or for the account of
the assigning or pledging Lender in accordance with the terms of this Agreement
shall satisfy the Borrowers' obligations hereunder in respect to such assigned
Loans or Notes to the extent of such payment. No such assignment shall release
the assigning Lender from its obligations hereunder.
SECTION 12.12 HEADINGS. Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose or be given any
substantive effect.
SECTION 12.13 SEVERABILITY. Whenever possible, each provision of
this Agreement, the Notes and each of the other Loan Documents shall be
interpreted in such a manner as to be valid, legal and enforceable under the
applicable law of any jurisdiction. Without limiting the generality of the
foregoing sentence, in case any provision of this Agreement, the Notes or any of
the other Loan Documents shall be invalid, illegal or unenforceable under the
applicable law of any jurisdiction, the validity, legality and enforceability of
the remaining provisions, or of such provision in any other jurisdiction, shall
not in any way be affected or impaired thereby.
SECTION 12.14 NOTIFICATION OF ADDRESSES, LENDING OFFICES, ETC. Each
Lender shall notify the Administrative Agent in writing of any changes in the
address to which notices to the Lender should be directed, of addresses of its
Domestic Lending Office, of payment instructions in respect of all payments to
be made to it hereunder and of such other administrative information as the
Administrative Agent shall reasonably request.
SECTION 12.15 NO THIRD PARTIES BENEFITED. This Agreement is made
and entered into for the sole protection and legal benefit of the Borrowers, the
Lenders, the Administrative Agent, the Intercreditor Agent, the Collateral Agent
and their permitted successors and assigns, and except as otherwise expressly
provided in this Agreement, no other Person shall be a direct or indirect legal
beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this Agreement or any of the other Loan Documents. Neither the
Administrative Agent nor any Lender shall have any obligation to any Person not
a party to this Agreement or other Loan Documents.
SECTION 12.16 RELATIONSHIP OF PARTIES. The relationship between the
Borrowers, on the one hand, and the Lenders, the Administrative Agent and the
Collateral Agent, on the other, is, and at all times shall remain solely that of
a borrower and lenders. Neither any Lender nor the
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Administrative Agent nor the Collateral Agent shall under any circumstances be
construed to be partners or joint venturers of the Borrowers or any of its
Affiliates; nor shall any Lenders nor the Administrative Agent nor the
Collateral Agent under any circumstances be deemed to be in a relationship of
confidence or trust or a fiduciary relationship with either Borrower or any of
its Affiliates, or to owe any fiduciary duty to either Borrower or any of its
Affiliates. Neither any Lender, the Administrative Agent, nor the Collateral
Agent undertakes or assumes any responsibility or duty to either Borrower or any
of its Affiliates to select, review, inspect, supervise, pass judgment upon or
otherwise inform either Borrower or any of its Affiliates of any matter in
connection with its or their Property, any Collateral held by the Administrative
Agent, the Collateral Agent or any Lender or the operations of either Borrower
or any of its Affiliates. Each Borrower and each of its Affiliates shall rely
entirely on their own judgment with respect to such matters, and any review,
inspection, supervision, exercise of judgment or supply of information
undertaken or assumed by any Lender, the Administrative Agent or the Collateral
Agent in connection with such matters is solely for the protection of such
Lender, the Administrative Agent and the Collateral Agent and none of the
Borrowers nor any of their Affiliates is entitled to rely thereon.
SECTION 12.17 TIME. Time is of the essence as to each term or
provision of this Agreement and each of the other Loan Documents.
SECTION 12.18 COUNTERPARTS. This Agreement and any amendments,
waivers, consents or supplements hereto may be executed in any number of
counterparts, and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
SECTION 12.19 JOINDER TO COLLATERAL AGENCY AGREEMENT AND
INTERCREDITOR AGREEMENT. Each Lender agrees that in becoming a Lender hereunder
(i) it is joined as a party to and bound for all purposes by the terms of the
Collateral Agency Agreement applicable to the Senior Facility Lenders (as
defined therein); and (ii) it hereby acknowledges and consents for all purposes
to the terms of the Intercreditor Agreement applicable to the Senior Facility
Lenders (as defined therein) and the Obligations in connection herewith.
SECTION 12.20 EQUITABLE RELIEF. Each Borrower recognizes that, in
the event such Borrower fails to perform, observe or discharge any of its
obligations or liabilities under this Agreement, the Notes or any of the other
Loan Documents, any remedy at law may prove to be inadequate relief to the
Lenders or the Administrative Agent; therefore, each Borrower agrees that the
Lenders or the Administrative Agent, if the Lenders or the Administrative Agent
so request, shall be entitled to temporary and permanent injunctive relief in
any such case without the necessity of proving actual damages.
SECTION 12.21 OBLIGATIONS OF EACH BORROWER. Each Borrower agrees
that its liability hereunder shall be the immediate, direct, and primary
obligation of such Borrower, as the case may be, and shall not be contingent
upon the Administrative Agent's, the Collateral Agent's or any Lender's exercise
or enforcement of any remedy it may have against the other Borrower or any other
person, or against any Collateral or any security for the Obligations. Without
limiting the generality of the foregoing, the Obligations shall remain in full
force and effect without
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regard to and shall not be impaired or affected by, nor shall such Borrower be
exonerated or discharged by, any of the following events:
(A) Insolvency, bankruptcy, reorganization, arrangement,
adjustment, composition, assignment for the benefit of creditors, death,
liquidation, winding up or dissolution of the other Borrower or any guarantor of
the Obligations of either Borrower;
(B) Any limitation, discharge, or cessation of the
liability of the other Borrower or any guarantor for the Obligations of either
Borrower due to any statute, regulation or rule of law, or any invalidity or
unenforceability in whole or in part of the documents evidencing the Obligations
of such other Borrower or any guaranty of the Obligations of either Borrower;
(C) Any merger, acquisition, consolidation or change in
structure of the other Borrower or any guarantor of the Obligations of either
Borrower or any sale, lease, transfer or other disposition of any or all of the
assets, shares or interests in or of the other Borrower or any guarantor of the
Obligations of either Borrower;
(D) Any assignment or other transfer, in whole or in
part, of any Lender's interests in and rights under this Agreement or any of the
other Loan Documents, including, without limitation, any assignment or other
transfer, in whole or in part, of the Administrative Agent's, the Collateral
Agent's or any Lender's interests in and to any Collateral;
(E) Any claim, defense, counterclaim or setoff, other
than that of prior performance, that the other Borrower or any guarantor of the
Obligations of either Borrower may have or assert, including, but not limited
to, any defense of incapacity or lack of corporate or other authority to execute
any documents relating to the Obligations of such other Borrower or any
collateral;
(F) The Administrative Agent's, the Collateral Agent's or
any Lender's amendment, modification, renewal, extension, cancellation or
surrender of any agreement, document or instrument relating to this Agreement,
the Obligations of the other Borrower or any collateral, or any exchange,
release, or waiver of any collateral;
(G) The Administrative Agent's, the Collateral Agent's or
any Lender's exercise or nonexercise of any power, right or remedy with respect
to the Obligations of the other Borrower or any collateral, including, but not
limited to, the compromise, release, settlement or waiver with or of such other
Borrower or any other person;
(H) The Administrative Agent's, the Collateral Agent's or
any Lender's vote, claim, distribution, election, acceptance, action or inaction
in any bankruptcy case related to the Obligations of the other Borrower or any
collateral, including the Collateral; and
(I) Any impairment or invalidity of any collateral or any
failure to perfect any of the Administrative Agent's and the Collateral Agent's
liens, including the Collateral thereon.
SECTION 12.22 CO-BORROWER WAIVERS. Each Borrower hereby expressly
waives (a) diligence, presentment, demand for payment and protest affecting the
other Borrower's
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liability under the Loan Documents; (b) discharge due to any disability of the
other Borrower; (c) any defenses of the other Borrower to obligations under the
Loan Documents not arising under the express terms of the Loan Documents or from
a material breach thereof by the Administrative Agent, the Collateral Agent or
any Lender which under applicable law has the effect of discharging the other
Borrower from the Obligations of such other Borrower as to which this Agreement
is sought to be enforced; (d) the benefit of any act or omission by the
Administrative Agent, the Collateral Agent or any Lender which directly or
indirectly results in or aids the discharge of the other Borrower from any of
the Obligations of such other Borrower by operation of law or otherwise; (e) all
notices whatsoever, including, without limitation, notice of acceptance of the
incurring of the Obligations of the other Borrower; (f) any right it may have to
require the Administrative Agent, the Collateral Agent or any Lender to disclose
to it any information that the Administrative Agent, the Collateral Agent or
Lenders may now or hereafter acquire concerning the financial condition or any
circumstances that bear on the risk of nonpayment by the other Borrower,
including the release of such other Borrower from its Obligations hereunder; and
(g) any requirement that the Administrative Agent, the Collateral Agent and
Lenders exhaust any right, power or remedy or proceed against the other Borrower
or any other security for, or any guarantor of, or any other party liable for,
any of the Obligations of either Borrower, or any portion thereof. Each Borrower
specifically agrees that it shall not be necessary or required, and Borrowers
shall not be entitled to require, that the Administrative Agent, the Collateral
Agent or any Lender (i) file suit or proceed to assert or obtain a claim for
personal judgment against the other Borrower for all or any part of the
Obligations of such other Borrower; (ii) make any effort at collection or
enforcement of all or any part of the Obligations of the other Borrower from
such other Borrower; (iii) foreclose against or seek to realize upon any
collateral or any other security now or hereafter existing for all or any part
of the Obligations of the other Borrower; (iv) file suit or proceed to obtain or
assert a claim for personal judgment against the other Borrower or any guarantor
or other party liable for all or any part of the Obligations of either Borrower;
(v) exercise or assert any other right or remedy to which the Administrative
Agent, the Collateral Agent or any Lender is or may be entitled in connection
with the Obligations of the other Borrower or any security or guaranty relating
thereto to assert; or (vi) file any claim against assets of one Borrower before
or as a condition of enforcing the liability of any other Borrower under this
Agreement or the Notes.
Each Borrower acknowledges that all or any portion of the Obligations
may now or hereafter be secured by a Lien or Liens upon real property evidenced
by certain Collateral Documents, including the Timberlands Mortgages. The
Collateral Agent, for the benefit of the Administrative Agent and the Lenders,
among others, may, pursuant to the terms of such real property security
documents and applicable law, foreclose under all or any portion of one or more
of such Liens by means of judicial or nonjudicial sale or sales. Each Borrower
agrees that the Collateral Agent, the Administrative Agent and the Lenders may
exercise whatever rights and remedies they may have with respect to such real
property security, all without affecting the liability of the Borrowers
hereunder, except to the extent the Lenders, the Administrative Agent or the
Collateral Agent realize payment by such action or proceeding. No election to
proceed in one form of action or against any party, or on any obligation shall
constitute a waiver of any Lender's, the Administrative Agent's or the
Collateral Agent's right to proceed in any other form of action or against the
Borrowers, jointly, severally or solidarily or against any other Person, or
diminish the liability of the Borrowers, as jointly, severally and solidarily
liable, or affect the right of any Lender, the Administrative Agent or the
Collateral Agent to proceed against the both
96.
<PAGE> 107
Borrowers for any deficiency, except to the extent such Lender, the
Administrative Agent or the Collateral Agent realizes payment by such action,
notwithstanding the effect of such action upon either Borrower's rights of
subrogation, reimbursement or indemnity, if any, against the other Borrower or
any other Person. Without limiting the generality of the foregoing, each
Borrower waives all rights and defenses that such Borrower may have because the
Indebtedness under this Agreement is secured by real property. This means, among
other things:
(A) The Administrative Agent, the Collateral Agent or any
Lender may collect from such Borrower without first foreclosing on any real or
personal property Collateral pledged by the other Borrower.
(B) If the Administrative Agent, the Collateral Agent or
any Lender forecloses on any real property Collateral pledged by the other
Borrower:
(I) the amount of the Indebtedness may be
reduced only by the price for which that Collateral is sold at the foreclosure
sale, even if the Collateral is worth more than the sale price.
(II) The Administrative Agent, the Collateral
Agent and any Lender may collect from such Borrower even if the Administrative
Agent, the Collateral Agent or any Lender, by foreclosing on the real property
Collateral, has destroyed any right such Borrower may have to collect from the
other Borrower.
This is an unconditional and irrevocable waiver of any rights and defenses such
Borrower may have because the Indebtedness under this Agreement is secured by
real property. These rights and defenses include, but are not limited to, any
rights or defenses based upon Section 580a, 580b, 580d or 726 of the California
Civil Code of Procedure. Each Borrower similarly unconditionally and irrevocably
waives any similar rights and defenses such Borrower may have under any and all
similar statutes of other states.
SECTION 12.23 NOTICE OF CLAIMS; CLAIMS BAR. EACH BORROWER HEREBY
AGREES THAT IT SHALL GIVE PROMPT NOTICE AFTER BECOMING AWARE OF ANY CLAIM OR
CAUSE OF ACTION IT BELIEVES IT HAS, OR MAY SEEK TO ASSERT OR ALLEGE AGAINST ANY
LENDER OR THE ADMINISTRATIVE AGENT, WHETHER SUCH CLAIM IS BASED IN LAW OR
EQUITY, ARISING UNDER OR RELATED TO THIS AGREEMENT, THE NOTES OR ANY OF THE
OTHER LOAN DOCUMENTS OR TO THE LOANS (OR THE COLLATERAL THEREFOR) CONTEMPLATED
HEREBY OR THEREBY OR ANY ACT OR OMISSION TO ACT BY ANY LENDER OR THE
ADMINISTRATIVE AGENT WITH RESPECT HERETO OR THERETO, AND THAT IF IT SHALL FAIL
TO GIVE SUCH NOTICE TO THE ADMINISTRATIVE AGENT PRIOR TO THE FIRST ANNIVERSARY
OF HAVING BECOME AWARE OF ANY SUCH CLAIM OR CAUSE OF ACTION, IT SHALL BE DEEMED
TO HAVE WAIVED, AND SHALL BE FOREVER BARRED FROM BRINGING OR ASSERTING SUCH
CLAIM OR CAUSE OF ACTION IN ANY SUIT, ACTION OR PROCEEDING IN ANY COURT OR
BEFORE ANY GOVERNMENTAL AUTHORITY.
SECTION 12.24 WAIVER OF PUNITIVE DAMAGES. NOTWITHSTANDING ANYTHING
TO THE CONTRARY CONTAINED IN THIS AGREEMENT, EACH BORROWER HEREBY AGREES THAT IT
SHALL NOT SEEK FROM THE LENDERS OR THE ADMINISTRATIVE AGENT, UNDER ANY THEORY OF
97.
<PAGE> 108
LIABILITY, INCLUDING, WITHOUT LIMITATION, ANY THEORY IN TORTS, ANY SPECIAL,
INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES.
SECTION 12.25 GOVERNING LAW. IN ACCORDANCE WITH THE CHOICE OF LAW
AND FORUM ACT (735 ILCS SS.SS. 105/5-1, ET. SEQ.), AND EXCEPT AS OTHERWISE
EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL
MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE
OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS
MADE AND PERFORMED IN SUCH STATE WITHOUT REGARD TO THE PRINCIPLES THEREOF
REGARDING CONFLICT OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF
AMERICA.
SECTION 12.26 SERVICE OF PROCESS. SERVICE OF PROCESS ON EITHER
BORROWER OR THE ADMINISTRATIVE AGENT OR THE LENDERS IN ANY ACTION SUBJECT TO
THIS SECTION 12.26 SHALL BE EFFECTIVE IF MAILED TO SUCH PARTY AT THE ADDRESS
LISTED ON THE SIGNATURE PAGES HERETO UNLESS PRIOR WRITTEN NOTICE OF ANY CHANGES
THEREOF HAS BEEN PREVIOUSLY DELIVERED.
SECTION 12.27 WAIVER OF JURY TRIAL. EACH BORROWER, EACH LENDER AND
THE ADMINISTRATIVE AGENT, HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO A
JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF
ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER
LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OF THEREUNDER, OR THE
PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS
SECTION 12.28 SUBMISSION TO JURISDICTION.
(A) EXCEPT AS SET FORTH IN SECTION 12.28(B), EACH
BORROWER, EACH LENDER AND THE ADMINISTRATIVE AGENT, AGREE THAT ALL DISPUTES
BETWEEN OR AMONG THEM ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL
TO THE RELATIONSHIP ESTABLISHED BETWEEN OR AMONG THEM, INCLUDING COURSE OF
DEALING, COURSE OF CONDUCT, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF
EITHER BORROWER, ANY LENDER OR THE ADMINISTRATIVE AGENT, IN CONNECTION WITH THE
LOAN DOCUMENTS OR ANY DOCUMENTS RELATED THERETO, AND WHETHER ARISING IN
CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY
IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS. EACH BORROWER HEREBY EXPRESSLY AND
IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS
AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS.
EACH BORROWER, EACH LENDER AND THE ADMINISTRATIVE AGENT HEREBY EXPRESSLY AND
IRREVOCABLY WAIVE IN ALL DISPUTES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION
OF THE COURT CONSIDERING THE DISPUTE, INCLUDING ANY OBJECTION TO THE LAYING OF
VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS.
(B) EACH BORROWER AGREES THAT THE ADMINISTRATIVE AGENT
AND EACH LENDER SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW,
TO PROCEED AGAINST EITHER BORROWER OR ANY COLLATERAL IN A COURT IN ANY LOCATION
REASONABLY
98.
<PAGE> 109
SELECTED IN GOOD FAITH TO ENABLE THE ADMINISTRATIVE AGENT OR ANY LENDER TO
REALIZE ON ANY COLLATERAL OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED
IN FAVOR OF THE ADMINISTRATIVE AGENT OR ANY LENDER. EACH BORROWER AGREES THAT IT
WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY THE
ADMINISTRATIVE AGENT OR ANY LENDER TO REALIZE ON ANY COLLATERAL OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE ADMINISTRATIVE AGENT OR ANY
LENDER. EACH BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY OBJECTION IT
MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE ADMINISTRATIVE AGENT OR ANY
LENDER HAS COMMENCED A PROCEEDING DESCRIBED IN THIS SECTION 12.28(B), INCLUDING
ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS. TO THE EXTENT THAT EITHER BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY
IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER
THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF
EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR THE COLLATERAL OR OTHER
PROPERTY, EACH BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF
ITS OBLIGATIONS UNDER THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS.
(C) EACH BORROWER HEREBY EXPRESSLY AND IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE FOREGOING COURTS IN ANY SUCH
ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID, TO SUCH BORROWER AT ITS ADDRESS FOR NOTICE DESIGNATED IN
ACCORDANCE WITH SECTION 12.2, SUCH SERVICE TO BECOME EFFECTIVE FOUR (4) DAYS
AFTER SUCH MAILING.
SECTION 12.29 AGREEMENTS IN WRITING.
(A) UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND
COMMITMENTS MADE BY THE LENDERS AFTER OCTOBER 3, 1989, CONCERNING LONAS AND
OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES
OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS
CONSIDERATION AND BE SIGNED BY THE ADMINISTRATIVE AGENTS AND THE LENDERS TO BE
ENFORCEABLE.
(B) ORAL AGREEMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
99.
<PAGE> 110
WITNESS the due execution hereof by the respective duly authorized
officers of the undersigned as of the date first written above.
BORROWERS STRATEGIC TIMBER PARTNERS, LP
a Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO.,
a Delaware corporation, a general partner
By:
-----------------------------------------
Joseph E. Rendini
Vice President and Secretary
Notices to be sent to:
Strategic Timber Partners, L.P.
5 North Pleasant Street
New London, New Hampshire 03527
Attention: Kenneth L. Chute
Telephone: (603) 526-7800
Facsimile: (603) 526-7811
PIONEER RESOURCES, LLC
an Oregon limited liability company,
By:
-----------------------------------------
Joseph E. Rendini
Vice President and Secretary
Notices to be sent to:
Pioneer Resources, LLC
5 North Pleasant Street
New London, New Hampshire 03527
Attention: Kenneth L. Chute
Telephone: (603) 526-7800
Facsimile: (603) 526-7811
100.
<PAGE> 111
LENDERS ABN AMRO BANK N.V.
By:
-----------------------------------------
Printed Name:
Title:
By:
-----------------------------------------
Wayne M. Rancourt,
Vice President
Domestic Lending Office
ABN AMRO Bank N.V.
One Union Square
600 University Street, Suite 2323
Seattle, WA 98101-2070
Attention: Operations
Telephone: 206/654-0368
Facsimile: 206/682-5641
Notices to be sent to:
ABN AMRO Bank, N.V.
Agency Services
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attention: Linda Boardman
Telephone: 212/314-1724
Facsimile: 212/314-1712
With a copy to:
ABN AMRO Bank N.V.
One Union Square
600 University Street, Suite 2323
Seattle, WA 98101-2070
Attention: Wayne M. Rancourt, Vice President
Telephone: 206/587-0342
Facsimile: 206/682-5641
101.
<PAGE> 112
ADMINISTRATIVE AGENT ABN AMRO BANK N.V.
By:
-----------------------------------------
Printed Name:
Title:
By:
-----------------------------------------
Wayne M. Rancourt,
Vice President
Administrative Agent's Payment Office:
ABN AMRO Bank, NV
Account No.: 650-001-1789-41
ABA NO.: 026009580
F/O: ABN AMRO Bank - Chicago CPU
Reference: Agency Services
(Strategic Timber Investments)
Notices to be sent to:
ABN AMRO Bank, N.V.
Agency Services
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attention: Linda Boardman
Telephone: 212/314-1724
Facsimile: 212/314-1712
With a copy to:
ABN AMRO Bank N.V.
One Union Square
600 University Street, Suite 2323
Seattle, WA 98101-2070
Attention: Wayne M. Rancourt, Vice President
Telephone: 206/587-0342
Facsimile: 206/682-5641
102.
<PAGE> 113
NATIONSBANK, N.A.
By:
-----------------------------------------
Name: Joseph L. Corah
Title: Vice President
Information for Notices:
100 North Tryon Street, 8th Floor
NC1-007-08-05
Charlotte, North Carolina 28255
Attention: Joseph L. Corah
Telephone: 704/386-5976
Facsimile: 704/386-9385
103.
<PAGE> 114
AMSOUTH BANK
By:
-----------------------------------------
Name:
Title:
Information for Notices:
1900 5th Avenue North
AST - 7th Floor
Birmingham, AL 35203
Attention: Don Sinclair
----------------------------------
Telephone: (205) 801-0349
----------------------------------
Facsimile: (205) 583-4436
----------------------------------
104.
<PAGE> 115
BANK OF MONTREAL
By:
-----------------------------------------
Name:
Title:
Information for Notices:
115 S. La Salle Street
12th Floor West
Chicago, IL 60603
Attention: Amy Dumser
----------------------------------
Telephone: (312) 750-3474
----------------------------------
Facsimile: (312) 750-6057
----------------------------------
105.
<PAGE> 116
BANK OF SCOTLAND
By:
-----------------------------------------
Name:
Title:
Information for Notices:
565 Fifth Avenue
New York, NY 10017
Attention: Annie Chin Tat
----------------------------------
Telephone: (212) 450-0871
----------------------------------
Facsimile: (212) 557-9460
----------------------------------
106.
<PAGE> 117
CITIZENS BANK NEW HAMPSHIRE
By:
-----------------------------------------
Name:
Title:
Information for Notices:
20 West Park Street
Lebanon, NH 03766
Attention: Vernon Studer
----------------------------------
Telephone: (603) 443-4047
----------------------------------
Facsimile: (603) 443-4001
----------------------------------
107.
<PAGE> 118
CREDIT AGRICOLE INDOSUEZ
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
Information for Notices:
55 E. Monroe, Suite 4700
Chicago, IL 60603
Attention: Alan Schmelzer
----------------------------------
Telephone: (312) 917-7455
----------------------------------
Facsimile: (312) 372-3455
----------------------------------
108.
<PAGE> 119
FIRST SECURITY BANK, N.A.
By:
-----------------------------------------
Name:
Title:
Information for Notices:
4949 Meadows Road
Lake Oswego, OR 97035
Attention: Mark Johnson
----------------------------------
Telephone: (503) 675-3258
----------------------------------
Facsimile: (503) 675-3209
----------------------------------
109.
<PAGE> 120
KEYBANK NATIONAL ASSOCIATION
By:
-----------------------------------------
Name:
Title:
Information for Notices:
700 Fifth Avenue, 46th Floor
Seattle, WA 98101
Attention: Rick Ameny
----------------------------------
Telephone: (206) 684-6014
----------------------------------
Facsimile: (206) 684-6035
----------------------------------
110.
<PAGE> 121
NATEXIS BANQUE
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
Information for Notices:
660 S. Figueroa Street, Suite 1400
Los Angeles, CA 90017
Attention: Iain Whyte
----------------------------------
Telephone: (213) 627-8677
----------------------------------
Facsimile: (213) 627-2761
----------------------------------
111.
<PAGE> 122
SOCIETE GENERALE
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Name:
Title:
Information for Notices:
One Montgomery Street, Suite 3220
San Francisco, CA 94104
Attention: Alec Neville
----------------------------------
Telephone: (415) 433-8400
----------------------------------
Facsimile: (415) 989-9922
----------------------------------
112.
<PAGE> 123
SOUTH TRUST
By:
-----------------------------------------
Name:
Title:
Information for Notices:
420 North 20th Street
Corporate Banking, 11th Floor
Birmingham, AL 35203
Attention: Spencer Ragland
----------------------------------
Telephone: (205) 254-5022
----------------------------------
Facsimile: (205) 254-4521
----------------------------------
113.
<PAGE> 124
UNION BANK OF CALIFORNIA, N.A.
By:
-----------------------------------------
Name:
Title:
Information for Notices:
350 California Street, 6th Floor
San Francisco, CA 94104
Attention: Kevin Sullivan
----------------------------------
Telephone: (415) 705-7460
----------------------------------
Facsimile: (415) 705-7566
----------------------------------
114.
<PAGE> 125
INDEX OF SCHEDULES
Schedule 1 - Loan Commitments
Schedule 2 - Disclosure Schedule
Schedule 3 - Financing Statements
INDEX OF EXHIBITS
Exhibit A-1 - Form of Revolving Note
Exhibit A-2 - Form of Term Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Borrowing Base Certificate
Exhibit D - Form of Compliance Certificate
Exhibit E - Form of Notice of Conversion/Continuation
Exhibit F - Designation of Responsible Persons
Exhibit G - Form of Assignment and Acceptance
Exhibit H - Form of Non-Bank Lender Tax Certificate
Exhibit I - Form of Timber Report Certificate
1.
<PAGE> 126
SCHEDULE 1
COMMITMENTS
<TABLE>
<CAPTION>
PRO RATA SHARE
LENDER REVOLVING LOAN TERM LOAN TOTAL OF TOTAL
COMMITMENT COMMITMENT COMMITMENT COMMITMENTS
<S> <C> <C> <C> <C>
ABN AMRO BANK N.V. $22,400,000.00 $25,600,000.00 $48,000,000 12.800000000%
BANK OF AMERICA NT & SA $22,400,000.00 $25,600,000.00 $48,000,000 12.800000000%
SOCIETE GENERALE $21,000,000.00 $24,000,000.00 $45,000,000 12.000000000%
BANK OF MONTREAL $19,600,000.00 $22,400,000.00 $42,000,000 11.200000000%
UNION BANK OF CALIFORNIA, N.A. $19,600,000.00 $22,400,000.00 $42,000,000 11.200000000%
AMSOUTH BANK $11,666,666.67 $13,333,333.33 $25,000,000 6.666666667%
BANK OF SCOTLAND $11,666,666.67 $13,333,333.33 $25,000,000 6.666666667%
KEYBANK NATIONAL ASSOCIATION $11,666,666.67 $13,333,333.33 $25,000,000 6.666666667%
SOUTHTRUST BANK, N.A. $11,666,666.67 $13,333,333.33 $25,000,000 6.666666667%
CREDIT AGRICOLE INDOSUEZ $7,000,000.00 $8,000,000.00 $15,000,000 4.000000000%
NATEXIS BANQUE BFCE $7,000,000.00 $8,000,000.00 $15,000,000 4.000000000%
CITIZENS BANK NEW HAMPSHIRE $4,666,666.67 $5,333,333.33 $10,000,000 2.666666667%
FIRST SECURITY BANK, N.A. $4,666,666.67 $5,333,333.33 $10,000,000 2.666666667%
TOTAL $175,000,000 $200,000,000 $375,000,000 100.0%
</TABLE>
Schedule-1
<PAGE> 127
SCHEDULE 2
DISCLOSURE SCHEDULE
Schedule-2
<PAGE> 128
SCHEDULE 3
FINANCING STATEMENTS
Schedule-3
<PAGE> 129
EXHIBIT A-1
FORM OF REVOLVING LOAN NOTE (STP)
([NAME OF LENDER])
U.S. $[____________] ____________, _________
STRATEGIC TIMBER PARTNERS, LP, a Delaware limited partnership ("STP") for value
received hereby promises to pay to the order of [NAME OF LENDER] (the "Lender"),
in lawful money of the United States of America, the aggregate principal amount
of all Revolving Loans (such Revolving Loans made by the Lender being referred
to herein as the "Lender Advances") made or maintained by the Lender pursuant to
the Loan Agreement (as defined below), payable on the dates, in the amounts and
in the manner set forth below.
This promissory note (the "Note") is one of the Notes referred to in that
certain Loan Agreement dated as of April __, 1999 (as the same may from time to
time be amended, modified, supplemented or restated, the "Loan Agreement"), by
and among STP and PIONEER RESOURCES, LLC, an Oregon limited liability company
("Pioneer"; and collectively with STP, the "Borrowers"), as co-borrowers, the
banks, financial institutions and other institutional lenders from time to time
party thereto and named as Lenders therein (the "Lenders"), and ABN AMRO Bank
N.V., not in its individual capacity, but solely in its capacity as
administrative agent on behalf of the Lenders (in such capacity, the
"Administrative Agent"). All capitalized terms used but not defined herein shall
have the meaning given to them in the Loan Agreement.
1. PRINCIPAL PAYMENTS. All payments of the principal amount of the Lender
Advances shall be made in lawful money of the United States of America and shall
be due and payable on the date(s) determined pursuant to the Loan Agreement.
2. INTEREST RATE. STP further promises to pay interest on the sum of the
daily unpaid principal balance of the Lender Advances outstanding on each day in
lawful money of the United States of America, from the date of this Note until
all such principal amounts shall have been repaid in full, which interest shall
be payable at the rates per annum and on the dates determined pursuant to the
Loan Agreement.
3. PLACE OF PAYMENT. All amounts payable hereunder shall be payable by
wire transfer to the Administrative Agent, on behalf and for the benefit of the
Lender, at the Administrative Agent's Payment Office, or such other place of
payment as may be specified by the Lender in writing.
4. APPLICATION OF PAYMENTS; ACCELERATION. Payments on this Note shall be
applied in the manner set forth in the Loan Agreement. Without limiting the
generality of Section 1 of this Note, the Loan Agreement contains provisions for
acceleration of the maturity of the principal amount of the Lender Advances upon
the occurrence of certain stated events.
Each Lender Advance made by the Lender to the Borrowers pursuant to the Loan
Agreement shall be recorded by the Lender on its books and records. The failure
of the Lender to record any
A-1.1
<PAGE> 130
repayment made on account of the principal balance thereof shall not limit or
otherwise affect the obligation of STP under this Note and under the Loan
Agreement to pay the principal, interest and other amounts due and payable
thereunder.
Any principal repayment of or interest payment on the Lender Advances not paid
when due or within the applicable cure period, if any, whether at stated
maturity, by acceleration or otherwise, shall, at the option of the Required
Lenders, thereafter bear interest at the default rate determined pursuant to
Section 2.4(c) of the Loan Agreement.
5. SECURED NOTE. The full amount of this Note is secured by the Collateral
identified and described as security therefor in the Loan Documents executed by
and delivered by STP. STP shall not, directly or indirectly, suffer or permit to
be created or to remain, and shall promptly discharge, any Lien on or in the
Collateral, or in any portion thereof, except as expressly permitted in the Loan
Documents. In addition, STP shall not suffer any other matter whereby an
interest of the Administrative Agent, the Collateral Agent or any Lender under
any of the Loan Documents in the Collateral or in any Lien granted to the
Administrative Agent or the Collateral Agent, for the benefit of the Lenders,
the Administrative Agent and the Collateral Agent or to any Lender pursuant to
any of the Loan Documents, might be impaired, except as expressly permitted
pursuant to such Loan Document.
6. DEFAULT. STP's failure to pay timely any of the principal amount due
under this Note when the same becomes due and payable or failure to pay timely
any accrued interest or other amounts due under this Note on the date the same
becomes due and payable or within three (3) Business Days thereafter shall
constitute a default under this Note. Upon the occurrence of a default hereunder
or an Event of Default under the Loan Agreement or any of the other Loan
Documents, all unpaid principal, accrued interest and other amounts owing
hereunder shall be collectible by the Lender, the Collateral Agent or the
Administrative Agent, on behalf and for the benefit of the Lender, pursuant to
the Loan Agreement and applicable law.
7. WAIVER. STP hereby waives presentment and demand for payment, notice of
dishonor, protest and notice of protest of this Note, and shall pay all costs of
collection when incurred by or on behalf of the Lender, including, without
limitation, reasonable attorneys' fees, costs and other expenses.
The right to plead any and all statutes of limitations as a defense to any
demands hereunder is hereby waived to the full extent permitted by law.
8. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Illinois, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
A-1.2
<PAGE> 131
9. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to STP and shall extend to any holder
hereof.
STP: STRATEGIC TIMBER PARTNERS, LP
a Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO., a
Delaware corporation, its general partner
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
A-1.3
<PAGE> 132
EXHIBIT A-1
FORM OF REVOLVING LOAN NOTE (PIONEER)
([NAME OF LENDER])
U.S. $[____________] ____________, _________
PIONEER RESOURCES, LLC, an Oregon limited liability company ("Pioneer") for
value received hereby promises to pay to the order of [NAME OF LENDER] (the
"Lender"), in lawful money of the United States of America, the aggregate
principal amount of all Revolving Loans (such Revolving Loans made by the Lender
being referred to herein as the "Lender Advances") made or maintained by the
Lender pursuant to the Loan Agreement (as defined below), payable on the dates,
in the amounts and in the manner set forth below.
This promissory note (the "Note") is one of the Notes referred to in that
certain Loan Agreement dated as of April __, 1999 (as the same may from time to
time be amended, modified, supplemented or restated, the "Loan Agreement"), by
and among Pioneer and STRATEGIC TIMER PARTNERS, LP, a Delaware limited
partnership ("STP"; and collectively with Pioneer, the "Borrowers"), as
co-borrowers, the banks, financial institutions and other institutional lenders
from time to time party thereto and named as Lenders therein (the "Lenders"),
and ABN AMRO Bank N.V., not in its individual capacity, but solely in its
capacity as administrative agent on behalf of the Lenders (in such capacity, the
"Administrative Agent"). All capitalized terms used but not defined herein shall
have the meaning given to them in the Loan Agreement.
1. PRINCIPAL PAYMENTS. All payments of the principal amount of the Lender
Advances shall be made in lawful money of the United States of America and shall
be due and payable on the date(s) determined pursuant to the Loan Agreement.
2. INTEREST RATE. Pioneer further promises to pay interest on the sum of
the daily unpaid principal balance of the Lender Advances outstanding on each
day in lawful money of the United States of America, from the date of this Note
until all such principal amounts shall have been repaid in full, which interest
shall be payable at the rates per annum and on the dates determined pursuant to
the Loan Agreement.
3. PLACE OF PAYMENT. All amounts payable hereunder shall be payable by
wire transfer to the Administrative Agent, on behalf and for the benefit of the
Lender, at the Administrative Agent's Payment Office, or such other place of
payment as may be specified by the Lender in writing.
4. APPLICATION OF PAYMENTS; ACCELERATION. Payments on this Note shall be
applied in the manner set forth in the Loan Agreement. Without limiting the
generality of Section 1 of this Note, the Loan Agreement contains provisions for
acceleration of the maturity of the principal amount of the Lender Advances upon
the occurrence of certain stated events.
Each Lender Advance made by the Lender to the Borrowers pursuant to the Loan
Agreement shall be recorded by the Lender on its books and records. The failure
of the Lender to record any
A-1.4
<PAGE> 133
repayment made on account of the principal balance thereof shall not limit or
otherwise affect the obligation of Pioneer under this Note and under the Loan
Agreement to pay the principal, interest and other amounts due and payable
thereunder.
Any principal repayment of or interest payment on the Lender Advances not paid
when due or within the applicable cure period, if any, whether at stated
maturity, by acceleration or otherwise, shall, at the option of the Required
Lenders, thereafter bear interest at the default rate determined pursuant to
Section 2.4(c) of the Loan Agreement.
5. SECURED NOTE. The full amount of this Note is secured by the Collateral
identified and described as security therefor in the Loan Documents executed by
and delivered by Pioneer. Pioneer shall not, directly or indirectly, suffer or
permit to be created or to remain, and shall promptly discharge, any Lien on or
in the Collateral, or in any portion thereof, except as expressly permitted in
the Loan Documents. In addition, Pioneer shall not suffer any other matter
whereby an interest of the Administrative Agent, the Collateral Agent or any
Lender under any of the Loan Documents in the Collateral or in any Lien granted
to the Administrative Agent or the Collateral Agent, for the benefit of the
Lenders, the Administrative Agent and the Collateral Agent or to any Lender
pursuant to any of the Loan Documents, might be impaired, except as expressly
permitted pursuant to such Loan Document.
6. DEFAULT. Pioneer's failure to pay timely any of the principal amount
due under this Note when the same becomes due and payable or failure to pay
timely any accrued interest or other amounts due under this Note on the date the
same becomes due and payable or within three (3) Business Days thereafter shall
constitute a default under this Note. Upon the occurrence of a default hereunder
or an Event of Default under the Loan Agreement or any of the other Loan
Documents, all unpaid principal, accrued interest and other amounts owing
hereunder shall be collectible by the Lender, the Collateral Agent or the
Administrative Agent, on behalf and for the benefit of the Lender, pursuant to
the Loan Agreement and applicable law.
7. WAIVER. Pioneer hereby waives presentment and demand for payment,
notice of dishonor, protest and notice of protest of this Note, and shall pay
all costs of collection when incurred by or on behalf of the Lender, including,
without limitation, reasonable attorneys' fees, costs and other expenses.
The right to plead any and all statutes of limitations as a defense to any
demands hereunder is hereby waived to the full extent permitted by law.
8. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Illinois, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
A-1.5
<PAGE> 134
9. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Pioneer and shall extend to any
holder hereof.
Pioneer:
PIONEER RESOURCES, LLC,
An Oregon limited liability company
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
A-1.6
<PAGE> 135
EXHIBIT A-2
FORM OF TERM LOAN NOTE (STP)
([NAME OF LENDER])
U.S. $[____________] ____________, _________
STRATEGIC TIMBER PARTNERS, LP, a Delaware limited partnership ("STP") for value
received hereby promises to pay to the order of [NAME OF LENDER] (the "Lender"),
in lawful money of the United States of America, the aggregate principal amount
of all Term Loans (such Loans made by the Lender being referred to herein as the
"Lender Advances") made or maintained by the Lender pursuant to the Loan
Agreement (as defined below), payable on the dates, in the amounts and in the
manner set forth below.
This promissory note (the "Note") is one of the Notes referred to in that
certain Loan Agreement dated as of April __, 1999 (as the same may from time to
time be amended, modified, supplemented or restated, the "Loan Agreement"), by
and among STP and PIONEER RESOURCES, LLC, an Oregon limited liability company
("Pioneer"; and collectively with STP, the "Borrowers"), as co-borrowers, the
banks, financial institutions and other institutional lenders from time to time
party thereto and named as Lenders therein (the "Lenders"), and ABN AMRO Bank
N.V., not in its individual capacity, but solely in its capacity as
administrative agent on behalf of the Lenders (in such capacity, the
"Administrative Agent"). All capitalized terms used but not defined herein shall
have the meaning given to them in the Loan Agreement.
1. PRINCIPAL PAYMENTS. All payments of the principal amount of the Lender
Advances shall be made in lawful money of the United States of America and shall
be due and payable on the date(s) determined pursuant to the Loan Agreement.
2. INTEREST RATE. STP further promises to pay interest on the sum of the
daily unpaid principal balance of the Lender Advances outstanding on each day in
lawful money of the United States of America, from the date of this Note until
all such principal amounts shall have been repaid in full, which interest shall
be payable at the rates per annum and on the dates determined pursuant to the
Loan Agreement.
3. PLACE OF PAYMENT. All amounts payable hereunder shall be payable by
wire transfer to the Administrative Agent, on behalf and for the benefit of the
Lender, at the Administrative Agent's Payment Office, or such other place of
payment as may be specified by the Lender in writing.
4. APPLICATION OF PAYMENTS; ACCELERATION. Payments on this Note shall be
applied in the manner set forth in the Loan Agreement. Without limiting the
generality of Section 1 of this Note, the Loan Agreement contains provisions for
acceleration of the maturity of the principal amount of the Lender Advances upon
the occurrence of certain stated events.
Each Lender Advance made by the Lender to the Borrowers pursuant to the Loan
Agreement shall be recorded by the Lender on its books and records. The failure
of the Lender to record any
A-2.1
<PAGE> 136
repayment made on account of the principal balance thereof shall not limit or
otherwise affect the obligation of STP under this Note and under the Loan
Agreement to pay the principal, interest and other amounts due and payable
thereunder.
Any principal repayment of or interest payment on the Lender Advances not paid
when due or within the applicable cure period, if any, whether at stated
maturity, by acceleration or otherwise, shall, at the option of the Required
Lenders, thereafter bear interest at the default rate determined pursuant to
Section 2.4(c) of the Loan Agreement.
5. SECURED NOTE. The full amount of this Note is secured by the Collateral
identified and described as security therefor in the Loan Documents executed by
and delivered by STP. STP shall not, directly or indirectly, suffer or permit to
be created or to remain, and shall promptly discharge, any Lien on or in the
Collateral, or in any portion thereof, except as expressly permitted in the Loan
Documents. In addition, STP shall not suffer any other matter whereby an
interest of the Administrative Agent, the Collateral Agent or any Lender under
any of the Loan Documents in the Collateral or in any Lien granted to the
Administrative Agent or the Collateral Agent, for the benefit of the Lenders,
the Administrative Agent and the Collateral Agent or to any Lender pursuant to
any of the Loan Documents, might be impaired, except as expressly permitted
pursuant to such Loan Document.
6. DEFAULT. STP's failure to pay timely any of the principal amount due
under this Note when the same becomes due and payable or failure to pay timely
any accrued interest or other amounts due under this Note on the date the same
becomes due and payable or within three (3) Business Days thereafter shall
constitute a default under this Note. Upon the occurrence of a default hereunder
or an Event of Default under the Loan Agreement or any of the other Loan
Documents, all unpaid principal, accrued interest and other amounts owing
hereunder shall be collectible by the Lender, the Collateral Agent or the
Administrative Agent, on behalf and for the benefit of the Lender, pursuant to
the Loan Agreement and applicable law.
7. WAIVER. STP hereby waives presentment and demand for payment, notice of
dishonor, protest and notice of protest of this Note, and shall pay all costs of
collection when incurred by or on behalf of the Lender, including, without
limitation, reasonable attorneys' fees, costs and other expenses.
The right to plead any and all statutes of limitations as a defense to any
demands hereunder is hereby waived to the full extent permitted by law.
8. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Illinois, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
A-2.2
<PAGE> 137
9. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to STP and shall extend to any holder
hereof.
STP: STRATEGIC TIMBER PARTNERS, LP
a Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO., a
Delaware corporation, its general partner
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
A-2.3
<PAGE> 138
EXHIBIT A-2
FORM OF TERM LOAN NOTE (PIONEER)
([NAME OF LENDER])
U.S. $[____________] ____________, _________
PIONEER RESOURCES, LLC, an Oregon limited liability company ("Pioneer") for
value received hereby promises to pay to the order of [NAME OF LENDER] (the
"Lender"), in lawful money of the United States of America, the aggregate
principal amount of all Loans (such Loans made by the Lender being referred to
herein as the "Lender Advances") made or maintained by the Lender pursuant to
the Loan Agreement (as defined below), payable on the dates, in the amounts and
in the manner set forth below.
This promissory note (the "Note") is one of the Notes referred to in that
certain Loan Agreement dated as of April __, 1999 (as the same may from time to
time be amended, modified, supplemented or restated, the "Loan Agreement"), by
and among Pioneer and STRATEGIC TIMER PARTNERS, LP, a Delaware limited
partnership ("STP"; and collectively with Pioneer, the "Borrowers"), as
co-borrowers, the financial institutions from time to time party thereto and
named as Lenders therein (the "Lenders"), and ABN AMRO Bank N.V., not in its
individual capacity, but solely in its capacity as administrative agent on
behalf of the Lenders (in such capacity, the "Administrative Agent"). All
capitalized terms used but not defined herein shall have the meaning given to
them in the Loan Agreement.
1. PRINCIPAL PAYMENTS. All payments of the principal amount of the Lender
Advances shall be made in lawful money of the United States of America and shall
be due and payable on the date(s) determined pursuant to the Loan Agreement.
2. INTEREST RATE. Pioneer further promises to pay interest on the sum of
the daily unpaid principal balance of the Lender Advances outstanding on each
day in lawful money of the United States of America, from the date of this Note
until all such principal amounts shall have been repaid in full, which interest
shall be payable at the rates per annum and on the dates determined pursuant to
the Loan Agreement.
3. PLACE OF PAYMENT. All amounts payable hereunder shall be payable by
wire transfer to the Administrative Agent, on behalf and for the benefit of the
Lender, at the Administrative Agent's Payment Office, or such other place of
payment as may be specified by the Lender in writing.
4. APPLICATION OF PAYMENTS; ACCELERATION. Payments on this Note shall be
applied in the manner set forth in the Loan Agreement. Without limiting the
generality of Section 1 of this Note, the Loan Agreement contains provisions for
acceleration of the maturity of the principal amount of the Lender Advances upon
the occurrence of certain stated events.
Each Lender Advance made by the Lender to the Borrowers pursuant to the Loan
Agreement shall be recorded by the Lender on its books and records. The failure
of the Lender to record any
A-2.4
<PAGE> 139
repayment made on account of the principal balance thereof shall not limit or
otherwise affect the obligation of Pioneer under this Note and under the Loan
Agreement to pay the principal, interest and other amounts due and payable
thereunder.
Any principal repayment of or interest payment on the Lender Advances not paid
when due or within the applicable cure period, if any, whether at stated
maturity, by acceleration or otherwise, shall, at the option of the Required
Lenders, thereafter bear interest at the default rate determined pursuant to
Section 2.4(c) of the Loan Agreement.
5. SECURED NOTE. The full amount of this Note is secured by the Collateral
identified and described as security therefor in the Loan Documents executed by
and delivered by Pioneer. Pioneer shall not, directly or indirectly, suffer or
permit to be created or to remain, and shall promptly discharge, any Lien on or
in the Collateral, or in any portion thereof, except as expressly permitted in
the Loan Documents. In addition, Pioneer shall not suffer any other matter
whereby an interest of the Administrative Agent, the Collateral Agent or any
Lender under any of the Loan Documents in the Collateral or in any Lien granted
to the Administrative Agent or the Collateral Agent, for the benefit of the
Lenders, the Administrative Agent and the Collateral Agent or to any Lender
pursuant to any of the Loan Documents, might be impaired, except as expressly
permitted pursuant to such Loan Document.
6. DEFAULT. Pioneer's failure to pay timely any of the principal amount
due under this Note when the same becomes due and payable or failure to pay
timely any accrued interest or other amounts due under this Note on the date the
same becomes due and payable or within three (3) Business Days thereafter shall
constitute a default under this Note. Upon the occurrence of a default hereunder
or an Event of Default under the Loan Agreement or any of the other Loan
Documents, all unpaid principal, accrued interest and other amounts owing
hereunder shall be collectible by the Lender, the Collateral Agent or the
Administrative Agent, on behalf and for the benefit of the Lender, pursuant to
the Loan Agreement and applicable law.
7. WAIVER. Pioneer hereby waives presentment and demand for payment,
notice of dishonor, protest and notice of protest of this Note, and shall pay
all costs of collection when incurred by or on behalf of the Lender, including,
without limitation, reasonable attorneys' fees, costs and other expenses.
The right to plead any and all statutes of limitations as a defense to any
demands hereunder is hereby waived to the full extent permitted by law.
8. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Illinois, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
A-2.5
<PAGE> 140
9. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Pioneer and shall extend to any
holder hereof.
Pioneer:
PIONEER RESOURCES, LLC, an Oregon limited
liability company
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
A-2.6
<PAGE> 141
EXHIBIT B
NOTICE OF BORROWING
Date:_______________
To: ABN AMRO Bank N.V., as Administrative Agent for the Lenders
Agency Services
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attention: Linda Boardman
Telephone: 212/314-1724
Facsimile: 212/314-1712
Re: The Loan Agreement dated as of April __, 1999 (as the same may from
time to time be amended, modified or supplemented or restated, the
"Loan Agreement"), by and among Strategic Timber Partners, LP, a
Delaware limited partnership, and Pioneer Resources, LLC, an Oregon
limited liability company (collectively, the "Borrowers"), as
co-borrowers, the banks, financial institutions and other institutional
lenders from time to time party thereto and referred to as Lenders
therein, and ABN AMRO BANK N.V., not in its individual capacity, but
solely as Administrative Agent for the benefit of the Lenders
Ladies and Gentlemen:
The undersigned Borrowers refer to the Loan Agreement, the terms defined therein
used herein as defined, and each hereby give you notice irrevocably, pursuant to
SECTION 2.5 of the Loan Agreement, of the Borrowing of a Revolving Loan as
specified herein:
1. The Funding Date, which shall be a Business Day, of the
requested Borrowing is __________________, 199_/200_.
2. The aggregate amount of the requested Borrowing is $_________.
3. The requested Borrowing shall consist of $ _____________ of
Base Rate Loans and $_________ of LIBOR Loans.
4. The duration of the Interest Period for the LIBOR Loans
included in the requested Borrowing shall be ___ months.
5. The Designated Deposit Account to which proceeds of the Loans
are to be transferred together with wiring instructions are:
B.1
<PAGE> 142
Bank: [____________________]
Account No.: [____________________]
ABA NO.: [____________________]
Reference: [____________________]
The undersigned hereby each certifies that the following statements are true on
the date hereof, and will be true on the date of the proposed Borrowing, before
and after giving effect thereto and to the application of the proceeds
therefrom:
(A) the representations and warranties of the Borrowers contained
in ARTICLE V of the Loan Agreement are true and correct as though made on and as
of such date (except to the extent such representations and warranties relate to
an earlier date, in which case they are true and correct as of such date);
(B) no Default or Event of Default has occurred and is continuing,
or would result from such proposed Borrowing; and
(C) the requested Borrowing will not exceed, as of the designated
Funding Date, the lesser of (i) the Borrowing Base Availability then in effect,
or (ii) the Aggregate Commitment.
STRATEGIC TIMBER PARTNERS, LP,
a Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO.,
a Delaware corporation, its general partner
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
PIONEER RESOURCES, LLC
an Oregon limited liability company,
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
B.2
<PAGE> 143
EXHIBIT C
BORROWING BASE
Date:__________________
To: ABN AMRO Bank N.V., as Administrative Agent for the Lenders
Agency Services
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attention: Linda Boardman
Telephone: 212/314-1724
Facsimile: 212/314-1712
RE: The Loan Agreement dated as of April __, 1999 (as the same may from
time to time be amended, modified or supplemented or restated, the
"Loan Agreement"), by and among Strategic Timber Partners, LP, a
Delaware limited partnership, and Pioneer Resources, LLC, an Oregon
limited liability company (collectively, the "Borrowers"), as
co-borrowers, the banks, financial institutions and other institutional
lenders from time to time party thereto and referred to as Lenders
therein, and ABN AMRO BANK N.V., not in its individual capacity, but
solely as Administrative Agent for the benefit of the Lenders
Ladies and Gentlemen:
Reference is made to the Loan Agreement. Capitalized terms used but not defined
in this Borrowing Base Certificate shall have the respective meanings given to
them in the Loan Agreement.
Pursuant to SECTION 7.1(E) of the Loan Agreement, the Borrowers, by their
respective undersigned chief financial officers, hereby certify that the
information furnished in SCHEDULE 1 attached hereto and incorporated herein by
this reference is true, accurate and complete as of __________, ____ and that:
1. Except as disclosed in SCHEDULE 2 attached hereto and
incorporated herein by this reference, all representations and warranties stated
in ARTICLE V of the Loan Agreement and in each other Loan Document are true,
correct and complete to the same extent as though made on and as of the date
hereof, except to the extent such representations and warranties specifically
relate to an earlier date, in which event they shall be true, correct and
complete as of such earlier date; and provided further that the representations
and warranties set forth in SECTION 5.7 of the Loan Agreement shall be deemed to
be made with respect to the financial statements most recently delivered to the
Administrative Agent pursuant to SECTIONS 7.1(A) and 7.1(B), as applicable, of
the Loan Agreement.
2. As of the date hereof, no Default or Event of Default has
occurred and is continuing.
C.1
<PAGE> 144
IN WITNESS WHEREOF, this Borrowing Base Certificate is executed by the
undersigned this _____ day of _______________ _____.
STRATEGIC TIMBER PARTNERS, LP, a
Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO.,
a Delaware corporation, its general partner
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
PIONEER RESOURCES, LLC
an Oregon limited liability company,
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
C.2
<PAGE> 145
SCHEDULE 1
TO BORROWING BASE CERTIFICATE
DATED [____________, ____]
BORROWING BASE AVAILABILITY
<TABLE>
<S> <C> <C> <C>
I. A. Contract price of all Timber sold forward
Under Eligible Timber Agreements (as such
terms are defined in the Loan Agreement) $
----------------
B. An amount equal to 80% x (Line IA) $
----------------
II. A. An amount equal to the Value of Merchantable Timber $
----------------
B. (i) From Closing through April 30, 2000, an amount
equal to 60% x (Line II.A) $
----------------
(ii) From May 1, 2000 through April 30, 2001,
an amount equal to 58% x (Line II.A) $
----------------
(iii) From May 1, 2001 through April 30, 2002,
an amount equal to 56% x (Line II.A) $
----------------
(iv) From May 1, 2002 through April 30, 2003,
an amount equal to 54% x (Line II.A) $
----------------
(v) From May 1, 2003 through the Maturity Date,
an amount equal to 52% x (Line II.A) $
----------------
III. BORROWING BASE
A. (i) From Closing through April 30, 2000, an amount
equal to the sum of Line I.B and Line II.B(i) $
----------------
</TABLE>
C.3
<PAGE> 146
<TABLE>
<S> <C> <C> <C>
(ii) From May 1, 2000 through April 30, 2001, an
amount equal to the sum of Line I.B and Line II.B(ii) $
----------------
(iii) From May 1, 2001 through April 30, 2002, an
amount equal to the sum of Line I.B and Line II.B(iii) $
----------------
(iv) From May 1, 2002 through April 30, 2003, an
amount equal to the sum of Line I.B and Line II.B(iv) $
----------------
(v) From May 1, 2003 through the Maturity Date,
an amount equal to the sum of Line I.B and Line II.B(v) $
----------------
B. Aggregate principal amount of all outstanding Loans
(without taking into account the requested Borrowing) $
----------------
C. Aggregate principal of all other outstanding Funded Debt
(without taking into account the Loans outstanding under the
Loan Agreement) $
----------------
D. An amount equal to Line III.B plus Line III.C $
----------------
E. An amount equal to Line III.A minus Line III.D $
----------------
F. Aggregate Revolving Commitment Amount $175,000,000
G. Amount Available for Borrowing under Revolving
Credit Facility: An amount equal to the lesser of
Lines III.E and III.F $
----------------
H. Amount of requested Borrowing of Revolving Loans $
----------------
</TABLE>
STRATEGIC TIMBER PARTNERS, LP, a
Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO.,
a Delaware corporation, its general partner
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
C.4
<PAGE> 147
PIONEER RESOURCES, LLC
an Oregon limited liability company,
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
C.5
<PAGE> 148
SCHEDULE 2
TO BORROWING BASE CERTIFICATE
DATED _____________ ___, ______
EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES
C.6
<PAGE> 149
EXHIBIT D
COMPLIANCE CERTIFICATE
__________________, 199_/200_
To: ABN AMRO Bank N.V., as Administrative Agent for the Lenders
Agency Services
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attention: Linda Boardman
Telephone: 212/314-1724
Facsimile: 212/314-1712
Re: The Loan Agreement dated as of April __, 1999 (as the same may from
time to time be amended, modified or supplemented or restated, the
"Loan Agreement"), by and among Strategic Timber Partners, LP, a
Delaware limited partnership, and Pioneer Resources, LLC, an Oregon
limited liability company (collectively, the "Borrowers"), as
co-borrowers, the banks, financial institutions and other institutional
lenders from time to time party thereto and referred to as Lenders
therein, and ABN AMRO BANK N.V., not in its individual capacity, but
solely as Administrative Agent for the benefit of the Lenders
Ladies and Gentlemen:
Reference is made to the Loan Agreement. Capitalized terms used in this
Compliance Certificate have the same meaning when used herein as given to them
in the Loan Agreement.
Pursuant to SECTION 7.1(D) of the Loan Agreement, the Borrowers, by their
respective undersigned chief financial officers, acting solely in such
capacities, hereby certify that the information furnished in SCHEDULE 1 attached
hereto and incorporated herein by this reference was true, accurate and complete
as of the last date of the Fiscal Quarter immediately preceding the date of this
Compliance Certificate and that:
1. Each undersigned chief financial officer has reviewed the
terms of the Loan Agreement and the Notes and has made, or caused to be made
under his or her supervision, a review in reasonable detail of the transactions
and financial condition of the respective Borrower with which he or she is
affiliated during the accounting period covered by financial statements
delivered pursuant to SECTIONS 7.1(A) AND 7.1(B) of the Loan Agreement.
2. All representations and warranties of the Borrowers stated in
the Loan Agreement are true, accurate and complete as of the date hereof;
provided, however, that those representations and warranties expressly referring
to another date are true, accurate and complete as of such date; and provided
further that the representations and warranties set forth in ARTICLE V of the
Loan Agreement shall be deemed to be made with respect to the financial
statements most recently delivered to the Administrative Agent pursuant to
SECTIONS 7.1(A) and 7.1(B), as applicable, of the Loan Agreement.
D.1
<PAGE> 150
3. Such reviews have not disclosed the existence during or at the
end of such accounting period, and the undersigned do not have knowledge of the
existence as of the date hereof of any Default or Event of Default, except for
such conditions or events listed on SCHEDULE 2 attached hereto, specifying the
nature and period of existence thereof and what action each of the Borrowers has
taken, or is taking and proposes to take, if any, with respect thereto.
IN WITNESS WHEREOF, this Compliance Certificate is executed by the undersigned
this ____ day of __________________, 199_/200_.
STRATEGIC TIMBER PARTNERS, LP, a
Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO.,
a Delaware corporation, its general partner
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
PIONEER RESOURCES, LLC
an Oregon limited liability company,
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
D.2
<PAGE> 151
SCHEDULE 1 TO COMPLIANCE CERTIFICATE
DATED ___________________, 19__/200_
FINANCIAL COVENANTS OF THE BORROWERS
For any computation of any financial covenant that includes in its
computation the results from any of the Fiscal Quarters set forth below,
the result used for such Fiscal Quarters shall be deemed to be the
following:
<TABLE>
<CAPTION>
DEEMED CAPITAL DEEMED INTEREST DEEMED
FISCAL QUARTER ENDING DEEMED EBITDDA EXPENDITURES EXPENSE DISTRIBUTIONS
<S> <C> <C> <C> <C>
September 30, 1998 $28,170,000 $787,000 $5,200,000 $3,892,000
December 31, 1998 $11,934,000 $400,000 $5,200,000 $3,892,000
March 31, 1999 $ 6,877,000 $176,000 $5,200,000 $3,892,000
</TABLE>
I. MINIMUM INTEREST COVERAGE RATIO (SECTION 9.1) Measured for STP, on a
consolidated basis, as of the last day of each Fiscal Quarter on a
rolling four (4) Fiscal Quarter basis:
<TABLE>
<S> <C> <C>
(A) EBITDDA
(I) Net Income $
----------------
(II) all amounts treated as expenses for
depreciation and the amortization of
intangibles of any kind to the extent
included in the determination of Net
Income $
----------------
(III) all amounts treated as expenses for the
depletion of Timber from the Timberlands
owned by STP and its consolidated
Subsidiaries $
----------------
(IV) Net Interest Expense to the extent
included in the determination of
Net Income $
----------------
(IV) net taxes on income attributable
to the business of STP and its
Subsidiaries (including Pioneer) $
----------------
EBITDDA (Line (a)(i) plus line (a)(ii) plus line
(a)(iii) plus line (a)(iv)) $
----------------
(B) Net Interest Expense $
----------------
(C) Interest Coverage Ratio :1.00
(Line I(a) divided by Line I(b)) ----------------
</TABLE>
D.3
<PAGE> 152
MINIMUM INTEREST COVERAGE RATIO
<TABLE>
<CAPTION>
Fiscal Quarters Minimum Interest Coverage Ratio
<S> <C>
(Closing - March 31, 2000) 2.00 to 1.00
(April 1, 2000 - June 30, 2000) 2.25 to 1.00
(July 1, 2000 and thereafter) 2.50 to 1.00
</TABLE>
II. MAXIMUM LEVERAGE RATIO (SECTION 9.2) Measured for STP, on a
consolidated basis, as of the last day of each Fiscal Quarter on a
rolling four (4) Fiscal Quarter basis:
<TABLE>
<S> <C> <C>
(A) Total Funded Debt $
-------------------------
(B) EBITDDA (Line I(a)) $
-------------------------
(C) Leverage Ratio (Line II(a) divided by Line II(b)) :1.00
--------------------------
</TABLE>
MAXIMUM LEVERAGE RATIO
<TABLE>
<CAPTION>
Fiscal Quarters Maximum Leverage Ratio
<S> <C>
(Closing - June 30, 2000) 6.00 to 1.00
(July 1, 2000 - September 30, 5.50 to 1.00
2001)
(October 1, 2001 and thereafter) 5.00 to 1.00
</TABLE>
III. MINIMUM FIXED CHARGE COVERAGE RATIO (SECTION 9.3) Measured for STP, on
a consolidated basis, as of the last day of each Fiscal Quarter on a
rolling four (4) Fiscal Quarter basis:
<TABLE>
<S> <C> <C> <C>
(A) EBITDDA (Line I(a)) $
-------------------------
(B) Net Interest Expense (Line I(b)) $
-------------------------
(C) distributions by STP $
-------------------------
(D) Capital Expenditures (other than Acquisitions) $
-------------------------
(E) Fixed Charges (Line III(b) plus Line III(c) plus
Line III(d)) $
-------------------------
A) (F) Fixed Charge Coverage Ratio
(Line III(a) divided by Line III(e)) :1.00
-------------------------
</TABLE>
MINIMUM FIXED CHARGE COVERAGE RATIO
<TABLE>
<CAPTION>
Fiscal Quarters Minimum Fixed Charge Coverage Ratio
<S> <C>
(Closing - June 30, 2000) 1.00 to 1.00
(July 1, 2000 and thereafter) 1.25 to 1.00
</TABLE>
D.4
<PAGE> 153
SCHEDULE 2 TO COMPLIANCE CERTIFICATE
DATED ___________________, 19__/200_
LIST OF EXCEPTIONS
Condition(s) or event(s) constituting a Default or Event of Default:
Period of Existence:
Remedial action with respect to such condition or event:
D.5
<PAGE> 154
EXHIBIT E
NOTICE OF CONVERSION/CONTINUATION
Date:_________________________
To: ABN AMRO Bank N.V., as Administrative Agent for the Lenders
Agency Services
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attention: Linda Boardman
Telephone: 212/314-1724
Facsimile: 212/314-1712
Re: The Loan Agreement dated as of April __, 1999 (as the same may from
time to time be amended, modified or supplemented or restated, the
"Loan Agreement"), by and among Strategic Timber Partners, LP, a
Delaware limited partnership, and Pioneer Resources, LLC, an Oregon
limited liability company (collectively, the "Borrowers"), as
co-borrowers, the banks, financial institutions and other institutional
lenders from time to time party thereto and referred to as Lenders
therein, and ABN AMRO BANK N.V., not in its individual capacity, but
solely as Administrative Agent for the benefit of the Lenders
Ladies and Gentlemen:
The undersigned Borrowers refer to the Loan Agreement, the terms defined therein
being used herein as therein defined, and hereby each gives you notice
irrevocably, pursuant to SECTION 2.6 of the Loan Agreement, of the [conversion]
[continuation] of the Loans specified herein, that:
1. The date of the [conversion] [continuation] is
________________, 19__/200_.
2. The aggregate amount of the proposed Loans [converted] is
$_____________ or [continued] is $__________________.
3. The Loans are to be [converted into] [continued as] [LIBOR]
[Base Rate] Loans.
4. [If applicable:] The duration of the Interest Period for the
LIBOR Loans included in the [conversion] [continuation] shall be ___________
months.
The undersigned hereby each certifies that the following statements are true on
the date hereof, and will be true on the date of the proposed [conversion]
[continuation], before and after giving effect thereto and to the application of
the proceeds therefrom:
(A) the representations and warranties of the Borrowers contained
in ARTICLE V of the Loan Agreement are true and correct as though made on and as
of such date (except to the extent such representations and warranties relate to
an earlier date, in which case they are true and correct as of such date); and
E.1
<PAGE> 155
(B) no Default or Event of Default has occurred and is continuing,
or would result from such proposed Borrowing.
STRATEGIC TIMBER PARTNERS, LP, a
Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO.,
a Delaware corporation, its general partner
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
PIONEER RESOURCES, LLC,
an Oregon limited liability company,
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
E.2
<PAGE> 156
EXHIBIT F
DESIGNATION OF RESPONSIBLE PERSONS
April __, 1999
To: ABN AMRO Bank N.V., as Administrative Agent for the Lenders
Agency Services
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attention: Linda Boardman
Telephone: 212/314-1724
Facsimile: 212/314-1712
RE: The Loan Agreement dated as of April __, 1999 (as the same may from
time to time be amended, modified or supplemented or restated, the
"Loan Agreement"), by and among Strategic Timber Partners, LP, a
Delaware limited partnership, and Pioneer Resources, LLC, an Oregon
limited liability company (collectively, the "Borrowers"), as
co-borrowers, the banks, financial institutions and other institutional
lenders from time to time party thereto and referred to as Lenders
therein, and ABN AMRO BANK N.V., not in its individual capacity, but
solely as Administrative Agent for the benefit of the Lenders
Ladies and Gentlemen:
Reference is made to the Loan Agreement, the terms defined therein being used
herein as therein defined. Pursuant to the Loan Agreement, the undersigned
Borrowers hereby appoint and designate the following persons to be the
"Responsible Persons" of the Borrowers:
<TABLE>
<CAPTION>
Responsible Person Signature Title/Position
<S> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
F.1
<PAGE> 157
Responsible Persons shall be the only persons authorized on behalf of the
Borrowers to request Loans under the Loan Agreement, request changes in the
rates of interest applicable thereto or to continue loans made thereunder, all
as more fully set forth in the Loan Agreement.
Very truly yours,
STRATEGIC TIMBER PARTNERS, LP, a
Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO.,
a Delaware corporation, its general partner
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
PIONEER RESOURCES, LLC,
an Oregon limited liability company,
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
F.2
<PAGE> 158
EXHIBIT G
ASSIGNMENT AND ACCEPTANCE
ASSIGNMENT AND ACCEPTANCE dated ,199_/200_ between_______________________ (the
"Assignor") and ________________ (the "Assignee").
PRELIMINARY STATEMENT
A. This Assignment and Acceptance is being executed and delivered
in accordance with and with reference to SECTION 12.11(A) of the Loan Agreement
(as from time to time amended, modified, supplemented or restated, the "Loan
Agreement") dated as of April __, 1999, by and among Strategic Timber Partners,
LP, a Delaware limited partnership, and Pioneer Resources, LLC, an Oregon
limited liability company (collectively, the "Borrowers"), as co-borrowers, the
banks, financial institutions and other institutional lenders from time to time
party thereto and referred to as Lenders therein, and ABN AMRO BANK N.V., not in
its individual capacity, but solely as Administrative Agent for the benefit of
the Lenders
B. The Assignor is a Lender under and as defined in the Loan
Agreement and, as such, presently has outstanding Loans under its Revolving Loan
Commitment and its Term Loan Commitment under the Loan Agreement as set forth in
SCHEDULE I to this Assignment and Acceptance.
C. On the terms and conditions set forth below, the Assignor
desires to sell and assign to the Assignee, and the Assignee desires to purchase
and assume from the Assignor, a ______%1 interest (the "Assigned Percentage") in
and to all of the Assignor's rights and obligations in, to and under the Loan
Agreement and the other Loan Documents as of the Effective Date (as defined
below).
D. After giving effect to such assignment, the outstanding
Revolving Loans and Term Loans of the Assignor and the Assignee under the Loan
Agreement will be as set forth in SCHEDULE II to this Assignment and Acceptance.
NOW THEREFORE, the Assignor and the Assignee hereby agree as follows:
1. The Assignor hereby sells and assigns to the Assignee WITHOUT
RECOURSE, and the Assignee hereby purchases and assumes from the Assignor, the
Assigned Percentage of the Assignor's rights and obligations under the Loan
Agreement as of the Effective Date.
2. After the execution and delivery of this Assignment and
Acceptance by the Assignee, the Assignor will, upon request of the Assignee,
promptly provide to the Assignee copies of all Loan Documents and other
documents not previously furnished to the Assignee that
- --------
1 Specify percentage of ASSIGNOR'S INTEREST ONLY in total facility to accuracy
on nine decimal points (for example, if Assignor has a 25% interest in the total
facility and 50% of that is being assigned, then complete the blank "50%", not
"12.5%").
G.1
<PAGE> 159
were delivered to such Assignor pursuant to the conditions precedent set forth
in ARTICLE IV of the Loan Agreement.
3. THE ASSIGNOR:
(A) represents and warrants that as of the date hereof the amount
of its Revolving Loan Commitment and its Term Loan Commitment (without giving
effect to assignments thereof which have not yet become effective) is as set
forth in SCHEDULE III to this Assignment and Acceptance;
(B) represents and warrants that it is the legal and beneficial
owner of the interest being assigned by it hereunder and that such interest is
free and clear of any adverse claim;
(C) represents and warrants that the copies of the Loan Agreement
and any other Loan Documents delivered by Assignor to Assignee are true and
correct copies of such documents;
(D) makes no representations or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with the Loan Agreement or any other Loan Documents or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of the Loan Agreement or any other Loan Document furnished pursuant
thereto; and
(E) makes no representations or warranty and assumes no
responsibility with respect to the financial condition of the Borrowers, or the
performance or observance by the Borrowers under the Loan Agreement or any other
Loan Document furnished pursuant thereto.
4. THE ASSIGNEE:
(A) represents and warrants that it is an Eligible Assignee;
(B) confirms that it has received a copy of the Loan Agreement,
together with copies of such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter this
Assignment and Acceptance;
(C) agrees that it will, independently and without reliance upon
the Administrative Agent, the Assignor or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under the Loan
Agreement or any other Loan Documents;
(D) appoints and authorizes the Administrative Agent to take such
action as agent on its behalf and to exercise such powers under the Loan
Agreement and the other Loan Documents as are delegated to the Administrative
Agent by the terms thereof, together with such powers as are reasonably
incidental thereto; and
G.2
<PAGE> 160
(E) agrees that it will perform in accordance with their terms all
of the obligations which by the terms of the Loan Agreement and the other Loan
Documents are required to be performed by a Lender.
5. Following the execution of this Assignment and Acceptance by
the Assignor and the Assignee, it will be delivered to the Administrative Agent
for acceptance and recording by the Administrative Agent and acceptance by the
Borrowers. The proposed effective date for this Assignment and Acceptance shall
be [_____________________].
6. At or before 12:00 noon, local time of the Assignor on the
proposed effective date, the Assignee shall have paid to the Assignor the
purchase price agreed to by the Assignor and the Assignee by wire transfer (the
"Purchase Price") and the Administrative Agent shall have accepted and recorded,
and the Borrowers shall have accepted, this Assignment and Acceptance (the
satisfaction of the foregoing two conditions on such date being the "Effective
Date"). As of the Effective Date, (a) the Assignee shall be a party to the Loan
Agreement and shall be entitled to the rights and benefits of the Loan Documents
and, to the extent of the percentage assigned in this Assignment and Acceptance,
have the rights and obligations of a Lender thereunder, (b) the Assignor shall,
to the extent of the percentage assigned in this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Loan
Agreement and the other Loan Documents and (c) the amounts of the Revolving Loan
Commitment and the Term Loan Commitment for each of the Assignor and Assignee
(after giving effect to the assignment pursuant to this Assignment and
Acceptance) will be as set forth in SCHEDULE IV to this Assignment and
Acceptance. The Assignor shall retain all rights (including rights of
indemnification) applicable to it under the Loan Agreement relating to credits
extended, acts or omissions made, or other matters.
7. Upon and after the Effective Date, the Administrative Agent
shall make all payments under the Loan Agreement which are payable by the
Administrative Agent for the account of the appropriate Lender to the
appropriate Lenders severally in proportion to their respective percentages
determined after giving effect to this assignment, when payment is due. The
Assignor and Assignee shall make all appropriate adjustments in payments under
the Loan Agreement and the other Loan Documents for periods prior to the
Effective Date directly between themselves.
8. Each of the parties to this Assignment and Acceptance agrees
that at any time and from time to time upon the written request of any other
party, it will execute and deliver such further documents and do such further
acts and things as such other party may reasonably request in order to effect
the purposes of this Assignment and Acceptance.
9. This Assignment and Acceptance shall be governed by, and
construed in accordance with, the law of the State of Illinois.
G.3
<PAGE> 161
IN WITNESS WHEREOF, each of the parties hereto has caused this Assignment and
Acceptance to be executed and delivered by a duly authorized person on the date
first set forth above.
ASSIGNOR:
[NAME OF ASSIGNOR]
By:
-----------------------------------------
Title:
--------------------------------------
ASSIGNEE:
[NAME OF ASSIGNOR]
By:
-----------------------------------------
Title:
--------------------------------------
ACCEPTED this _____ day of
_________________, 199_/200_
ABN AMRO BANK N.V., as Administrative Agent
By:
---------------------------------
By:
---------------------------------
Title:
------------------------------
G.4
<PAGE> 162
ACCEPTED this ___ day of ________________,
199_/200_
STRATEGIC TIMBER PARTNERS, LP, a
Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO.,
a Delaware corporation, its general partner
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
PIONEER RESOURCES, LLC,
an Oregon limited liability company,
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
G.5
<PAGE> 163
SCHEDULE I
ASSIGNOR'S OUTSTANDING LOANS (PRIOR TO ASSIGNMENT)
Revolving Loans $_______________
Term Loans $_______________
G.6
<PAGE> 164
SCHEDULE II
ASSIGNOR'S AND ASSIGNEE'S OUTSTANDING LOANS (AFTER ASSIGNMENT)
ASSIGNOR OUTSTANDING LOANS
Revolving Loans $_______________
Term Loans $_______________
ASSIGNEE
Revolving Loans $_______________
Term Loans $_______________
G.7
<PAGE> 165
SCHEDULE III
ASSIGNOR'S COMMITMENT AMOUNTS (PRIOR TO ASSIGNMENT)
Revolving Loan Commitment $_______________
Term Loan Commitment $_______________
G.8
<PAGE> 166
SCHEDULE IV
ASSIGNOR'S AND ASSIGNEE'S COMMITMENT AMOUNTS (AFTER ASSIGNMENT)
ASSIGNOR REVISED COMMITMENT
Revolving Loan Commitment $_______________
Term Loan Commitment $_______________
ASSIGNEE COMMITMENT
Revolving Loan Commitment $_______________
Term Loan Commitment $_______________
G.9
<PAGE> 167
EXHIBIT H
NON-BANK LENDER TAX CERTIFICATE
Reference is hereby made to the Loan Agreement dated as of April __, 1999 (as
the same may from time to time be amended, modified or supplemented or restated,
the "Loan Agreement"), by and among Strategic Timber Partners, LP, a Delaware
limited partnership, and Pioneer Resources, LLC, an Oregon limited liability
company (collectively, the "Borrowers"), as co-borrowers, the banks, financial
institutions and other institutional lenders from time to time party thereto and
referred to as Lenders therein, and ABN AMRO BANK N.V., not in its individual
capacity, but solely as Administrative Agent for the benefit of the Lenders.
Pursuant to the provisions of SECTION 3.1(G) of the Loan Agreement, the
undersigned hereby certifies that it is not a "bank" as such term is used in
Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended.
NAME OF LENDER:
By:
-----------------------------------------
Title:
--------------------------------------
H.1
<PAGE> 168
EXHIBIT I
TIMBER REPORT CERTIFICATE
To: ABN AMRO Bank N.V., as Administrative Agent for the Lenders
Agency Services
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attention: Linda Boardman
Telephone: 212/314-1724
Facsimile: 212/314-1712
Re: The Loan Agreement dated as of April __, 1999 (as the same may from
time to time be amended, modified or supplemented or restated, the
"Loan Agreement"), by and among Strategic Timber Partners, LP, a
Delaware limited partnership, and Pioneer Resources, LLC, an Oregon
limited liability company (collectively, the "Borrowers"), as
co-borrowers, the banks, financial institutions and other institutional
lenders from time to time party thereto and referred to as Lenders
therein, and ABN AMRO BANK N.V., not in its individual capacity, but
solely as Administrative Agent for the benefit of the Lenders
Ladies and Gentlemen:
Reference is made to the Loan Agreement. Capitalized terms used in this Timber
Report and Certificate have the same meaning when used herein as given to them
in the Loan Agreement.
Pursuant to SECTION 7.1(F) of the Loan Agreement, the Borrowers, by their
undersigned [chief financial officers], acting solely in such capacities, hereby
certify that the information furnished herein was true, accurate and complete as
of the last date of the Fiscal Quarter immediately preceding the date of this
Timber Report Certificate and that:
1. Attached hereto as EXHIBIT A is a summary of activity,
including a breakdown of harvesting under stumpage agreements and under other
types of agreements, under (a) all outstanding timber cutting contracts or log
sale agreements or auctions or sales of logs conducted orally on the Timberlands
whereby the undersigned, as seller, is or may become obligated to cut, harvest
or otherwise remove Timber from the Timberlands and to sell or deliver such
Timber to third Persons and (b) all Cutting Rights Agreements and Timber Sales
Agreements;
2. Attached hereto as EXHIBIT B is a report detailing the total
amount of Timber cut since the Closing Date on a cumulative basis and during the
previous Fiscal Quarter classified (a) by Timberlands parcel, (b) by species and
(c) by total volumes removed and acreage disposed of.
3. Attached hereto as EXHIBIT C is a report describing all sales,
exchanges and other dispositions of acreage or land during the previous Fiscal
Quarter;
I.1
<PAGE> 169
4. Attached hereto as EXHIBIT D is a report listing revenues
generated and operating and other costs incurred and all cash and other proceeds
received, by each Parcel from such cutting, harvesting, sale, exchange or other
disposition during the previous Fiscal Quarter and any other receipts from
operation of the Timberlands such as wood use fees;
5. Attached hereto as EXHIBIT E is a summary of the status of
Timber harvesting and similar permits applied for and received by the Borrower.
IN WITNESS WHEREOF, this Compliance Certificate is executed by the undersigned
this day of , 199_/200_.
STRATEGIC TIMBER PARTNERS, LP, a
Delaware limited partnership,
By: STRATEGIC TIMBER OPERATING CO.,
a Delaware corporation, its general partner
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
PIONEER RESOURCES, LLC,
an Oregon limited liability company,
By:
-----------------------------------------
Printed Name:
-------------------------------
Title:
--------------------------------------
I.2
<PAGE> 1
ARTHUR ANDERSEN LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
April 12, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF SUTHERLAND ASBILL & BRENNAN LLP
Pursuant to Rule 436 promulgated under the Securities Act of 1933, as
amended, the undersigned hereby consents to the reference to our firm under the
heading "Experts" in the prospectus constituting part of this Registration
Statement on Form S-11 and to the filing of this consent as an exhibit to such
Registration Statement.
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ Thomas C. Herman
-----------------------------
Thomas C. Herman, Partner
Atlanta, Georgia
April 14, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT FORESTERS
We consent to the reference to our firm under the heading "Experts" in the
prospectus constituting part of this Registration Statement on Form S-11.
MASON, BRUCE & GIRARD, INC.
/s/ KENNETH M. VROMAN
Portland, Oregon
April 13, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT FORESTERS
We consent to the reference to our firm under the heading "Experts" in the
prospectus constituting part of this Registration Statement on Form S-11.
CANAL FOREST RESOURCES, INC.
/s/ PETER J. STEWART
Technical Manager
Charlotte, North Carolina
April 13, 1999
<PAGE> 1
EXHIBIT 99.5
[LETTERHEAD OF MASON, BRUCE & GIRARD, INC.]
April 15, 1999
Board of Directors
Strategic Timber Trust, Inc.
5 North Pleasant Street
New London, New Hampshire 03257
Re: Form S-11 Registration
Statement File No. 333-71291
Dear Sirs:
Based upon our authority as an expert in timber inventory, forest
regulatory, and appraisal matters, you have included in the prospectus that is
part of the referenced Registration Statement, as amended, information relating
to the timber inventory, acreage, forest regulatory matters, and timber
harvest/management sales plan with respect to the properties owned by your
subsidiary Pioneer Resources, LLC in California, Washington, and Oregon. In the
prospectus, these properties are referred to as the Pacific Northwest
properties, and in this report we will do the same.
We summarize below our determinations in reviewing the timber
inventory and timber sales plan information contained in the prospectus and
describe the assumptions and methodologies we used in making our determinations.
We also provide below confirmation as to the conformance of your timber
operations and timber sales plan with applicable forestry rules, regulations,
and practices in the Pacific Northwest areas.
The forest tracts designated as the Pacific Northwest properties are
comprised of the Coastal forest (79,026 acres), Commander forest (43,313 acres),
Oregon timberlands (232,631 acres), and Washington timberlands (10,822 acres).
The Coastal forest is comprised of the Longview, Willits Wood, and Williams
Ranch tracts. The Washington timberlands are comprised of the Riffe Lake and
Aloha Tracts.
In confirming information contained in the prospectus, we conducted an
extensive assessment of the effect of applicable regulatory restrictions on your
timber harvesting and
1
<PAGE> 2
timberland management operations on the Pacific Northwest properties. Our
regulatory assessment included site surveys, reviews of your public filings and
ongoing and planned timber operations, and reviews of federal and state
regulatory endangered species and watershed databases. We confirmed compliance
of your timber operations and sales plans in each of the Pacific Northwest
properties with forestry laws, rules, and regulations and local accepted
practices.
This summary report is divided into three sections dealing with Timber
Inventory, Regulatory Restrictions, and the Pacific Northwest Properties' Timber
Sales Plan. Within each of these three sections, our discussion is organized by
reference to each of the four Pacific Northwest properties.
I. TIMBER INVENTORY
PACIFIC NORTHWEST MARKET AREA
We defined the separate market area for each of the four Pacific
Northwest forests by identifying those mills that are within sufficient
proximity of the particular forest to purchase its timber on a cost-efficient
basis. The Commander market is comprised of twenty lumber mills in nine counties
of Siskiyou, Shasta, Trinity, Lassen, Plumas, Placer, El Dorado, Sacramento, and
Sierra. Twenty-two mills in Mendocino, Humboldt, and Sonoma counties in coastal
California comprise the Coastal forest market.
In the market for the Oregon forests there are fourteen lumber mills
in the Grant, Jefferson, Crook Union, Wallowa, Umatilla, and Morrow counties
east of the Cascade Mountains. Thirty-one mills in the seven counties of Grays
Harbor, Mason, Pierce, Thurston, Pacific, Lewis, and Cowlitz in the western part
of the state comprise the Washington market.
PROCEDURE AND METHODOLOGIES
It is impractical to count or measure each tree on a large timber
stand. Therefore, timber inventories are prepared on a statistical sampling of
the trees observed and measured on a tract, with the total inventory and
estimate of species presence being a compilation of this sample. This inventory
process is often referred to as a "cruise."
The methods MB&G used to establish the inventory of merchantable timber
volumes set out in the prospectus are customary for the type of transactions
involved. As is the practice with respect to large acreage tracts of timber with
diverse species and diverse locations, MB&G did not perform a complete
re-inventory. Instead, MB&G confirmed the timber volumes by sampling or
observing portions of the tracts which individually had been inventoried by MB&G
2
<PAGE> 3
or others (and in that case, checked by MB&G) at various times. Each inventory
estimate was adjusted for depletion and growth before inclusion. In each case,
MB&G completed field work and office work to confirm its opinion of inventory
volumes.
With the exception of the Riffe Lake Tract in Washington, we or other
recognized consulting forestry firms whose work we confirmed performed inventory
samples for all of the Pacific Northwest properties in accordance with industry
standards. These standards ranged from +/-5% at a 95% confidence interval to
+/-10% at a 90% confidence interval, dependent upon the particular inventories.
This means that in 95 (or 90) times out of 100, if the property were
reinventoried using the same sampling procedure and specifications, the
resultant volumes should not vary by more than those standards (5% or 10%).
Set forth below are the years in which an inventory sampling was done
for each of the Pacific Northwest properties, together with the acres which were
the subject of our sample inventoried, as the basis for our determination of
timber volume and acreage:
<TABLE>
<CAPTION>
EASTERN OREGON
SAMPLING YEAR ACRES
<S> <C>
1994 41,112
1995 5,804
1996 93,820
1997 14,322
1998 60,491
Total: Sampled in Eastern Oregon 215,649
----- -------
WESTERN WASHINGTON
SAMPLING YEAR ACRES
1998 10,822
Total: Sampled in Western Washington 10,822
----- -------
CALIFORNIA
SAMPLING YEAR ACRES
1995 75,138
1997 43,312
Total: Sampled in California 118,450
----- -------
</TABLE>
The Riffe Lake Tract inventory is as reported by Weyerhaeuser
Corporation at the time of purchase by Pioneer Resources, less depletions and
plus growth adjustments made by us.
3
<PAGE> 4
Immediately after the acquisition by Pioneer, and on its behalf, we established
a sample of the inventory on the Riffe Lake Tract adequate to assure that at
least the volume indicated by Weyerhaeuser was present on the property. Since
the purchase, Weyerhaeuser's inventory has proven (based on depletions) to be
accurate, if not slightly understating the timber inventory on the Riffe Lake
Tract.
To determine species information in our report and in the prospectus,
we did not do independent statistical tests. Such testing is not customarily
done and, in our experience, has not normally been done for any industrial
forest land inventory. We are aware of instances where even 100 percent samples
of all trees are taken. However such instances never in our experience apply to
large acreages.
The species volumes are part of the total volumes confirmed by our
report and are identified only as they appear in the sample. An individual
volume sample in a multi-species stand might be composed of several species. For
example, in Eastern Oregon, a single sample point might include ponderosa pine,
lodgepole pine, Douglas-fir and white fir. The trees at each sample point were
individually recorded and the volume reported as part of the total.
MERCHANTABILITY STANDARDS
In calculating timber inventory, we used merchantability standards of
length and diameter recognized in the markets of your Pacific Northwest
properties. In accordance with recognized inventory standards, we required for
merchantability that the minimum diameter of standing trees, measured inside the
tree bark at the top of the segment, be at least five inches, rounded to the
nearest whole inch.
Minimum diameter standards for merchantability are tied to local market
mill specifications, which are a function of two factors:
1. Technology/Equipment - The ability of the facility to process
economically logs of a certain length and diameter, and most are
capable of processing five-inch diameter logs.
2. General Market Prices for Timber - Mills, when market prices
are lower, as is currently the case, adjust specifications to require
logs of a greater diameter to enhance mill efficiency.
Currently, mills in all the Pacific Northwest areas, except for Coastal
market area, are actively purchasing logs with a 5-inch top diameter. Mills in
the Coastal market have the technology to take logs with a 5-inch top diameter
and historically have done so. In current conditions in the Coastal market area,
mills with limited exceptions require logs with at least a 5.5-inch top diameter
(inside bark) which is consistent with your timber sales plans, which call for
harvest and sales of logs with at least a 6-inch (5.5-inch) diameter. We have
confirmed, for this report, that mills in the area are capable of sawing and
under appropriate market conditions
4
<PAGE> 5
will accept five-inch diameter top logs. Seven mills currently manufacture
and/or purchase five-inch diameter logs. Two of these mills are actively
purchasing five-inch diameter top logs from outside suppliers. For purposes of
this report specifically, we have spoken to representatives of most of the over
20 mills in the economic area for the Coastal tracts.
When MB&G completed work on the Option A for the former owner of the
Coastal properties, we utilized a model that projected harvest volumes and
growth in terms of a minimum of six-inch diameter logs since this model was most
readily available. The stand configuration of the Coastal lands is such that a
substantial amount of volume accrues when the inventory is processed utilizing
the five-inch rather than the six-inch model. The stands are at the stage of
development where a large component is in trees just lower in diameter than
allows inclusion in the volume analysis where a six-inch minimum is used. The
differential is shown by comparing the table below with the five-inch inventory
analysis we have used for purposes of appraisal and as included later in this
report. Both the projected harvest and the estimated growth are in terms of the
six-inch class rendering it probable that the growth is somewhat understated, as
compared to a five-inch basis volume, for the first two to three decades of the
Option A plan. The harvest volumes projected and communicated to the regulatory
agencies contemplate utilization to a six-inch diameter. The hardwoods, which
utilize a different volume table, are the same in both instances.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
VOLUME TO A MINIMUM
6-INCH DIAMETER TOP
SPECIES (MBF)
<S> <C>
Second-growth redwood 312,760
Douglas-fir 250,328
Hardwoods 113,766
Sugar pine 28,956
Whitewoods 8,263
TOTAL 714,073
- --------------------------------------------------------------------------------
</TABLE>
The difference between the two estimates, both of which are based on
the same inventory data, is about 19% for conifer alone and 17% where hardwoods
are included.
Merchantability length specifications vary in the Washington market
from the other three Pacific Northwest markets, where length specifications are
similar. In the Washington market a tree is merchantable and is included in
inventory if it will produce at least one log that is 32 feet long with the
minimum top diameter noted above. For all other markets, a tree is merchantable
and is included in inventory if it contains at least one 16-foot log with the
five inch minimum top diameter. In addition, in each of the Pacific Northwest
markets, volumes for the portion of a tree's bole above the merchantable first
log will be included if the additional piece beyond the merchantable first log
is at least a minimum length of 12 feet.
5
<PAGE> 6
In our determinations and in accordance with industry standards, an
entire tree is not required to be free from defect to be considered
merchantable. Logs from trees otherwise merchantable can contain mechanical
defects such as breaks, splits, crooks or defects caused by fungi for up to 75%
of the gross volumes of the timber. Only that portion of the tree free from such
defect, however, is considered merchantable. These defect percentages vary by
the specific rules of the relevant log scaling bureaus. There are more than ten
independent scaling bureaus operating in the Pacific Northwest area, all of
which use generally the same standards and the ones we have applied.
None of the trees we included in inventory is physically impossible to
harvest, but trees are included if they are restricted and cannot be harvested
immediately because of an environmental, endangered species, or other regulatory
restriction. This is in accordance with industry standards, which recognize that
no large-acreage timber stand like the Pacific Northwest properties can be
harvested at one time but must be harvested according to a deferred schedule.
To be included as merchantable timber, a tree, though it may not be
immediately harvestable, must impact your scheduled harvest plan. For instance,
a tree in a stream side zone having a crown that regulates stream temperature
and wildlife habitat may not itself be cut, but it will allow for the harvest of
a tree at another location. In some instances, also, trees may become available
for harvest through the change in location of endangered species or when density
of surrounding stands change.
Later in this report we set out the acres in the Pacific Northwest
properties where harvesting is now prohibited, as well as restricted. We have
advised you that in part these restrictions are political in nature and that
changes should be expected to acreages included as prohibited or restricted. We
anticipate some reduction specifically in streamside restrictions as better
definition is made.
Based upon and subject to the foregoing, the volumes we confirmed and
that are included in the prospectus are set out in the table below.
6
<PAGE> 7
INVENTORY OF TIMBER ON STT CALIFORNIA, OREGON AND
WASHINGTON PROPERTIES AS OF DECEMBER 31, 1998
CALIFORNIA COASTAL FOREST
MERCHANTABLE TIMBER BY SPECIES
<TABLE>
<CAPTION>
BOARD FEET
----------
(IN THOUSANDS)
SPECIES
-------
<S> <C>
Second-growth redwood...................... 398,249
Douglas-fir................................ 276,826
Hardwoods.................................. 113,766
Sugar pine................................. 52,397
Whitewoods................................. 15,072
-------
Total............................. 856,310
=======
</TABLE>
CALIFORNIA COMMANDER FOREST
MERCHANTABLE TIMBER BY SPECIES
<TABLE>
<CAPTION>
BOARD FEET
----------
(IN THOUSANDS)
SPECIES
-------
<S> <C>
Douglas-fir................................ 136,927
White fir.................................. 73,756
Ponderosa pine............................. 40,234
Sugar pine................................. 25,271
Incense cedar.............................. 28,350
Other pine................................. 539
-------
Total............................. 305,077
=======
</TABLE>
7
<PAGE> 8
EASTERN OREGON TIMBERLANDS
MERCHANTABLE TIMBER BY SPECIES
<TABLE>
<CAPTION>
BOARD FEET(1)
-----------
(IN THOUSANDS)
SPECIES
-------
<S> <C>
Ponderosa pine.............................. 148,201
Douglas-fir................................. 119,298
White fir................................... 62,721
Western larch............................... 29,944
Lodgepole pine.............................. 9,766
Other....................................... 1,892
-------
Total.............................. 371,822
=======
</TABLE>
WESTERN WASHINGTON TIMBERLANDS
MERCHANTABLE TIMBER BY SPECIES
<TABLE>
<CAPTION>
BOARD FEET
----------
(IN THOUSANDS)
SPECIES
-------
<S> <C>
Western hemlock............................. 56,980
Douglas-fir................................. 30,789
Red and incense cedar....................... 16,066
Other conifers.............................. 13,168
Red alder................................... 8,348
Other hardwoods............................. 3,415
-------
Total.............................. 128,766
=======
</TABLE>
- ---------
(1) Includes a small volume of timber located on Eastern Washington "timber
deed" holdings. The timber is marketed with and is similar in quality to the
Oregon timber. Also it is similarly restricted as to harvest as is the
Eastern Oregon timber.
8
<PAGE> 9
II. REGULATORY RESTRICTIONS IMPACTING PACIFIC NORTHWEST PROPERTIES
Regulatory restrictions apply to timber harvesting and timberland
management operations in each of California, Oregon, and Washington.
Historically, California has the most restrictive harvesting restrictions
imposed by government agencies. In the mid-70's, the Z'berg-Nejedly Forest
Practices Act was put in place by the California legislature, and since then, a
substantial amount of investigative, planning and documentation work must
precede essentially any timber harvesting operation in California. The
California Protection Act was significantly modified in 1994 when the current
rules were put in place. More recently, Washington, and presently Oregon have
imposed significant regulatory restrictions. Washington appears to be far in
front of Oregon in the implementation process.
We have reviewed your regulatory filings and timber operations and
sales plans in each of the Pacific Northwest properties and found them to be in
compliance with forestry laws, rules, and regulations and local accepted
practices. For California, this included a review of the Option A timber
management plan applicable to the Coastal forest and all timber harvest plans
under which you are operating both at Coastal and in the Commander forests. We
reviewed all notifications of operations filed by Pioneer with the Oregon
Forestry Department. In Washington, all your forest practice applications and
any required environmental statements were inspected by us and found to be in
compliance.
In the following we describe regulatory issues affecting the Pacific
Northwest properties on a state-by-state basis:
CALIFORNIA
Before a private landowner can harvest timber in California, the
California Forest Practice Act and the Forest Practice Rules require a
timberland owner to submit a timber harvest plan to the California Department of
Forestry and Fire Protection for its approval. A timber harvest plan must be
prepared by a registered professional forester (RPF) and filed on a
tract-by-tract basis within a particular forest. The plan must comply with
California's forestry rules and legal requirements, which are perhaps the most
stringent in the United States. Generally, the timber harvest plan must include,
among other things:
- - how the harvest will be done;
- - the silvicultural techniques to be used;
- - proposed replanting and reforestation activities;
- - the measures that will be taken to prevent erosion and maintain water
quality;
- - the measures that will be taken to protect wildlife and plant habitats;
and
- - methods of sustaining other forest resources.
The Forest Practice Rules require a timber harvest plan to demonstrate
that a forest is being harvested in manner that will not exceed maximum
sustained production. This generally means that, over a 10-year period, the rate
of harvest in a forest tract will not exceed growth of timber from that forest.
The Forest Practice Rules provide three options for demonstrating the
9
<PAGE> 10
ability to achieve maximum sustained production. These optional methods are
called Option A, Option B and Option C.
Option A. Under Option A, the landowner is required to prepare a
separate plan to achieve maximum sustained production for the entire forest,
commonly known as an "Option A plan." The Option A plan is filed as an
attachment to the timber harvest plan. The Option A plan generally expires after
ten years.
The Option A plan is divided into four main sections. The first section
describes the property, its history and the owner's strategy for achieving
maximum sustained production. The second section provides a detailed survey of
the volume and species of timber in the forest. The third section estimates the
volume of timber that can be harvested over a ten-year period and the estimated
long-term (100 years) sustained yield for the forest. The fourth section
contains articles referenced in the first three sections, maps of the property,
detailed forest growth and inventory data, and the statistical data from which
growth and inventory estimates were derived.
Once the Option A plan is filed and approved by the California
Department of Forestry and Fire Protection, a landowner, after receiving
approval of a prepared Timber Harvest Plan, can harvest the timber included in
the area under plan to which the Option A plan was attached. When the landowner
desires to harvest other tracts in the forest covered by the Option A plan, the
landowner must then file another timber harvest plan with respect to the new
tract, but the landowner will be deemed to have already shown maximum sustained
production.
Option B. Under Option B, the landowner files a sustained yield plan as
part of the timber harvest plan. This sustained yield plan includes the owner's
plan to achieve maximum sustained production, as well as a forest-wide analysis
of environmental and endangered species impacts of harvesting. An owner
utilizing Option B must continue to submit timber harvest plans for each
subsequent tract in a forest that is harvested. However, once the sustained
yield plan is approved, the owner does not need to include a specific
environmental or endangered species impact assessment in subsequent timber
harvest plans.
Option C. Under Option C, a landowner does not submit a separate
maximum sustained production or environmental impact analysis. Instead, the
owner would include these analyses in each timber harvest plan submitted to the
Department of Forestry for approval prior to harvesting timber on a particular
tract. The landowner would be required to comply with the Forestry Practice
Rules' restocking requirements when harvesting a tract. However, Option C is not
available for use with respect to forests of 50,000 or more acres.
Coastal Forestlands, Ltd., the prior owner of the Coastal forest, filed
a timber management plan under Option A on July 4, 1996. Following extensive
review and comment by the Department of Forestry, the timber management plan and
related Option A conditions were approved by that agency on November 18, 1996.
After approval, the California Department of Forestry continued to review this
plan, and Coastal Forestlands made appropriate revisions to its Option A plan
based upon this review. The Option A conditions were last updated on January 30,
1998, and approved by the California Department of Forestry effective as of May
7, 1998.
10
<PAGE> 11
As the purchaser of the Coastal forest, Pioneer had the option of
assuming the terms of the Option A plan filed and updated by Coastal. Pioneer
did elect to assume the existing Option A, and we have confirmed that your
timber harvest plans filed with the Department of Forestry and the timber sale
plans for Coastal as reflected in the overall timber sales plan contained in the
prospectus are in conformance with the existing Option A and its harvesting
limitations.
In addition to the Forest Practice Rules described above, timber
harvest operations must comply with the California Endangered Species Act and
the California Environmental Quality Act. All three sets of rules have
requirements for threatened and endangered species. Implementation is variable
depending on the philosophies and experiences of local regulators, the public,
and the RPF preparing the timber harvest plan.
The Forest Practice Rules specifically state measures to minimize and
mitigate impacts to fish habitat, water quality and wildlife. These are briefly
summarized below:
Riparian area management along Class I (domestic use and fish always or
seasonally present) and Class II (fish present within 1000 feet
downstream or aquatic habitat for non-fish aquatic species)
watercourses:
- Require 50 percent of existing overstory and 50 percent
understory covering the ground adjacent to watercourses.
- Allow timber harvesting in riparian area to a 50 percent
overstory and 50 percent understory retention in a
well-distributed multistoried stand, with conifers making up
at least 25 percent of existing overstory.
- Designate two living conifers per acre at least 16 inches dbh
(diameter at breast height, 4 1/2 feet above the ground) and
50 feet tall within 50 feet of the watercourse.
- Provide for mitigation measures related to the protection of
fish and riparian wildlife habitat, including snags. No
numeric standards.
- Require variable widths of Watercourse and Lake Protection
Zones (WLPZ) based on site-specific conditions such as
side-slope, yarding systems, and beneficial uses. WLPZ widths
vary from 50 feet to 150 feet for Class I and II water.
Riparian area management along Class III (no aquatic life, capable of
sediment transport) watercourses:
- Tree retention for large woody debris is not required.
- May require, when necessary to protect beneficial use, a WLPZ
on Class III waters.
11
<PAGE> 12
- Require only vegetation other than commercial tree species to
be retained and protected near wet areas. Specify that
environmental impacts with the potential for significant
adverse effects are to be avoided or mitigated.
- Specify that the need for Class III protection, which may
include equipment limitation zones, is to be determined on a
site-specific basis.
Erosion and sedimentation:
- Require road maintenance for erosion control for 1 year, but
may prescribe maintenance for up to 3 years post-harvest.
- Specify that the protection of Class III watercourses shall be
determined on a site-specific basis.
- Require that mitigation and erosion protection must be stated
in the Timber Harvest Plan and approved by the state forester.
According to the National Marine Fisheries Service (the federal
regulatory agency with jurisdiction over anadromous fish), the Forest Practice
Rules contain provisions that are protective if fully implemented. There are
also exceptions to the Forest Practice Rules that allow timber harvest to occur
without any requirement for environmental review or monitoring. Therefore,
National Marine Fisheries Service assumes that there is potential for incidental
taking of listed fish species as a result of timber harvest operations under the
current rules. Several landowners have prepared or are preparing Habitat
Conservation Plans (HCPs) to receive the incidental taking permit. National
Marine Fisheries Service protection standards under HCPs have changed over the
last five years, with increased buffer widths, more restrictions on types of
activities allowed (including along Class III streams), and increased assurances
from watershed analysis through site-specific land management.
The "Option A" plan for the Coastal Forest includes a program of
watershed evaluation, monitoring, and stream restoration throughout the property
to increase protection for aquatic and riparian species. Based on the resource
assessment modules in the watershed analysis, three major factors have been
identified which significantly affect the viability of habitat conditions in
streams on the property:
- Sedimentation
- Large woody debris
- Riparian canopy/stream temperature
Numerous sections of the Forest Practice Rules address threatened and
endangered species issues. Article 9 addresses wildlife protection practices,
describing general measures as
12
<PAGE> 13
well as measures specific to the northern spotted owl and marbled murrelet.
Current wildlife protection strategies from the Forest Practice Rules are
summarized below.
- SNAG RETENTION. Current rules require that all snags be
retained except those designated as a fire hazard. Snags are
defined as standing dead trees over 20 feet tall and 16 inches
dbh.
- GENERAL PROTECTION OF NEST SITES. Outlines strategies for
protecting nest sites of sensitive species. A pre-harvest
inspection will be required for known sites where the site
buffer is within a harvest unit. During harvest, nest trees,
designated perch trees, screening trees and replacement trees
shall be left standing and unharmed except as otherwise
provided in the rules. If an occupied nest site of a listed
bird species is discovered during harvesting, the trees shall
be protected and agencies contacted to modify the Timber
Harvest Plan.
- SPECIFIC REQUIREMENTS FOR PROTECTION OF NEST SITES. Defines
buffers for various species.
- Northern Spotted Owl - minimum of 18 acres and must
avoid "take".
- Bald eagle and peregrine falcon - minimum 10 acres,
can be increased beyond 40 acres to avoid "take".
- Golden eagle - minimum 8 acres.
- Great blue heron and great egret - area within a
300-foot radius of a tree, or trees, containing a
group of five or more active nests in close
proximity.
- Northern goshawk - minimum 5 acres, can be increased
to a maximum of 20 acres.
- Peregrine falcon - must avoid "take" and protect nest
sites.
- Osprey - up to 5 acres, can be increased to a maximum
of 18 acres.
The rules define the type of activities allowed within these buffers.
Generally, no clear-cutting is allowed; selection, commercial thinning,
sanitation-salvage, and the shelterwood regeneration methods are allowed as long
as designated trees are left standing and unharmed. The rules also define
critical time periods for these species when timber operations cannot occur near
the nest.
The surveys we conducted in the first quarter of 1998 showed that there
were approximately 110 northern spotted owl activity centers that affect the
Commander forest, though many of these activity centers are located on adjacent
properties. Although there have been incidental observations of bald eagles,
American peregrine falcons, golden eagles and
13
<PAGE> 14
northern goshawk in the Commander forest, no nesting or roosting sites have been
found. Steelhead trout and fall chinook salmon have been observed in streams in
the Commander forest and it is likely that streams in that forest will be
subject to restrictions for these species and for coho salmon.
We have also conducted surveys on the Coastal forest. These surveys
showed that there were approximately 12 pairs or single spotted owls on the
Longview tract in the Coastal forest, and that the property is within the range
of the bald eagle, peregrine falcon and marbled murrelet, though none is
currently known to reside on the property. Streams within the Longview tract
support coho salmon, steelhead trout and chinook salmon. You currently comply
with restrictions to protect and restore the habitat of these fish. The nature
and scope of restrictions to conserve fish populations may increase over time.
For example, the size of buffer zones along streams on the property may have to
be widened and the number of streams subject to buffer requirements may
increase. Road construction and maintenance requirements may also become more
burdensome. A similar survey conducted on the Willits Woods/Williams Ranch tract
in the Coastal forest showed that there were approximately 10 pairs or single
spotted owls and one peregrine falcon nest on the property, and that the
property is within the range of the bald eagle and the marbled murrelet, though
none is currently known to reside on the property. Streams within the Willits
Woods/Williams Ranch tract contain coho salmon and steelhead trout. Some chinook
salmon have also been reported. You comply with the same protective measures
with respect to streams on this tract as with the Longview tract.
Threatened and endangered species plants are not specifically addressed
in the Forest Practice Rules. Sections 919.12, 939.12 and 959.12 deal with
sensitive species classification. Part (d) states that the Board shall consider
the best available science to establish feasible mitigation for the protection
of the species. However, the rules do not specify any mitigation measures for
sensitive plants.
EASTERN OREGON
The Oregon Forest Practices Act requires submission of written plan to
the Oregon Department of Forestry a written plan, with a mandatory waiting
period, when an operation is larger than 120 acres or is within prescribed
distances of certain streams or wildlife sites. The potential influence of
biological resources on timber harvest for Pioneer lands in Oregon is currently
much less than in either California or Washington. The Oregon lands include
property in the following counties: Grant, Morrow, Umatilla, Union and Wheeler.
The Oregon Natural Heritage Program (ONHP) was contacted early in January 1999
for information on State or Federally threatened and endangered plant and animal
species on or near Pioneer property in these counties: Grant, Morrow, Umatilla,
Union and Wheeler. The Oregon Natural Heritage Program (ONHP) was contacted
early in January 1999 for information on State or Federally threatened and
endangered plant and animal species on or near Pioneer property in these
counties. There are four fish of concern, three birds of concern and two plants
that have been observed on the property. All of these species are given
consideration in harvesting operations.
14
<PAGE> 15
In addition to the above, other species of concern are known to be in the
vicinity. (Restrictions similar to the ones included here for the Eastern Oregon
lands apply to the small acreage of Eastern Washington lands on which timber is
owned.)
Although the ONHP does not yet have database records for anadromous
fish in Oregon, both steelhead trout and chinook salmon have the potential to
occur on the property. Nineteen observations of bull trout resulted from the
1998 ONHP database query. However, many of these records were not for
observations on Pioneer property because, for fish species, the query searches
by watershed and not by section. Bull trout were noted on Pioneer property in
the Texas Bar Block (John Day River) and the Desolation Block (Desolation
Creek). While bull trout were not recorded on blocks downstream of these reaches
(e.g., Elk Grove, Buckaroo, River, etc.), it is likely that bull trout occur
there as well.
Only one federally-listed wildlife species is known to occur on Pioneer
lands in Eastern Oregon; six observations of bald eagle were found in the ONHP
database. All sightings were along the John Day River. These sightings were all
recorded during the winter and are believed to be associated with winter
roosting sites. It is possible that one or more of these sites could also be
used by nesting bald eagles, although no nesting territories are known to occur
on these Pioneer lands.
In July 1998, the U.S. Fish and Wildlife Service (USFWS) proposed to
list the Canada lynx as threatened. Timber harvest and related activities were
noted in the proposal as the predominant land use affecting lynx habitat. Two
observations of Canada lynx were found in the ONHP database in the Umatilla
National Forest. Both of these observations are within approximately 1.5 miles
of Pioneer ownership. The wolverine was listed by the state of Oregon as
threatened in 1975 and is a federal species of concern. Two observations were
documented in the ONHP database search.
The ONHP database query found observations of Laurence's milk-vetch
(FSC, ST) and arrow-leaf thelypody (FSC, ST) on or near Pioneer lands in Eastern
Oregon. Neither the Federal nor Oregon Endangered Species Acts prohibit the
"taking" of listed plant species, so plants are not considered to be something
that could affect timber harvesting on Pioneer lands for the foreseeable future.
The Oregon Forest Practice Administrative Rules (OAR) defines necessary
protections for Type D (domestic water supply), F (fish or domestic), and N
(neither fish nor domestic use) streams. Riparian Management Area (RMA) widths
are determined by stream size and stream type. Geographic region and stream size
determines the general prescription for RMAs adjacent to Type F or Type D. The
OFPA describes watershed-specific practices for water quality limited watersheds
and areas where threatened or endangered aquatic species are present.
The listings of bull trout and anadromous salmonids under the federal
ESA have changed forestry practices in riparian and upland areas, and more
changes will likely be forthcoming. These changes have caused operators to
minimize ground disturbance and remove fewer trees from riparian areas. Harvest
activities within riparian buffers have been, and will likely continue
15
<PAGE> 16
to be, restricted beyond current Forest Practice Rules to address protection for
fish and aquatic resources. The use of watershed analysis methodologies is
likely to become more prevalent in Oregon. It is likely that new rules will
include provisions to use watershed analysis to identify hazard areas and
habitat that is vulnerable ro requires improvement.
In addition to legal requirements, voluntary stream and aquatic habitat
protection measures were developed under the Oregon Coastal Salmon restoration
Initiative, and outlined in a memo from Paul Bell (Forest Practice Policy
Analyst) dated September 15, 1997. Oregon Forest Industries Council (OFIC)
members have made a commitment to select trees within harvest units to restore
salmon habitat in Core Areas (as defined by ODFW). This can be accomplished by
placing large woody debris in streams, or other actions. Other voluntary
management measures (within Core Area) include riparian hardwood conversions,
additional conifer retention, RMAs for Type N streams, and leave tree placement.
These measures might affect the volume of wood harvested on the property.
In addition, the NMFS has proposed new stream rules that would apply to
private land in Oregon. While the NMFS's proposed modifications to the OAR will
not be adopted, a revision of the current rules in the near future is likely.
This would mean more restrictions on activities within the RMA, and less timber
harvest. Operations that may affect TES species or their designated critical
habitat will require Endangered Species Act (ESA) compliance.
Unlike fish, the regulatory climate dealing with most wildlife in the
forested landscape or Oregon has remained relatively static for the last few
years. The bald eagle is the only species that currently has the potential to
measurably impact timber harvest on the Pioneer lands in Eastern Oregon, and
then only slightly.
The State Forester will not approve timber operations if they would
result in "taking" of bald eagles. Additional restrictions apply for operations
near bald eagle nesting, roosting or foraging sites. Winter roosts sites must be
retained and protected from damage including windthrow. During the critical
period of use (November 15-March 31), operations must not disturb eagles using
the resource site, and no operation shall be permitted within 1/4 mile of the
active roost tree, or 1/2 mile if the eagles have line-of-sight vision to the
operation.
WASHINGTON
The potential influence of biological resources on timber harvest for
the Aloha and Riffe Lake blocks, Washington is less than California and more
than Oregon. Database queries were conducted to determine if any state or
federally listed (threatened or endangered) plant, wildlife, or fish species
occur. Four fish species, three bird species but no plants are listed as being
of concern on the Western Washington lands. There are three sensitive plant
species.
Timber harvesting and land management in Washington State is subject to
all relevant state and federal laws. Timber harvest activities must comply with
the Washington Forest
16
<PAGE> 17
Practices Act (FPA) (RCW 76.09), as governed by the Washington Department of
Natural Resources (WDNR). Other relevant laws include the federal Endangered
Species Act (ESA), State environmental Policy Act (SEPA; Chapter 222-10 WAC),
and the Clean Water Act. The National Environmental Policy Act (NEPA) could also
apply under certain circumstances.
The database query identified one stream, Joe Creek, on the Aloha
property as having reticulate sculpin, a state monitor species. In addition to
the reticulate sculpin, this creek is also identified as having critical
spawning habitat for resident fish, anadromous fish runs, and priority fish
present. The Aloha block is within the Copalis River watershed, Boone Creek
watershed, and Moclips River watershed; however, the rivers themselves are not
on the property. Both the Copalis River and the Moclips River have chum salmon,
chinook salmon, sockeye salmon, and bull trout, plus the species identified for
Joe Creek. None of these streams are currently protected under the Endangered
Species Act. However, sea-run cutthroat trout are a candidate species for
listing and are under review.
Elk Creek, on the Riffe Lake property was also identified as containing
anadromous fish, but did not provide specific information about species presence
or absence. Elk Creek is not a tributary to Riffe Lake, but flows into the Green
River, which is a tributary of the North Fork Toutle River (Cowlitz watershed).
Elk Creek is identified as having anadromous fish throughout the reach on the
property. Although not identified in the database report, the anadromous species
referred to are likely sea-run cutthroat trout, steelhead trout, and coho
salmon. Because a dam has blocked passage of anadromous fish into the lake, all
fish in Riffe Lake tributaries are resident fish only. Weyerhaeuser, the former
owner of the property, was contacted in 1998 for information on fish or stream
surveys for the Riffe Lake property. No information was on file.
As stated above, there are no known threatened or endangered wildlife
species on or within close proximity of the Aloha block (WDFW 1998). According
to a representative of Weyerhaeuser, there are no known spotted owl nests and no
known marbled murrelet nests on the property. Two bald eagle nest sites have
been located but both are over one mile from Pioneer ownership. A marbled
murrelet detection area is centered in T19N R12W S12 according to the WDFWs
marbled murrelet detection map (October 1998) which places the southwestern
portion of the tract in a special management zone.
The database query identified a bald eagle nest on the Pioneer
Resources property along the margin of Riffe Lake. There are no known spotted
owl nest on the property, although the property is within the range of this
species, and several spotted owl circles are known to occur within 2 miles of
the property boundary. The majority of the property is within the range for the
marbled murrelet but none have been detected within 1.5 miles of the property.
No threatened or endangered plant species are known to occur on or
within one mile of either the Aloha block or the Riffe Lake property. The
Natural Heritage Information System has no records for rare plants or high
quality ecosystems in the vicinity of property (WDNR 1999). There are no
requirements to survey for listed plant species, A list of sensitive plants for
Grays Harbor and Lewis Counties shows the Western Washington properties may
contain three different sensitive plant species, but no sitings were reported.
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<PAGE> 18
Timber harvesting and land management in Washington State is subject
all relevant state and federal laws. Timber harvest activities must comply with
Washington Forest Practices Act (FPA) (RCW 76.09), as governed by the Washington
Department of Natural Resources. Other relevant laws include federal Endangered
Species Act (ESA), State Environmental Policy Act (SE Chapter 222- 1 0 WAC), and
the Clean Water Act. The National Environmental Policy Act (NEPA) could also
apply under certain circumstances.
The following tables indicate the number of acres on the Pacific
Northwest timberlands, by property, that are currently subject to harvest
restrictions due to the presence of waterway buffer zones, geologically unstable
areas or wildlife on or near the property. The first table shows the number of
acres on each property that cannot be harvested today. This number of acres may
increase or decrease with a change in any category. The second table shows the
number of acres on each property as to which harvesting is presently restricted,
but not prohibited.
HARVESTING CURRENTLY PROHIBITED
<TABLE>
<CAPTION>
WATERWAY GEOLOGICALLY TOTAL
BUFFER ZONE* UNSTABLE AREAS WILDLIFE** BY PROPERTY
------------ -------------- ---------- -----------
<S> <C> <C> <C> <C>
California - Commander ....... -- 40 155 195
California - Coastal ......... 1,708 480 396 2,584
Oregon ....................... 2,165 -- 80 2,245
Washington ................... -- -- 20 20
----- --- --- -----
Totals ............. 3,873 520 651 5,044
===== === === =====
</TABLE>
HARVESTING CURRENTLY RESTRICTED
<TABLE>
<CAPTION>
WATERWAY TOTAL
BUFFER ZONE* WILDLIFE** BY PROPERTY
------------ ---------- -----------
<S> <C> <C> <C>
California - Commander ..... 2,334 541 2,875
California - Coastal ....... 4,656 1,074 5,730
Oregon ..................... 8,231 -- 8,231
Washington ................. 977 -- 977
------ ----- ------
Totals ........... 16,198 1,615 17,813
====== ===== ======
</TABLE>
* Streamside buffer zone restrictions include restrictions due to chinook and
coho salmon, and bull and steelhead trout.
** All wildlife restricted acres except for 5 acres for a peregrine falcon on
the Mendocino lands, and 100 acres for bald eagles in Oregon and Washington, are
due to the Northern Spotted Owl.
The NMFS is still in an adjustment period following the recent listings
of many salmon and steelhead stocks in the Pacific Northwest. As such, many new
field staff and management personnel have joined NMFS, and the agency culture is
early in its development process. As a result the agency is continually
developing and refining its policies and positions regarding, among other
things, the adequacy of state forest practices rules to adequately protect fish.
NMFS' positions described in this document regarding various regulatory issues
may not necessarily reflect their current or future position.
18
<PAGE> 19
PENDING REGULATIONS
In our work we completed a review of known pending regulations applying
to each state of the Pacific Northwest region of your properties:
California
Resolution No. 98-66, an amendment to the Water Quality Control Plan
for the North Coast, by the North Coast Region California Regional Water Quality
Control Board, was adopted establishing a Total Maximum Daily Load (TMDL) for
sediment in the Garcia River watershed. Upon approval it will be sent to the
Office of Administrative Law for review and final approval before becoming law.
In 1996 the state of California identified the Garcia River as a high
priority waterbody according to the requirements in Section 303(d) of the
federal Clean Water Act (CWA). Section 303(d)(1)(A) of the CWA requires that
states list those waters for which existing management practices are not
sufficient to achieve water quality standards. The Garcia River was identified
due to excessive sedimentation. When the Garcia River was designated a
high-priority waterbody the development of a Total Maximum Daily Load (TMDL) for
the river became necessary.
These regulations pertaining to TMDL compliance that are pending and
may have the effect of law are being applied by the regulatory agencies at this
time. These regulations are resulting in additional costs for land
administration, preparing harvesting plans and harvesting costs. These costs as
they apply to harvesting have been taken into account.
However, the costs for planning may not be accounted for.
Eastern Oregon
The recent listing of the various salmon species by NMFS affects the
harvest near streams. The effect of these listings have been considered and
anticipated in our analysis of harvest.
Western Washington
The Washington Department of Fish and Wildlife's Timber, Fish and
Wildlife regulations are in the process of change. The impact of the pending
regulations has been estimated and the results under those regulations have been
included in our analysis.
III TIMBER SALES PLAN
We reviewed your timber sales plan, as set forth below, against
regulatory limitations, local stocking levels and growth rates, and the demand
for logs in each of the Pacific Northwest market areas. In each instance, the
plan is consistent with regulatory limitations, and, with respect to Coastal,
calls for less harvesting than permitted by the applicable Option A plan. The
demand for logs in the relevant markets is sufficient to accommodate your
planned sales and
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<PAGE> 20
resulting harvest volumes without adversely affecting stumpage prices in any
of the markets. The timber sales plan we reviewed and confirmed provides as
follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004 2005
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
California Coastal 34,681 35,687 36,722 37,788 38,884 40,012 41,173
California Commander 30,753 28,895 27,150 25,510 23,969 22,522 21,161
Oregon 49,353 46,113 43,116 40,340 37,763 35,369 33,140
Washington 13,559 12,636 11,776 10,974 10,227 9,531 8,882
------- ------- ------- ------- ------- ------- -------
Total 128,346 123,331 118,764 114,612 110,843 107,434 104,356
</TABLE>
Sincerely,
/s/ Glenn Zane
Glenn Zane
Vice President
- ------------
20
<PAGE> 1
EXHIBIT 99.6
[LETTERHEAD OF CANAL FOREST RESOURCES, INC.]
April 15, 1999
Board of Directors
Strategic Timber Trust, Inc.
5 North Pleasant Street
New London, NH 03257
Dear Sirs:
Since the inception of your efforts to acquire and manage the Bel-Quatre
timberlands in Kinder, Louisiana, Canal Forest Resources has provided a number
of services relating to the assessment and appraisal of the land and timber
inventory. I am writing to provide a consolidated review of the results of our
work as it relates to the following subjects:
1. Timber inventory.
2. Projected cutting schedule.
3. Timber inventory growth rates.
4. Applicable forestry regulations.
TIMBER INVENTORY
Our initial timber inventory was completed in July 1998. The timber volumes
and sampling errors (at the 95% confidence level) by species and product are
summarized below:
<TABLE>
<CAPTION>
SPECIES/PRODUCT WEIGHT (TONS) SAMPLING ERROR
- --------------- ------------- --------------
<S> <C> <C>
Pine Sawtimber.............................................. 3,134,825
Pine Chip-n-Saw............................................. 478,233
Pine Pulpwood (includes tops)............................... 773,444
---------
Total Pine........................................ 4,386,502 1.3%
--------- ---
Hardwood Sawtimber.......................................... 502,286
Hardwood Pulpwood........................................... 546,222
---------
Total Hardwood.................................... 1,048,508 2.4%
--------- ---
</TABLE>
<PAGE> 2
We estimated merchantable timber volume using sampling methods and
standards that are used in the Southeastern United States. Our sampling error
for this inventory estimate was plus or minus 5% at a 95% confidence interval.
This means that 95 times out of 100, if the property were re-inventoried using
the same sampling procedure and specifications, the resulting volumes would vary
by no more than 5%. All timber volume estimates were calculated in tons and
included only trees that met the merchantability specifications set forth below.
The sampling errors associated with our volume estimates are very small, as
a result of the large sample size we established to develop the estimate (6,323
plots on approximately 62,900 merchantable acres). This is important to
establish confidence in our overall valuation of the property.
Consistent with industry standards in Louisiana, the following wood product
specifications were used in our inventory and subsequent harvest plan:
<TABLE>
<CAPTION>
PRODUCT MINIMUM DBH MINIMUM TOP MINIMUM HEIGHT
- ------- ----------- ----------- --------------
<S> <C> <C> <C>
Pine Sawtimber............................... 11.6" 7" 16"
Pine Chip-n-Saw.............................. 8.6" 6" 16"
Pine Pulpwood................................ 4.6" 3" 25"
Pine Poles................................... 11.0" 5" 35"
Hardwood Pulpwood............................ 5.6" 4" 25"
Hardwood Sawtimber........................... 12.6" 9" 16"
</TABLE>
These standards are used to determine timber that would be considered
merchantable in the market area for the Louisiana property. "DBH" refers to
"diameter at breast height," which is an industry convention that measures the
diameter of a tree outside the tree bark at a height of 4.5 feet above the
ground, and is the accepted standard in the Southeastern United States.
Minimum top diameter is measured inside the tree bark at the top of the log
cut, to the nearest whole inch. Mills in the market area for the Louisiana
property are able to process timber meeting the specifications set forth above.
Since the initial inventory, we have revised the inventory estimates on
your property to account for timber sale activities and to adjust for
corrections in estimates on some of the individual tract and stand acres.
However, this estimate does not reflect any new additional physical inventories.
The last estimate of inventory (as of 12/31/98) is as follows:
2
<PAGE> 3
<TABLE>
<CAPTION>
SPECIES/PRODUCT WEIGHT (TONS)
- --------------- -------------
<S> <C>
Pine Sawtimber.............................................. 3,329,749
Pine Chip-n-Saw............................................. 473,301
Pine Pulpwood (includes tops)............................... 785,631
---------
Total Pine........................................ 4,588,681
---------
Hardwood Pulpwood........................................... 546,507
Hardwood Sawtimber.......................................... 508,151
---------
Total Hardwood.................................... 1,054,658
---------
</TABLE>
The table above reflects timber growth over the 6 months between June 1998
and December 1998. We did not conduct a new physical inventory of the timber on
the property to determine growth through December 1998. However, in connection
with our original inventory of the property, we also conducted extensive
physical samplings, including coring of sample trees, to determine physical
growth characteristics on a stand-by-stand level within the sample. We used this
data to determine growth rates for the timber on the property, and projected
this growth through December 31, 1998. We also eliminate any merchantable timber
removed from the property due to harvesting, although this was a small amount
since only a limited amount of salvage harvesting occurred.
Also included in this estimate is the volume associated with 4,486 acres of
timber in wetland areas. Harvesting on these 4,486 acres is restricted to the
extent that harvest activities are prohibited by wetlands regulations, which can
affect access to the timber on these acres. We identified no acres on your
property having unstable soils that would prohibit harvesting, and no acres on
which harvesting would be prohibited or restricted by virtue of the presence of
a threatened or endangered species.
PROJECTED TIMBER HARVEST SCHEDULE
We have completed multiple analyses of how this property could be managed
to maximize your long-term returns. These analyses are used to identify
detailed -- stand-by-stand -- cutting schedules, thinning schedules, and
management (site prep, regeneration, and fertilization) schedules for the
property. From these schedules we have determined that the property can support
harvest levels between 215,000-255,000 cunits per year over the next 10 years
(for your Louisiana timberlands, one ton of timber converts to 0.3525 cunits).
TIMBER INVENTORY IN 2008 AND 2018
The timber inventory is constantly changing. Changes reflect harvests,
growth and mortality. As mature, slower growing natural pine is replaced with
fast growing plantation pine, the overall vigor and productivity of the forest
improves. The years 2008 and 2018 provide a snap-shot of an improving forest. In
2008, CFR projects that 552,780 tons could be harvested through a final cutting
and 79,468 tons could be harvested via an intermediate thinning. Conversely, by
2018 only 84,315 tons could be harvested through a final cutting, while 189,069
tons could be thinned. During this time, merchantable inventory volume increases
more than 300%, from 1,239,341 tons in 2008 to 3,815,935 tons in 2018.
Furthermore, the weighted mean annual increment of
3
<PAGE> 4
harvested volume is projected to increase from 1.63 tons/acre/year to 6.61
tons/acre/year, reflecting a four fold increase in stand productivity. The
follow chart portrays selected forest attributes in 10 and 20 years.
COMPARISON BETWEEN 2008 AND 2018
<TABLE>
<CAPTION>
HARVEST TONS INVENTORY (TONS)
----------------- ------------------------------------
FINAL THIN TOTAL* ANNUAL GROWTH** MAI***
------- ------- --------- --------------- ------
<S> <C> <C> <C> <C> <C>
2008..................................... 552,780 79,468 1,239,341 (136,357) 1.63
2018..................................... 84,315 189,069 3,815,935 458,282 6.61
% change................................. -555.6% 137.9% 207.9% na 305.5%
</TABLE>
- ---------------
* total merchantable tons
** annual growth for year over year period; 2008-2009 and 2018-2019
*** mean annual increment, a measure of mean annual growth over rotation
TIMBER INVENTORY GROWTH RATES
Canal Forest Resources uses whole-stand growth projection models to
estimate annual growth for each individual stand based on characteristics such
as site quality, age, current stand density, and species. Thus, we do not use
standard growth rates across all stands or even a species group. However, in
looking at the current yields by age class on your property, we can develop
reasonable estimates of exhibited growth rates. This analysis shows that pine
growth rates will range from a low of 0.66 tons/acre/year in old (90+) natural
stands to a high of 10.68 tons/acre/year in young (15-19) merchantable natural
stands. To provide some comparison with other estimates you may have, I
converted some of these empirical (observed) estimates of mean annual increment
(MAI) into relative growth rates by timber type as shown below:
<TABLE>
<CAPTION>
EMPIRICAL GROWTH RATES
(MAI AS % OF YIELD)
----------------------------
PINE HARDWOOD
------------ ------------
TIMBER TYPE MIN. MAX. MIN. MAX.
- ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Hardwood................................................ 1.1% 1.6% 1.1% 2.1%
Pine-Hardwood........................................... 1.0 4.4 1.0 4.4
Natural Pine............................................ 1.1 5.7 1.1 5.7
Planted Slash Pine...................................... 1.5 3.6 1.6 2.4
Planted Loblolly Pine................................... 1.4% 3.6% 1.4% 2.4%
</TABLE>
Please note that empirical estimates cannot be adjusted for past partial
harvesting (thinning) or other non-normal timber removal factors. Thus the
percent growth rates shown above likely underestimate the actual rate that would
occur if no thinning had ever taken place on the property.
APPLICABLE FORESTRY REGULATIONS IN THE SOUTHERN UNITED STATES
Although a number of states in the Pacific Northwest and Northeastern
United States currently have regulations that govern forest management and
harvesting practices, the U.S. South is generally free of state regulations.
However, there are some exceptions.
4
<PAGE> 5
- Louisiana Right to Farm and Practice Forestry Law renders any legislation
or regulation void if that legislation or regulation diminishes the
property's income or asset value by more than 20%.
- All southern states, including Louisiana, have some road use permitting
process that affects some percentage of the roads.
- Maryland Sediment and Erosion Control Laws require a permit when any
operation, including timber harvesting, disturbs soil over more than
5,000 square feet.
- Virginia Seed Tree Law requires leaving at least six seed trees per acre
on land that is harvested that was predominately pine.
- Virginia Forestry Water Quality Law states that it is illegal to cause
excessive sedimentation into water courses. This regulation is a state
statute and does have the force of law. A violator can be fined up to
$5,000 per day.
- Florida Seed Tree, Doyle Log Rule, and Barging Timber Statutes are
largely out of date and not applicable.
- The Florida Water Management Districts' Water Quality Rules do have force
of law and regulate sedimentation and stream turbidity.
- Also, there are many local and municipal ordinances that regulate timber
harvesting within the Southern United States.
This is a brief description of the prominent state forestry regulations in
the southern U.S., however this is not meant to be an exhaustive list.
ENDANGERED SPECIES
Pending legislation relative to forest management.
FEDERAL LEVEL
At this time, we are not aware of any pending legislation relative to
endangered species that would hinder the ability to practice forest management
in Louisiana. The current mindset of the US Fish & Wildlife Service is to work
with landowners that have protected species on their property to promote a
"win/win" situation.
STATE LEVEL
At this time, we are not aware of any pending legislation relative to
endangered species that would hinder the ability to practice forest management
in Louisiana.
5
<PAGE> 6
ENDANGERED SPECIES IN LOUISIANA
There are 17 threatened/endangered animal species that occur or potentially
occur in Louisiana. Based on information obtained from discussions with US Fish
& Wildlife Service personnel located in Lafayette and Louisiana Natural Heritage
Program personnel located in Baton Rouge, 3 of these species could potentially
occur on STT land. One of these three, the American peregrine Falcon, would only
be considered as a migrant and should not impact your ability to practice forest
management.
The other two species, the red cockaded woodpecker and the American bald
eagle, are known to nest and forage in the four-parish area in which the
property is located. Both species can significantly impact your ability to
practice forest management.
Canal Forest Resources has conducted site specific surveys on near term
harvest areas to determine the presence of red cockaded woodpeckers. None have
been found. Furthermore, we recommend that prior to any harvesting activities a
thorough survey of the harvest area for the presence of threatened and
endangered species be conducted. If occurrences are found, the impacted area
should be identified and management practices modified to ensure compliance with
the Endangered Species Act.
I hope this information is helpful in consolidating your understanding of
the timber inventory and applicable regulations on the Bel-Quatre forest. Please
do not hesitate to call if I can provide any additional information.
Sincerely,
/s/ PETER J. STEWART
--------------------------------------
Peter J. Stewart
Manager of Technical Services
6
