<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1999
REGISTRATION NO. 333-71291
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 5
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>
---------------------
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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<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 JUNE 21, 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. The common stock has been
approved 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.
- Forestry, 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 have incurred a
combined net loss of $23.5 million through March 31, 1999.
- 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 June ,
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.
June , 1999
<PAGE> 3
[COMPANY LOGO] STRATEGIC TIMBER TRUST, INC.
[MAP DEPICTING LOCATION OF REGISTRANT'S TIMBERLANDS AND SURROUNDING
MARKETS APPEARS HERE]
<TABLE>
<CAPTION>
NUMBER OF
MILLS WITHIN
MARKET AREA OF
PROPERTY ACRES* PREDOMINANT SPECIES PROPERTY
-------- ------- ------------------- --------------------
<S> <C> <C> <C>
California:
Coastal 79,026 Young-growth redwood, Douglas-fir 23
Commander 43,313 Douglas-fir, white fir, ponderosa pine 19
Louisiana 81,991 Slash and loblolly pine 50
Oregon 230,323 Ponderosa pine, Douglas-fir, white fir 13
Washington 10,822 Western hemlock, Douglas-fir, cedar 31
------- ---
Total 445,475 136
======= ===
</TABLE>
*As of March 31, 1999.
<PAGE> 4
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
Forestry, 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 have incurred a
combined net loss of $23.5 million
through March 31, 1999.............. 13
Our management has never operated a
REIT or a public company............ 13
We may not be able to achieve our
intended growth..................... 13
Acquisitions of additional timberlands
involve numerous risks.............. 14
Our recently declared distribution
will be funded with borrowings under
our new credit facility or proceeds
of this offering.................... 14
Our recognition of revenues depends on
when buyers harvest our timber...... 14
We may be required to refund some or
all of the advance payments we
receive from timber buyers.......... 14
Our financial results and cash flow
will change from season to season... 15
Losses of timber from fire and other
causes are not insured.............. 15
We will be taxed as a regular
corporation if we fail to qualify as
a REIT.............................. 15
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...................... 16
Our actual timber inventory may be
less than our current estimates..... 16
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
We may invest in timberlands in
countries outside the United States,
which may be substantially riskier
than investments in domestic
timberlands......................... 16
You will incur immediate dilution of
your common stock................... 17
Our common stock has not had a prior
trading market and we do not know if
one will develop.................... 17
The market price of our common stock
could fluctuate significantly....... 17
Shares eligible for sale in the future
may reduce the market price of our
common stock........................ 18
Some members of our management and
other continuing investors could
have conflicts of interest.......... 18
We may change our investment,
financing and other policies without
your approval....................... 18
We are subject to risks associated
with our interest rate swap
agreements.......................... 19
An investment in the common stock
involves other tax issues........... 19
FORWARD-LOOKING STATEMENTS.............. 20
STRUCTURE AND FORMATION OF STRATEGIC
TIMBER................................ 21
Our Structure......................... 21
Our Formation......................... 21
Benefits to Related Parties........... 25
DISTRIBUTION POLICY..................... 26
USE OF PROCEEDS......................... 27
CAPITALIZATION.......................... 28
DILUTION................................ 29
SELECTED HISTORICAL FINANCIAL AND
OPERATING INFORMATION................. 30
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION................. 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................ 45
Overview.............................. 45
Plan of Operation..................... 45
Historical Results of Operations...... 48
Liquidity and Capital Resources....... 54
Commitments and Contingencies......... 57
Year 2000............................. 58
Market Risk........................... 60
BUSINESS AND PROPERTIES................. 62
Overview.............................. 62
Business Strategy..................... 64
Our Competitive Strengths............. 67
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Timber Industry Overview.............. 69
Initial Timberland Properties......... 74
Harvest Methods....................... 92
Access and Limitations on Access...... 93
Federal and State Regulations......... 93
Our Customers......................... 101
Competition........................... 102
Insurance Coverage.................... 102
Legal Proceedings..................... 102
Employees............................. 103
POLICIES WITH RESPECT TO
CERTAIN ACTIVITIES.................... 104
Investment Policies................... 104
Financing Policies.................... 104
Working Capital Reserves.............. 105
Conflict of Interest Policies......... 105
Reports to Shareholders............... 106
Other Policies........................ 106
MANAGEMENT.............................. 108
Directors and Executive Officers...... 108
Management Relationships.............. 111
Committees of the Board of
Directors........................... 111
Executive Compensation................ 112
Compensation of Directors............. 112
1999 Incentive Plan................... 113
Employment and Non-Competition
Agreements.......................... 114
Compensation Committee Interlocks and
Insider Participation............... 115
TRANSACTIONS WITH RELATED PARTIES....... 116
PRINCIPAL SHAREHOLDERS.................. 117
DESCRIPTION OF CAPITAL STOCK............ 118
General............................... 118
Common Stock.......................... 118
Transfer Agent and Registrar.......... 118
Preferred Stock....................... 118
Restrictions on Ownership and Transfer
of Shares........................... 119
Nasdaq National Market Listing........ 120
MATERIAL PROVISIONS OF GEORGIA LAW AND
STRATEGIC TIMBER'S ARTICLES OF
INCORPORATION AND BYLAWS THAT MAY HAVE
AN ANTI-TAKEOVER EFFECT.............. 121
Ownership Limit....................... 121
Business Combination Provisions of
Georgia Law......................... 121
The Board of Directors................ 122
Special Meetings of Shareholders;
Consents............................ 122
Preferred Stock....................... 122
Advance Notice of Director Nominations
and New Business.................... 123
Supermajority Vote Requirements....... 123
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Amendment of Articles of Incorporation
and Bylaws.......................... 123
Limitation of Liability and
Indemnification..................... 123
Insurance Policies.................... 125
SHARES AVAILABLE FOR FUTURE SALE........ 126
General............................... 126
Registration Rights................... 127
THE PARTNERSHIP AGREEMENT............... 128
Powers of Strategic Timber Operating
Co., as General Partner............. 128
Power of Attorney..................... 128
Transfer of the General Partner's and
Strategic Timber's Interests........ 128
Amendments to the Partnership
Agreement........................... 128
Transfer of Partnership Units;
Substitute Limited Partners......... 129
Redemption of Partnership Units....... 129
Issuance of Additional Limited
Partnership Interests; Additional
Capital Contributions............... 129
Other Covenants....................... 129
Exculpation and Indemnification of
Strategic Timber and Strategic
Timber Operating Co................. 129
Cash Distributions.................... 130
Tax Matters........................... 130
Term.................................. 130
FEDERAL INCOME TAX
CONSEQUENCES.......................... 131
Legal Opinions........................ 131
Taxation of Strategic Timber.......... 132
Taxation of Taxable U.S.
Shareholders........................ 138
Taxation of Tax-Exempt Shareholders of
Strategic Timber.................... 140
Taxation of Non-U.S. Shareholders of
Strategic Timber.................... 140
Tax Aspects of Strategic Timber's
Ownership of Interests in Strategic
Timber Partners..................... 143
Other Taxes........................... 145
ERISA CONSIDERATIONS.................... 147
General............................... 147
Status of Strategic Timber and
Strategic Timber Partners under
ERISA............................... 148
UNDERWRITING............................ 150
EXPERTS................................. 152
LEGAL MATTERS........................... 152
WHERE YOU CAN FIND MORE
INFORMATION........................... 153
GLOSSARY OF SELECTED TIMBER INDUSTRY
TERMS................................. 154
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> 6
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.
We are a Georgia corporation. We operate our business through our operating
partnership, Strategic Timber Partners, LP, a Delaware limited partnership, and
its subsidiary, Pioneer Resources, LLC, an Oregon limited liability company. 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. As of March
31, 1999, we owned approximately 445,000 acres of timberlands in the states of
California, Louisiana, Oregon and Washington. Our timberlands are located in
active and competitive timber markets. They contain 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, plywood or veneer,
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. From our inception through March 31, 1999, and before
beginning full scale operations, our businesses incurred a combined net loss of
$23.5 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.
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.
1
<PAGE> 7
- 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.
- Forestry, 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 have incurred a
combined net loss of $23.5 million through March 31, 1999.
- 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 recently declared distribution will be funded with borrowings under
our new credit facility or proceeds of this offering.
2
<PAGE> 8
- 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 $4.85 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> 9
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, as of
March 31, 1999, consisted 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 held approximately 363,000 acres of timberland in the U.S. Pacific
Northwest as of March 31, 1999. 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 $305.8 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> 10
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>
VALUE AT
SHARES AND VALUE OF COMPLETION
UNITS CONSIDERATION OF OFFERING
---------- ---------------------- -----------
<S> <C> <C> <C>
C. Edward Broom............................ 408,329 $ 290 $ 8,166,580
Christopher J. Broom....................... 408,329 290 8,166,580
Thomas P. Broom............................ 408,329 290 8,166,580
T. Yates Exley............................. 108,516 2,047,250 2,170,320
Nicholas C. Brunet......................... 90,740 6 1,814,800
Vladimir Harris............................ 90,740 65 1,814,800
Joseph E. Rendini.......................... 90,740 65 1,814,800
--------- ---------- -----------
Total................................... 1,605,723 $2,048,256 $32,114,460
========= ========== ===========
</TABLE>
The shares and units that we issued to these executives, other than T.
Yates Exley, were in consideration of services. Except for the shares
issued to Mr. Brunet, these shares and units were issued upon the
formation of Strategic Timber and Strategic Timber II. Mr. Brunet received
his shares as of June 15, 1998, when he joined us. When issued, the value
of these shares and units reflected the value of Strategic Timber and
Strategic Timber II. 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
5
<PAGE> 11
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 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. The value of this interest is
estimated to be $2,047,250, which represents the portion of the
acquisition price of Pioneer allocable to Mr. Exley's interest, net of
cash proceeds to be paid to Mr. Exley. 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 "Management" and "Transactions with Related Parties" for
additional information concerning benefits to executive officers, directors and
other continuing investors.
6
<PAGE> 12
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.
Nasdaq symbol....................... The common stock has been approved 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> 13
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 March 31, 1999. The pro forma operating results for
the year ended December 31, 1998 and for the three months ended March 31, 1999
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>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
--------------------------------------
PRO FORMA
--------------------------------------
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 37,567 $ 8,622
Depletion, depreciation and amortization.................... 14,742 5,148
Cost of timberland and property sold........................ 2,257 66
Cost of products sold....................................... 11,056 9
Selling, general and administrative expenses................ 8,809 1,393
Operating income............................................ 39 1,840
Interest expense............................................ 18,426 4,910
Minority interest........................................... 1,420 554
Loss from continuing operations............................. (16,922) (2,501)
Basic and diluted loss from continuing operations per
share..................................................... $ (0.98) $ (0.14)
Weighted average number of shares used in the calculation of
basic and diluted loss from continuing operations per
share..................................................... 17,271,770 17,271,770
BALANCE SHEET DATA (AT PERIOD END):
Timberlands................................................. $ 604,055
Total assets................................................ 616,186
Long-term debt.............................................. 269,215
Minority interest........................................... 61,722
Shareholders' equity........................................ 278,597
</TABLE>
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<PAGE> 14
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.
FORESTRY, ENVIRONMENTAL AND ENDANGERED SPECIES REGULATIONS RESTRICT TIMBER
HARVESTING AND MAY OTHERWISE RESTRICT OUR ABILITY TO CONDUCT OUR BUSINESS
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 of our filings, including our
timber harvest plans. Any delay associated with a filing could result in a delay
in harvesting. In addition, the rejection of a filing could result in the
restriction or prohibition of harvesting. Any delay in or restriction on
harvesting could have an adverse affect on our operating results.
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<PAGE> 15
NO TIMBER MAY BE CUT IN CALIFORNIA WITHOUT APPROVAL OF HARVEST PLANS BY
STATE OFFICIALS
Before any of our timber may be harvested in California, we must submit a
timber harvest plan to the California Department of Forestry and Fire Protection
and receive the Department's approval. The Department may indefinitely postpone
approval of our plan or require significant limitations. A state-registered
professional forester must prepare the plan and it must comply with the
Department's stringent forestry rules and requirements. On receipt of a plan,
the Department takes several steps to inform the public of the proposed harvest
plan and to solicit comment of any concerns regarding the plan. These steps
include notifying environmental groups and adjoining landowners.
An owner submitting a timber harvest plan must demonstrate that, over a
ten-year period, the owner will harvest no more timber than will grow in the
forest over the same period. The timber harvest plan must also reflect
applicable limitations on harvesting, such as limitations due to habitats for
endangered species, waterway buffer zones and highway scenic corridors.
REGULATORY RESTRICTIONS MAY PREVENT US FROM SELLING ALL THE COASTAL FOREST
TIMBER WE PLAN TO SELL
For the Coastal forest, which is part of our California timberlands and has
young-growth redwoods, we submit timber harvest plans under an "Option A" timber
management plan. "Option A" refers to the section in the California Forest
Practices Act regulations providing for a plan by which an owner will
demonstrate that its harvest will not exceed growth on a tract over a ten-year
measurement period. An Option A plan is a management tool and is not intended to
be in any way a timberland evaluation or appraisal.
The Option A plan under which we operate the Coastal forest was filed by a
prior owner in 1994 and took four years to be approved by the California
Department of Forestry and Fire Protection in its present form. During this
four-year period, the prior landowner engaged in extensive negotiations and
discussions with the Department regarding the procedures for estimating the
current tree volumes in the forest, as well as expected growth rates.
Environmental and silvicultural conditions were reviewed, revised and accepted
by the Department.
We report regularly to the Department on harvesting and silvicultural
activities conducted on the Coastal forest. The Department monitors growth
estimates and timber volumes remaining after current harvesting, as well as
wildlife protection and erosion control, and compares them to current figures in
the Option A plan. We have recently agreed with the Department that we will
conduct a complete re-inventory of our Coastal forest in 1999, and that we will
revise our maximum projected harvest levels under our Option A plan based on
that re-inventory. This revision is likely to cause us to decrease the maximum
projected harvests shown in that plan. The amount of any decrease may be
significant, although it is not possible to quantify until the re-inventory is
complete. The Department will not approve new timber harvest plans under our
Option A plan until the re-inventory is complete. We may submit timber harvest
plans under an alternate timber regulation that does not require us to utilize
the Option A plan in 1999. Beginning in 2000, however, we will not be able to
submit new timber harvest plans for our Coastal forest unless our re-inventory
is complete and the Department has approved our revised Option A plan.
We recently revised our timber sales plan for our Coastal forest to
decrease the level of expected timber sales from the Coastal forest over the
next decade. Even with these lower projected current sales, however, there can
be no assurance that the Department, as it monitors, enforces and revises our
Option A plan, will approve the sales we have planned in each year.
ENVIRONMENTAL GROUPS AND INTERESTED INDIVIDUALS MAY SEEK TO DELAY OR
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 California, for instance, the Coast Action Group, an environmental
advocacy organization, opposed the approval of a timber harvest plan we filed in
October 1998 for our Coastal forest. Coast Action raised numerous concerns
regarding erosion, soil loss and the intensity of our proposed logging. The
California
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<PAGE> 16
Department of Forestry and Fire Protection delayed approval of our timber
harvest plan to consider Coast Action's objections.
In addition to intervention in regulatory proceedings, groups and
individuals may file or threaten to file lawsuits that seek to prevent us from
implementing our timber sales plans. These parties may sue to appeal approval of
a particular timber harvest plan by the California Department of Forestry and
Fire Protection or the similar agency in another state. For example, a coalition
of interested parties in California have threatened to sue the Department
challenging that agency's forestry standards under the federal Endangered
Species Act. Any lawsuit or even a threatened lawsuit could delay harvesting on
our timberlands. Among the remedies that could be enforced in a lawsuit is a
judgment entirely preventing or restricting harvesting on our timberlands. 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.
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 cockaded woodpecker,
marbled murrelet, bull trout and coho salmon, are protected under the federal
Endangered Species Act or similar state laws. See "Business and
Properties -- Initial Timberland Properties -- Methodology for Determining
Inventories -- Harvest Restrictions" and "-- Federal and State
Regulations -- Endangered Species 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
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<PAGE> 17
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.
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, changes in existing laws or regulations, which could be made by
the United States Congress, legislatures in states where we own timberlands, or
federal or state administrative agencies, could result in new or additional
restrictions on harvesting on our properties. In addition, California, Oregon
and Washington permit interested citizens to initiate state or local ballot
propositions by which voters may directly enact legislative measures. These
initiatives may be directed toward more stringent regulation of the timber
industry. In recent years, initiatives that, if enacted, would have
significantly affected our timber harvest practices have appeared on ballots in
both California and Oregon. New initiatives may appear on future ballots in
these states. We cannot assess the likelihood that one or more of these measures
will be adopted, and, if so, what effect this might have on our operations. See
"Business and Properties -- Federal and State Regulations -- Endangered Species
Laws."
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.
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<PAGE> 18
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 HAVE INCURRED A COMBINED
NET LOSS OF $23.5 MILLION THROUGH MARCH 31, 1999
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.
Furthermore, although we believe our overall timber sales plan is
reasonable, we cannot have the same level of confidence in the plan that we
would have if we had operated our timberlands for a number of years.
Our businesses incurred combined net losses of approximately $23.5 million
for the period from inception through March 31, 1999. 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 RECENTLY DECLARED DISTRIBUTION WILL BE FUNDED WITH BORROWINGS UNDER OUR NEW
CREDIT FACILITY OR PROCEEDS OF THIS OFFERING
Our recently declared cash distribution will be funded with borrowings
under our new credit facility or proceeds of this offering. We have not
previously made any cash distributions on our common stock. Further, we can give
you no assurance as to when or if any distributions will be paid in the future,
except for the distribution described below.
On April 12, 1999, our Board of Directors declared a cash distribution on
our common stock that will be payable only if we complete the formation
transactions and this offering no later than June 30, 1999. Neither our
historical operations nor our pro forma operations support this distribution.
Our businesses on a combined basis lost approximately $16.4 million for the
period from April 21, 1998 through December 31, 1998 and approximately $7.1
million for the three months ended March 31, 1999. Furthermore, our businesses
incurred pro forma losses from continuing operations of approximately $16.9
million and $2.5 million for the year ended December 31, 1998 and the three
months ended March 31, 1999, respectively. Accordingly, we will have to borrow
under our new credit facility or use the proceeds of this offering to make this
distribution to you. This distribution will be a return of a portion of the
money paid by you for your shares. See "Distribution Policy."
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 13% 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.
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<PAGE> 20
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. Due to the less favorable weather that generally
prevails in the first and fourth quarters and the related decreases in
construction activity, we expect that our customers will harvest less timber
from our properties in those quarters than in the second and third quarters.
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.
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.
15
<PAGE> 21
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."
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
16
<PAGE> 22
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 $15.15 per share. Thus, by purchasing common stock in this
offering, you will incur immediate dilution of $4.85 per share. See "Dilution."
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.
Even though our common stock has been approved for quotation on the Nasdaq
National Market, we will 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.
17
<PAGE> 23
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 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."
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<PAGE> 24
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.
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%.
19
<PAGE> 25
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.
20
<PAGE> 26
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, as
of March 31, 1999, consisted 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>
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<PAGE> 27
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 held approximately 363,000 acres of
timberland in the Pacific Northwest as of March 31, 1999.
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.
22
<PAGE> 28
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>
<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>
23
<PAGE> 29
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 $ 1,100 671,770 shares of 671,770 shares of $32,096,100
Management and Strategic Timber Strategic Timber
Other Original 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 $270.9 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.
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<PAGE> 30
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>
VALUE AT
SHARES AND VALUE OF COMPLETION
UNITS CONSIDERATION OF OFFERING
---------- ------------- -----------
<S> <C> <C> <C>
C. Edward Broom..................................... 408,329 $ 290 $ 8,166,580
Christopher J. Broom................................ 408,329 290 8,166,580
Thomas P. Broom..................................... 408,329 290 8,166,580
T. Yates Exley...................................... 108,516 2,047,250 2,170,320
Nicholas C. Brunet.................................. 90,740 6 1,814,800
Vladimir Harris..................................... 90,740 65 1,814,800
Joseph E. Rendini................................... 90,740 65 1,814,800
--------- ---------- -----------
Total..................................... 1,605,723 $2,048,256 $32,114,460
========= ========== ===========
</TABLE>
The shares and units that we issued to these executives, other than T.
Yates Exley, were in consideration of services. Except for the shares
issued to Mr. Brunet, these shares and units were issued upon the formation
of Strategic Timber and Strategic Timber II. Mr. Brunet received his shares
as of June 15, 1998, when he joined us. When issued, the value of these
shares and units reflected the value of Strategic Timber and Strategic
Timber II. 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.
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<PAGE> 31
- 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. The value of this
interest is estimated to be $2,047,250, which represents the portion of
the acquisition price of Pioneer allocable to Mr. Exley's interest, net
of cash proceeds to be paid to Mr. Exley. 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.
Further, we can give you no assurance as to whether or when any distributions
will be paid in the future except for the distribution described below.
On April 12, 1999, our Board of Directors declared a cash distribution on
our common stock. This distribution will be payable only if we complete the
formation transactions and the offering no later than June 30, 1999. 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 this offering
and June 30, 1999. The record date for the distribution will be the 15th day
following the date of completion of the offering, and the distribution will be
paid 15 days after the record date. If we complete the offering on June 28,
1999, the aggregate distribution payable would be approximately $66,000, or
approximately $76,000 if the underwriters exercise in full their over-allotment
option. Because the dividend was declared in April 1999, no amount was accrued
at March 31, 1999.
Neither our historical operations nor our pro forma operations support this
cash distribution. Our businesses incurred combined net losses of approximately
$16.4 million for the period from April 21, 1998 through December 31, 1998 and
approximately $7.1 million for the three months ended March 31, 1999.
Furthermore, our businesses incurred pro forma losses from continuing operations
of approximately $16.9 million and $2.5 million for the year ended December 31,
1998 and the three months ended March 31, 1999, respectively. The cash payment
of the distribution will be funded entirely with borrowings under our new credit
facility or the proceeds of this offering. The distribution will be a return to
you of the money you pay for your shares. The distribution is permitted under
Georgia law and our new credit facility and will not cause a default under the
new credit facility. The closing of the new credit facility is conditioned on
the closing of this offering.
Our Board of Directors, in its sole discretion, will determine whether any
subsequent distributions will be made on our common stock. Our new credit
facility allows us to make distributions to shareholders so long as the
distributions do not cause us to default under provisions of the credit
agreement. For a description of the financial covenants contained in our new
credit facility, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." 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. Because substantially all of our expected earnings will
be in the form of capital gains from the sale of standing timber, we do not
expect that we will be required to distribute any material amounts of cash to
satisfy the tax rule that generally requires a REIT to distribute to
shareholders 95% of its ordinary income. As noted above, we can give you no
assurance as to when or if any distributions will be paid, except for the
distribution discussed above.
26
<PAGE> 32
USE OF PROCEEDS
We estimate that we will receive net cash proceeds from this offering of
approximately $305.8 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 $352.1 million.
We will use the net proceeds of this offering, together with approximately
$270.9 million of borrowings under our new credit facility, as follows:
- approximately $520.6 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 $5.8 million for termination fees on some of our 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 will differ to the extent of 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 or the
prime rate 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 $270.9 million of debt outstanding under
our new credit facility. The closing of the new credit facility is conditioned
on the closing of this offering. 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.
27
<PAGE> 33
CAPITALIZATION
The following table sets forth the combined historical capitalization of
Strategic Timber and Strategic Timber II as of March 31, 1999. 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 March 31, 1999. The following table also sets forth our pro
forma capitalization as of March 31, 1999 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." The closing of the new credit facility is
conditioned on the closing of this offering. 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>
MARCH 31, 1999
----------------------------
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......................... 144,297 --
Long-term debt............................................ 247,950 269,215
Minority interest........................................... 116,516 61,722
Shareholders' equity:
Preferred Stock, $.01 par value(1)........................ -- --
Common Stock, $.01 par value(2)........................... 1 173
Additional paid-in capital................................ -- 311,980
Accumulated deficit....................................... (23,546) (33,556)
-------- --------
Total shareholders' equity (deficit).............. (23,545) 278,597
-------- --------
Total Capitalization.............................. $605,218 $609,534
======== ========
</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."
28
<PAGE> 34
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)............................................ $14.64
Increase in net combined tangible book value per share
attributable to this offering.......................... 0.51
------
Pro forma net tangible book value per share after this
offering(2)............................................ 15.15
------
Dilution per share purchased in this offering............. $ 4.85
======
</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 March 31, 1999.
<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 97.6% $20.00
Common stock and partnership units
outstanding or to be issued in the
formation transactions................ 5,637,975 25.3 8,319 2.4 1.48
---------- ----- -------- -----
Total......................... 22,237,975 100.0% $340,319 100.0%
========== ===== ======== =====
</TABLE>
29
<PAGE> 35
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 and as of and for the three months
ended March 31, 1999. The information as of and for the period ended December
31, 1998 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 for 1998 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 for 1998 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.
The information for Strategic Timber and Strategic Timber II as of and for
the three months ended March 31, 1999 is derived from unaudited historical
financial statements. In the opinion of management, each of the unaudited
financial statements includes all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of those statements. Operating
results for the three months ended March 31, 1999 may not be indicative of
results for an entire year.
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 during 1998 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.
30
<PAGE> 36
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 AS OF AND FOR THE AS OF AND FOR THE
PERIOD FROM INCEPTION THREE MONTHS PERIOD FROM INCEPTION THREE MONTHS
(APRIL 21, 1998) TO ENDED (OCTOBER 9, 1998) TO ENDED
DECEMBER 31, 1998 MARCH 31, 1999 DECEMBER 31, 1998 MARCH 31, 1999
--------------------- ----------------- --------------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:......................... $ 507 $ 2,827 $ 9,018 $ 5,795
Operating Expenses:
Cost of timber and property
sold.......................... 403 2,793 5,746 2,410
Amortization of deferred
financing costs............... 1,743 654 499 546
General and administrative
expenses...................... 1,820 475 1,738 938
--------- --------- -------- --------
Operating income (loss)......... (3,459) (1,095) 1,035 1,901
Other Income (Expense):
Interest expense................ (13,781) (4,841) (5,657) (5,976)
Interest income................. 33 1 12 14
--------- --------- -------- --------
Loss before minority interest..... (17,207) (5,935) (4,610) (4,061)
Minority interest in loss of
subsidiary partnership.......... 2,863 701 2,587 2,115
--------- --------- -------- --------
Net loss.......................... $ (14,344) $ (5,234) $ (2,023) $ (1,946)
========= ========= ======== ========
CASH FLOW AND OTHER DATA:
EBITDDA(a)........................ $ (1,312) $ 2,354 $ 7,268 $ 4,800
Depletion......................... 403 2,793 5,703 2,337
Depreciation and amortization..... 1,744 656 530 562
Cash provided by (used in)
operating activities............ (6,913) (4,633) 5,268 170
Cash used in investing
activities...................... (205,235) (88) (295,218) (181)
Cash used in (provided by)
financing activities............ 212,458 5,510 295,793 (2,050)
BALANCE SHEET DATA (AT PERIOD
END):
Working capital (b)............... $(226,623) $(229,198) $(38,617) $(44,510)
Timberlands....................... 251,597 248,804 354,298 352,137
Total assets...................... 260,878 259,485 369,082 362,764
Total debt........................ 218,787 224,297 290,000 287,950
Minority interest................. 46,919 46,218 72,413 70,298
Shareholders'/members' deficit.... (14,343) (19,577) (2,023) (3,968)
OPERATING DATA (UNAUDITED):
Timber harvested.................. 10,923tons 65,044tons 11,601(c) 2,796(c)
Timber sold under timber deed..... -- -- 19,295(c) 14,884(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 TIMBER STRATEGIC TIMBER II
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FROM INCEPTION
(APRIL 21, 1998) TO THREE MONTHS (OCTOBER 9, 1998) TO THREE MONTHS
DECEMBER 31, 1998 ENDED MARCH 31, 1999 DECEMBER 31, 1998 ENDED MARCH 31, 1999
------------------- -------------------- -------------------- --------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating income
(loss)................. $(3,459) $(1,095) $1,035 $1,901
Depletion................ 403 2,793 5,703 2,337
Depreciation and
amortization........... 1,744 656 530 562
------- ------- ------ ------
$(1,312) $ 2,354 $7,268 $4,800
======= ======= ====== ======
</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.
31
<PAGE> 37
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>
32
<PAGE> 38
<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 and property 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.
33
<PAGE> 39
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
March 31, 1999. The Pro Forma Condensed Consolidated Statements of Operations
for the year ended December 31, 1998 and for the three months ended March 31,
1999 present 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 for the year
ended December 31, 1998 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 Statements of Operations, however, do
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 Statements of
Operations also do 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 Statements 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 and
unaudited consolidated financial statements of Strategic Timber as of and
for the three months ended March 31, 1999,
- Audited consolidated financial statements of Strategic Timber II as of
and for the period from inception (October 9, 1998) to December 31, 1998
and unaudited consolidated financial statements of Strategic Timber II as
of and for the three months ended March 31, 1999,
- 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."
34
<PAGE> 40
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL INTERCOMPANY
--------------------- 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.................. $ 1,100 $ 3,782 $ -- $ 4,882
Trade accounts receivable.................. 460 35 -- 495
Prepaid expenses........................... 1,934 157 (1,934)(b) 157
Due from affiliate......................... 154 -- (154)(c) --
-------- -------- --------- --------
Total current assets.................. 3,648 3,974 (2,088) 5,534
Timberlands.................................. 248,804 352,137 3,114(d) 604,055
Property and equipment, net.................. 102 175 -- 277
Land subject to repurchase................... 3,000 -- -- 3,000
Deferred financing costs, net................ 3,932 6,478 (10,410)(e) 3,320
3,320(e)
-------- -------- --------- --------
Total assets....................... $259,486 $362,764 $ (6,064) $616,186
======== ======== ========= ========
LIABILITIES:
Current liabilities
Bridge loans............................... $ 85,000 $ 35,000 $(120,000)(e) $ --
Current portion of long-term debt.......... 139,297 5,000 (144,297)(e) --
Accounts payable and other accrued
liabilities............................. 1,999 268 (1,934)(b) 333
Accrued interest........................... 1,888 4,746 (6,634)(e) --
Due to affiliates.......................... 798 154 (154)(c) 798
Deferred revenue........................... 3,863 -- -- 3,863
Obligations under interest rate swaps...... -- 3,316 (1,658)(e) 1,658
-------- -------- --------- --------
Total current liabilities............. 232,845 48,484 (274,677) 6,652
Long-term debt............................... -- 247,950 (247,950)(e) 269,215
269,215(e)
Minority interest............................ 46,218 70,298 (43,886)(d) 61,722
(2,640)(e)
(1,907)(f)
(6,361)(g)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock............................... 1 -- 172(h) 173(h)
Additional paid-in capital................. -- -- 305,619(i) 311,980
(6,361) (g)
Accumulated deficit........................ (19,578) (3,968) (11,917)(e) (33,556)
1,907(f)
-------- -------- --------- --------
Total shareholders' equity
(deficit)........................ (19,577) (3,968) 302,142 278,597
-------- -------- --------- --------
Total liabilities and shareholders'
equity (deficit)................. $259,486 $362,764 $ (6,064) $616,186
======== ======== ========= ========
</TABLE>
The accompanying notes to pro forma condensed consolidated balance sheet
are an integral part of this balance sheet.
35
<PAGE> 41
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(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...................... 269,215(e)
--------
Total proceeds.................................... $601,215
========
Uses of proceeds:
Repayment of existing debt and accrued interest thereon... $ 518,881(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 certain interest rate swaps................ 2,505(e)
Partial redemption of minority interests.................. 47,000(d)
Fees and expenses associated with this offering........... 26,209(i)
-----------
Total uses of proceeds............................ $601,215
========
</TABLE>
(b) Represents the reversal of offering expenses incurred and accrued as of
March 31, 1999. 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 March 31, 1999, 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 $3,114 premium over the minority unitholders'
account balances at March 31, 1999. The premium represents additional
consideration related to Strategic Timber's
36
<PAGE> 42
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
MARCH 31, 1999
(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......................................... 144,297
Pioneer credit facility................................... 247,950
Accrued interest.......................................... 6,634
--------
$518,881
========
</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. The
closing of the new credit facility is conditioned on the closing of this
offering. We expect to immediately borrow $269,215 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 31, 2004. The remaining $69,215 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 31, 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 $10,410 at March 31, 1999. 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 interest rate swaps with a
notional principal of $50,000 at the date of this offering, while
maintaining swaps with a notional principal of $150,000 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 $2,505, which
represents the fair value of these swaps as of March 31, 1999.
37
<PAGE> 43
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
MARCH 31, 1999
(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 $14,557, of which $2,640 will be
allocated to minority interests, as shown below:
<TABLE>
<S> <C> <C>
Write-off of unamortized debt issuance costs......................... $10,410
Early termination fees............................................... 3,300
Termination of interest rate swaps, net of amount applied against
obligations under interest rate swaps of $1,658.................... 847
-------
Total extraordinary loss............................................. 14,557
Multiply by: minority interest percentage................... 18.1%
-------
Portion allocated to minority interests..................... 2,640
-------
Extraordinary loss................................................... $11,917
=======
</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...................................... (5,127)
--------
$305,619
========
</TABLE>
38
<PAGE> 44
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
MARCH 31, 1999
(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>
39
<PAGE> 45
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:
Depletion, depreciation and
amortization............. 397 5,734 12,789 (6,787) 2,551(c) 14,742
58(d)
Cost of timberland and
property sold............ 7 -- 2,536 (957) 671(c) 2,257
Cost of products sold...... -- 43 45,498 (34,485) -- 11,056
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) -- 13,517(e) (18,426)
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) 11,992 (18,342)
Income tax (provision)
benefit.................... -- -- 336 -- (336)(g) --
-------- ------- -------- -------- ------- -----------
Income (loss) from
continuing operations
before minority
interest............... (17,207) (4,610) (7,402) (779) 11,656 (18,342)
Minority interest............ 2,863 2,587 12 (12) (4,030)(h) 1,420(h)
-------- ------- -------- -------- ------- -----------
Income (loss) from
continuing
operations............. $(14,344) $(2,023) $ (7,390) $ (791) $ 7,626 $ (16,922)
======== ======= ======== ======== ======= ===========
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 statements of
operations are an integral part of this statement.
40
<PAGE> 46
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
---------------------
STRATEGIC STRATEGIC PRO FORMA
TIMBER TIMBER II ADJUSTMENTS(B) PRO FORMA
--------- --------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Timber sales................................ $ 2,694 $ 5,032 $ -- $ 7,726
Property sales and other.................... 133 763 -- 896
------- ------- ------- -----------
Total revenues...................... 2,827 5,795 -- 8,622
Operating Expenses:
Depletion, depreciation and amortization.... 2,795 2,353 -- 5,148
Cost of property sold....................... -- 66 -- 66
Cost of products sold....................... -- 9 -- 9
Amortization of deferred financing costs.... 654 546 (1,034)(e) 166
Selling, general and administrative
expenses................................. 473 920 --(f) 1,393
------- ------- ------- -----------
Operating income (loss)............. (1,095) 1,901 1,034 1,840
Other Income (Expense):
Interest expense............................ (4,841) (5,976) 5,907(e) (4,910)
Interest income............................. 1 14 -- 15
------- ------- ------- -----------
Income (loss) from continuing
operations before minority
interest.......................... (5,935) (4,061) 6,941 (3,055)
Minority interest............................. 701 2,115 (2,262)(h) 554(h)
------- ------- ------- -----------
Income (loss) from continuing
operations........................ $(5,234) $(1,946) $ 4,679 $ (2,501)
======= ======= ======= ===========
Basic and diluted loss from continuing
operations per share: $ (0.14)(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 statements of
operations are an integral part of this statement.
41
<PAGE> 47
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31,
1999
(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 these Pro Forma Condensed Consolidated Statements 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...................... 269,215(e)
--------
Total proceeds.................................... $601,215
========
Uses of proceeds:
Repayment of Strategic Timber II debt and accrued interest
thereon................................................ $ 292,696(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 certain interest rate swaps................ 2,505(e)
Partial redemption of minority interests.................. 47,000
Fees and expenses associated with this offering........... 26,209 375,030
----------- --------
Excess cash proceeds................................. $226,185
========
</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 Statements of Operations
assume that the formation transactions and this offering occur on January
1, 1998, but do 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 $69,215 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 $69,215 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
42
<PAGE> 48
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31,
1999 -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
$200,000 term loan and a revolving line of credit of up to $175,000. The
closing of the new credit facility is conditioned on the closing of this
offering. We expect to immediately borrow $269,215 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 31, 2004. The remaining $69,215 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 31, 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 $18,426 for the year ended December 31,
1998 and $4,910 for the three months ended March 31, 1999. The adjustments
shown on the accompanying Pro Forma Condensed Consolidated Statements of
Operations are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
<S> <C> <C>
Expected interest expense................................... $ 18,426 $ 4,910
Less: previously recognized interest expense of:
Strategic Timber..................................... (13,781) (4,841)
Strategic Timber II.................................. (5,657) (5,976)
Pioneer.............................................. (12,505) --
-------- -------
$(13,517) $(5,907)
======== =======
</TABLE>
An increase in the interest rates of 1/8% would yield additional annual
interest expense of approximately $337, 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 adjustments shown on the accompanying Pro Forma Condensed
Consolidated Statements of Operations are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
<S> <C> <C>
Pro forma amortization expense.............................. $ 664 $ 166
Less: previously recognized amortization expense of:
Strategic Timber..................................... (1,743) (654)
Strategic Timber II.................................. (499) (546)
Pioneer.............................................. (177) --
------- -------
$(1,755) $(1,034)
======= =======
</TABLE>
As a result of the termination of our existing debt and some of our
interest rate swaps, we will record an extraordinary loss from the early
extinguishment of debt. This loss would approximate $14,557 using
historical amounts reported in the Strategic Timber and Strategic Timber II
consolidated financial statements as of March 31, 1999. 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
for the year ended December 31, 1998, which shows only pro forma income
(loss) from continuing operations.
43
<PAGE> 49
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31,
1999 -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(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.
(h) Represents the minority interest charges, assuming minority ownership in
Strategic Timber Partners of 18.1% after the formation transactions and
this offering. Amounts are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1999
------------ -------------
<S> <C> <C>
Loss from continuing operations before minority interest
expense................................................... $(18,342) $(3,055)
Multiply by: minority interest percentage................... 18.1% 18.1%
-------- -------
Minority interest before dividends.......................... 3,327 554
Less: Dividend on minority interests........................ (1,907) --
-------- -------
Minority interest........................................... $ 1,420 $ 554
======== =======
</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 and for the three months ended March
31, 1999, 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 entirety of both reporting periods.
Diluted loss from continuing operations per share is calculated by dividing
loss 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 these calculations
because 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.
44
<PAGE> 50
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 and as of and for the three months ended March 31,
1999,
- Strategic Timber II as of and for the period from inception (October 9,
1998) to December 31, 1998 and as of and for the three months ended March
31, 1999 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
the remainder of 1999 and beyond. The primary reason for this belief is that the
1998 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. In addition, the 1998 pro
forma results are based on actual harvest levels during the period, which are
well below expected future levels. The pro forma results for the three months
ended March 31, 1999 are also based on actual harvest levels, which are somewhat
below expected future levels because we had only recently begun marketing
efforts for our timber.
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. The results of operations prior to April 27, 1998
are not included in the 1998 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 are actively focusing 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,
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<PAGE> 51
detailed mapping, preparation of timber sales plans and initiation of commercial
marketing activities. We 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 1998 financial statements of Strategic Timber.
The 1998 pro forma condensed consolidated statement of operations also
excludes 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. This Option A plan establishes a
decade-by-decade harvesting model for the Coastal forest. Under the Option A
plan, we must file with the Department timber harvest plans with respect to
specific tracts from which we propose to sell timber for harvest. The 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 have recently agreed with the Department that we
will conduct a complete re-inventory of our Coastal forest in 1999, and that we
will revise our maximum projected harvest levels under our Option A plan based
on that re-inventory. This revision is likely to cause us to decrease the
maximum projected harvests shown in that plan. The amount of any decrease may be
significant, although it is not possible to quantify until the re-inventory is
complete. Even though our timber sales plan calls for significantly lower
cutting and sales in the Coastal forest than the maximum harvests currently
shown in the Option A plan, we cannot be sure that the Department, as it
monitors, enforces and revises the Option A plan, will approve the sales we have
planned in each year. See "Risk Factors -- Forestry, environmental and
endangered species regulations restrict timber harvesting and may otherwise
restrict our ability to conduct our business," "Business and
Properties -- Initial Timberland Properties -- The California Timberlands" and
"-- Federal and State Regulations -- State Forestry Regulations."
For a description of our timber sales plan, see "Business and
Properties -- Initial Timberland Properties -- Timberland Management Strategy."
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
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<PAGE> 52
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 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. Due to the more favorable weather
that generally prevails in the second and third quarters and the related
increases in construction activity, we expect that our customers will harvest
more timber from our properties in those quarters than in the first and fourth
quarters. 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>
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<PAGE> 53
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.
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 and for the three months ended March 31, 1999. For the majority of 1998,
Strategic Timber deferred active harvesting on these timberlands to prepare for
full-scale commercial operations. During that 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. For
1998, 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 depletion on timber harvested.
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 $21.4 million at March 31, 1999.
Three Months Ended March 31, 1999
Revenues from timber sales for the three months ended March 31, 1999
totaled approximately $2.7 million. These revenues reflect that we began
commercial operations on the Louisiana property at the end of 1998 and began
actively marketing in the first quarter of 1999. Entering the first quarter, we
did not have any significant backlog of cutting contracts. Revenues were also
affected by winter weather, which limits harvesting and construction activity.
In addition, we recognized approximately $133,000 of revenues from hunting,
grazing and farming leases issued on the Louisiana property.
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<PAGE> 54
Cost of timber and property sold of approximately $2.8 million for the
three months ended March 31, 1999 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 an initial timber survey. Merchantable
timber volumes are adjusted for growth and harvest annually. Depletion rates
will be adjusted at that time and applied prospectively.
Amortization of deferred financing costs of approximately $654,000 for the
three months ended March 31, 1999 represent the amortization of costs incurred
to obtain financing used for our acquisitions and working capital requirements.
These costs are being amortized over the term of the underlying debt, ranging
from one to five years.
General and administrative expenses of approximately $475,000 for the three
months ended March 31, 1999 are comprised primarily of salaries and forestry
management fees. Forestry management fees represent costs paid to outside
vendors for managing and tracking available timber. For the three months ended
March 31, 1999, these fees totaled approximately $115,000.
Interest expense of approximately $4.8 million for the three months ended
March 31, 1999 primarily represents interest costs on Strategic Timber's
existing debt, net of the effect of an interest rate swap used to hedge certain
exposures to variable interest rates. See "-- Market Risk."
Minority interest of approximately $701,000 for the three months ended
March 31, 1999 is the share of the operating partnership's income and losses
attributable to the minority unitholders of the operating partnership.
Period from April 21, 1998 (Inception) to December 31, 1998
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.
Cost of timber sold of approximately $403,000 represents depletion on
timber harvested.
Amortization of deferred financing costs of approximately $1.7 million for
the period represents the amortization of costs incurred to obtain financing
used for our acquisition and working capital requirements.
General and administrative expenses of approximately $1.8 million for the
period are composed primarily of consulting and forestry management fees 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.
Interest expense of approximately $13.8 million for the period 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 for the period is the share
of the operating partnership's losses attributable to the minority unitholders
of the operating partnership.
STRATEGIC TIMBER TRUST II, LLC
Our initial shareholders formed Strategic Timber II in September 1998 to
acquire Pioneer, which held approximately 363,000 acres of timberland in the
Pacific Northwest as of March 31, 1999. 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
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<PAGE> 55
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 and for the three months ended March 31, 1999. The operating
results through December 31, 1998 reflect only limited harvesting activities, as
Strategic Timber II primarily focused on transitioning systems and personnel in
the months immediately following the acquisition. Operating results for the
first quarter of 1999 reflect that Strategic Timber II began commercial
operation of most of the Pacific Northwest properties other than the Coastal
forest.
Three Months Ended March 31, 1999
For the three months ended March 31, 1999, Strategic Timber II recognized
revenues of approximately $5.8 million. Approximately $4.1 million relates to
amounts recognized under a timber deed with Sierra Pacific Industries, Inc.
Under this timber deed, Sierra Pacific obtained the right to harvest on a 7,623
acre tract on our Commander forest. Sierra Pacific paid approximately $4.1
million for this right, none of which is refundable. Sierra Pacific bears the
risk of loss of the timber for the duration of the contract, which expires on
October 15, 2000. In accordance with our accounting policies, we recognized
revenues for the entire value of the contract when the contract was signed. See
"-- Commitments and Contingencies."
We also recorded revenues of approximately $982,000 related to the sales of
timber on our Commander forest and our Oregon and Washington timberlands.
Excluding amounts harvested under the timber deed with Sierra Pacific, harvests
for the first quarter of 1999 were approximately 2.8 million board feet. Future
harvest levels are expected to increase in the near-term as the winter rainy
season subsides and we continue to integrate the newly acquired properties into
our on-going operations.
In March 1999, we sold 2,300 acres of grasslands and timberlands on our
Oregon property for approximately $737,000. These lands contained a nominal
amount of timber. We also recognized approximately $26,000 of revenues during
the three months ended March 31, 1999 from hunting, grazing and farming leases
issued on our Pacific Northwest properties.
Subsequent to the end of the first quarter, we sold 9,771 acres of ranch
lands on our Oregon property for $700,000. Mason, Bruce & Girard has confirmed
that these lands contained no merchantable timber.
Cost of timber sold of approximately $2.2 million for the three months
ended March 31, 1999 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. Merchantable timber volumes
are adjusted for growth and harvest annually. Depletion rates will be adjusted
at that time and applied prospectively.
Cost of property sold of approximately $181,000 for the three months ended
March 31, 1999 primarily represents the cost basis of the timberlands we sold
and closing costs on these sales.
Amortization of deferred financing costs of approximately $546,000 for the
three months ended March 31, 1999 represent the amortization of costs incurred
to obtain financing used for our acquisitions and working capital requirements.
These costs are being amortized over the term of the underlying debt, ranging
from one to five years.
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<PAGE> 56
General and administrative expenses of approximately $938,000 for the three
months ended March 31, 1999 are comprised primarily of salaries, professional
fees, property taxes and reimbursement of expenses incurred by Strategic Timber
on behalf of Strategic Timber II. 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 fees
for management services provided by Strategic Timber on behalf of Strategic
Timber II. During the three months ended March 31, 1999, Strategic Timber II
recognized expenses of approximately $337,000 for reimbursed costs.
Interest expense of approximately $6.0 million for the three months ended
March 31, 1999 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 Risks."
Minority interest of approximately $2.1 million for the three months ended
March 31, 1999 is the share of the operating partnership's income and losses
attributable to the minority unitholders of the operating partnership.
Period from October 9, 1998 (Inception) to December 31, 1998
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.
Cost of timber sold of approximately $5.7 million for the period primarily
represents depletion on timber harvested.
Amortization of deferred financing costs of approximately $499,000 for the
period represent the amortization of costs incurred to obtain financing used for
our acquisition and working capital requirements.
General and administrative expenses of approximately $1.7 million for the
period 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 for the period 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 for the period 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.
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<PAGE> 57
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 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 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.
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<PAGE> 58
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.
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.
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 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.
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<PAGE> 59
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.
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 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
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<PAGE> 60
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. We reduced the commitment under the operating
partnership credit facility from $215.0 million to $155.0 million effective
March 17, 1999. The commitment remains 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 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 June 28, 1999,
we expect to recognize an extraordinary loss of approximately $12.5 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
some of our existing swaps with a notional principal of $50.0 million. Assuming
the terminations had occurred on March 31, 1999, we would have recognized a loss
of approximately $2.5 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. The closing of the new credit
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facility is conditioned on the completion of this offering. Assuming net
proceeds from the initial public offering of $305.8 million, we expect to borrow
at the time of closing approximately $70.9 million under the revolving line of
credit and all $200.0 million of the term loan. Strategic Timber 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 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 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.
Any significant decline in the prices we expect to realize from sales of
our timber or any significant reduction in the volume of our sales, or both,
could cause us not to comply with our financial covenants in the new credit
facility. This could preclude us from making distributions or utilizing funds
for acquisitions.
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. Because we intend to conduct our business with
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minimal cash on hand, we intend to fund the entire amount of our recently
declared distribution with borrowings under our new credit facility or with
proceeds from this offering. See "Distribution Policy."
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 believe that our initial working capital, together with cash flow from
operations and 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
As of June 15, 1999, we have entered into contracts providing for harvests
for 1999 valued at approximately $46.3 million. We have recognized $13.9 million
under these contracts for harvests that have been conducted to date. We have
contracts with ten separate buyers, including Boise Cascade Corporation, Hunt
Forest Products, Inc., Louisiana-Pacific Corp., Sierra Pacific Industries, Inc.,
Temple-Inland Inc. and Wiergate Forest Products Company. These contracts provide
for 1999 harvests of up to 453,000 tons of timber from the Louisiana property
and up to 91.1 million board feet of timber from our Pacific Northwest
properties.
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. In June 1999, Strategic Timber II agreed in
principle to sell to Frontier Resources LLC, another entity controlled by Mr.
Demers, the right to harvest on approximately 15,000 additional acres on our
Oregon property pursuant to a timber deed. See "Transactions with Related
Parties."
In March 1999, Strategic Timber II entered into a timber deed granting
Sierra Pacific Industries, Inc. the right to harvest on a 7,623 acre tract on
our Commander forest. Similar to the timber deed with Kinzua Resources, Sierra
Pacific may harvest designated timber on the defined acreage during the period
of the contract, but upon expiration of the contract, any standing timber on the
tract reverts back to Strategic Timber II. Sierra Pacific bears the risk of loss
of the timber for the duration of the contract, which expires on October 15,
2000. Sierra Pacific paid approximately $4.1 million for these rights, none of
which is refundable. Accordingly, Strategic Timber II recognized revenues for
the full value of this contract during the three months ended March 31, 1999.
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
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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."
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 -- Forestry, 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. We made capital
expenditures of approximately $176,000 in the first quarter of 1999. We expect
to make additional capital expenditures of approximately $1.9 million during the
remainder of 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 June 28, 1999, the aggregate amount
that we would distribute to our shareholders would approximate $66,000, or
$76,000 if the underwriters exercise in full their over-allotment option.
Because we intend to conduct our business with minimal cash on hand, we intend
to fund this distribution with borrowings under our new credit facility or with
proceeds from this offering. The new credit facility permits borrowing to fund
distributions. The distribution will not cause a default under our new credit
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 March 31, 1999
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.
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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, 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.
<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>
The aggregate fair value of our swaps was approximately ($7.6 million) at
December 31, 1998.
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
some of our existing swap agreements with aggregate notional principal amounts
of $50.0 million. Assuming that we terminated these agreements on March 31,
1999, we would have recognized a loss of approximately $2.5 million before
allocation to minority interests.
It is likely that the total notional amount of our remaining swaps 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 new 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. For
the three months ended March 31, 1999, these amounts were $208,056 and $281,571,
respectively.
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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 154 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.
As of March 31, 1999, we owned approximately 445,000 acres of timberlands
in the states of California, Louisiana, Oregon and Washington. Our timberlands
contain a variety of species of merchantable timber. Merchantable timber is an
inventory classification. Timber is considered merchantable in a particular
timber market when it meets the minimum size, length and usable volume that is
suitable for sale for commercial uses in that market.
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, plywood
or veneer. The remaining 13% of our merchantable timber can be sold for less
valuable commercial uses than our sawtimber. Less mature timber, or timber that
contains substantial defects, may be processed into pulp and paper or used to
manufacture plywood substitutes. Smaller trees may be used for fence poles or
agricultural stakes. Other commercial applications include split wood products
and firewood.
The fact that timber is included in our volumes as "merchantable" does not
mean that we either could or would want to harvest it immediately. Timber
included in our merchantable inventory may be subject to restrictions that would
prevent immediate harvesting, or, because of current market conditions, may not
produce a profit for us if it is cut immediately. In general, we intend to
manage our forests so that we do not harvest timber that meets only minimum
standards of merchantability. Our plans will call for allowing most of our
timber to grow into larger size classifications, so we can realize greater
value. From time to time, however, we will thin a given timber stand by removing
crooked, unhealthy or lower value trees. We will do this to improve the health
of the remaining trees and to provide more space for them to grow. We will sell
timber that is harvested through thinning for lower value uses, even though
these sales may not produce a profit for us.
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 75% of our total
merchantable timber volume consists of premium softwood species, such as
Douglas-fir, young-growth redwood, southern pine, ponderosa pine and cedar.
Approximately 13% of our merchantable timber volume consists of other softwood
species and approximately 12% consists of hardwood species. Young-growth
redwoods are redwoods that have regrown after a virgin stand or any successor
stand was logged or otherwise removed.
Our timberlands are located near approximately 136 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,
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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.
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 13% 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
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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 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.
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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
- 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
358 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.
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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
- 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.
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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 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.
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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 timberlands is well
diversified by geographic region. Approximately 35% of our merchantable timber
is located in Louisiana, 34% in coastal California, 15% in Oregon, 11% 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, young-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 young-growth redwood, ponderosa pine
and cedar account for approximately 16%, 7% and 2% of our merchantable timber,
respectively. Other softwood species account for approximately 13% and hardwood
accounts for approximately 12% 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. Young-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
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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 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 volumes that are not immediately available for harvest
under applicable law. Mason, Bruce & Girard and Canal Forest Resources have
confirmed with us that our practices for determining merchantable timber volumes
in each of our market areas 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
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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, young-growth redwood, ponderosa and sugar pine, hemlock, cedar
and white fir are the most prevalent softwood species on our timberlands.
Currently, approximately 12% of the volume of our merchantable timber consists
of hardwoods.
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. Young-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. Young-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,
young-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 decreased 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
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<PAGE> 76
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.
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.
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<PAGE> 77
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>
The table below provides estimated average prices and costs for our
predominant commercial species of timber on a property-by-property basis as of
March 31, 1999, 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 estimated average prices as of March 31, 1999 for
timber on our timberlands. Prices for standing trees and logs vary by the size
of trees cut as well as the diameter and length of logs that can be cut from the
trees. Our independent forestry consultants have taken into account the size
distribution of the trees in our forests to estimate the average prices for
timber on our timberlands. The tree prices in the following table are generally
consistent with our sales of standing trees in each area by species. 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. All prices are
expressed in dollars per thousand board feet, except the price for Louisiana
pine timber, which is in dollars per ton.
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<PAGE> 78
<TABLE>
<CAPTION>
PRICES OF PREDOMINANT COMMERCIAL SPECIES OF TIMBER BY PROPERTY
--------------------------------------------------------------
AS OF MARCH 31, 1999
------------------------------------
STANDING TREE LOGGING DELIVERED
PRICES COSTS LOG PRICES
------------- ------- ----------
<S> <C> <C> <C>
CALIFORNIA -- COASTAL FOREST
Young-growth redwood........................................ $508 $282 $790
Douglas-fir................................................. 238 282 520
CALIFORNIA -- COMMANDER FOREST
Douglas-fir................................................. 275 245 520
White fir................................................... 205 245 450
Ponderosa pine.............................................. 285 245 530
LOUISIANA
Slash and loblolly pine..................................... 48 -- --
OREGON
Ponderosa pine.............................................. 286 184 470
Douglas-fir................................................. 278 182 460
White fir................................................... 234 176 410
WASHINGTON
Western hemlock............................................. 368 144 512
Douglas-fir................................................. 471 180 651
Cedar....................................................... 835 135 970
</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 for trees comparable to ours. 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, a non-profit industry
publication. Canal Forest Resources also analyzed prices paid by mills in the
market area for the Louisiana timberlands. These analyses involved the direct
comparison of the timber in our forest to similar timber that was sold recently
in the same market, in terms of tree diameter and height, site operability and
distance to markets. 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.
We have used the methods set forth above to determine prices for timber in
our markets, rather than using prices from our own timber cutting contracts, due
to our limited operating history. Thus, the prices set forth in the table should
only be considered an approximation of the prices we would have received as of
March 31, 1999. Historical prices have fluctuated in the long term and in the
short term and therefore the prices shown in the table above should not be
considered indicative of the prices we will receive in the future.
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<PAGE> 79
INITIAL TIMBERLAND PROPERTIES
We have summarized below our initial timber portfolio, as of March 31,
1999, 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 Young-growth redwood, 856 million board feet(b)(c) 1,927,000
Douglas-fir
Commander 43,313 Douglas-fir, white 288 million board feet(b) 647,000
fir, ponderosa pine
Louisiana 81,991 Slash and loblolly 5.7 million tons (d) 1,996,000
pine
Oregon 230,323 Ponderosa pine, 371 million board feet(b)(e) 835,000
Douglas-fir, white
fir
Washington 10,822 Western hemlock, 129 million board feet(b) 290,000
Douglas-fir, cedar
------- ---------
Total 445,475 5,695,000
======= =========
</TABLE>
- ---------------
(a) We maintain and track timber volumes 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 growth to
December 31, 1998 and for harvest to March 31, 1999.
(c) Merchantable timber volume on our Coastal forest includes timber with a
minimum diameter of at least 5 inches, measured at the top of the cut
segment. Most mills in the Coastal forest market area currently require a
6-inch minimum diameter top for logs they purchase from outside sources.
Our current timber sales plan does not contemplate harvesting timber from
the Coastal forest that will not produce at least one log with a 6-inch
minimum diameter top. If we used a 6-inch minimum diameter top
specification, merchantable timber volume for the Coastal forest would be
approximately 713 million board feet. See "-- Methodology for Determining
Inventories -- The Pacific Northwest Properties."
Merchantable timber volume on our Coastal forest includes approximately
113.8 million board feet, or approximately 256,000 cunits, of hardwood. We
expect to generate little if any profit, and could generate a loss, from
sales of hardwood from our Coastal forest. See "-- Initial Timberland
Properties -- The California Timberlands."
(d) Verified by Canal Forest Resources in July 1998, as adjusted for harvest
and growth to March 31, 1999.
(e) Includes approximately 15.2 million board feet, or approximately 34,306
cunits of merchantable timber volume 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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<PAGE> 80
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 in each of 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. Practical limitations on immediate access to a particular
tract may occur, for example, if we have recently harvested an area adjacent to
the site and are required, either by regulation or by good forestry practices,
to wait until these recently cut areas are fully stocked with established trees
before harvesting the tract. Similarly, endangered species restrictions may
require adjacent timber stands to develop into suitable habitat before we can
harvest a particular tract. These limitations may extend for three years or
longer. Our inclusion in our inventory of trees that are subject to these
limitations on harvest is in accordance with industry standards for calculating
timber inventories, 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 waterway 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 become
available for harvest through the change in location of endangered species or
when density of surrounding stands change.
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 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 merchantable timber volumes, Mason, Bruce & Girard has
confirmed that it used standards of length and diameter recognized in each of
the markets of our Pacific Northwest properties. Recognized standards for
determining merchantable timber volumes 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 log specifications demanded by mills in our market areas change from
time to time. In general, as log and lumber prices increase, mills accept
smaller diameter logs. The mills in each of our California, Oregon and
Washington markets, except for the Coastal forest 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. In the Coastal forest
market area, most mills are currently specifying logs with a 6-inch minimum
diameter top for logs they purchase from outside sources, although many of these
same mills use smaller logs produced from their own timberlands. Mills
throughout the Coastal forest market area have historically purchased logs with
as small as a 5-inch top, and two mills are currently purchasing logs of that
size. Our current timber sales plan contemplates harvest of timber from the
Coastal forest that will produce at least one log with a 6-inch minimum diameter
top.
Mason, Bruce & Girard has used the 5-inch minimum diameter top in
estimating merchantable timber volumes for all of our Pacific Northwest forests.
That firm used a 6-inch minimum diameter top when it estimated merchantable
timber volumes for a prior owner of the Coastal forest in connection with
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<PAGE> 81
its 1996 Option A submission to the California Department of Forestry and Fire
Protection, as this was an accepted specification used in growth and harvest
modelling at the time. Mason, Bruce & Girard has confirmed that this 5-inch
diameter merchantability specification is in accord with industry standards
currently employed by timber owners and professional foresters and appraisers in
determining merchantable timber volumes in the Coastal forest area. If we used a
6-inch specification on our Coastal forest, we would show our merchantable
timber volumes for that forest to be approximately 713 million board feet,
instead of 856 million board feet using the 5-inch minimum 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 our California and Oregon markets, a
tree is merchantable and is included in our inventory if it contains at least
one 16-foot log with a 5-inch minimum 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 actual harvests and estimated growth before inclusion. These sample
inventories (including some re-inventories of the same areas) covered an
aggregate of approximately 216,000 acres in Oregon, 11,000 acres in Washington,
75,000 acres in the Coastal forest and 43,000 acres in the Commander forest 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 the standard of 5% or 10%, as the case may be. Similarly, at the 90%
confidence interval, 90 times out of 100 the reinventoried volumes would vary by
no more than 5% or 10%, as the case may be. These statistical reliability
indicators relate to total volume and not to the volume for individual species.
No statistical tests were performed to determine the reliability of volume
estimates for each species. These tests would be unusual and, to the knowledge
of 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 properties.
Stand projection systems are computer-generated growth models commonly used by
forestry professionals to forecast specific tree stand growth. These projections
are based on historical growth data of tree stands and species in specific soil
types and climates. Mason, Bruce & Girard used its proprietary Stand Projection
System to project growth on our Washington and Oregon properties. Mason, Bruce &
Girard estimated growth rates on the Commander forest based on the collective
experience of its personnel on similar properties in the interior coastal range
of California, the Siskiyou mountains and Sierra Nevada range.
Growth rates on the Coastal forest were determined as part of the Option A
process using a computer model accepted in the industry and by the California
Department of Forestry and Fire Protection for projecting Coastal tree growth.
This model is called the Cooperative Redwood Yield Project Timber Output
Simulator. Mason, Bruce & Girard applied to this model relevant site fertility
statistics and harvest, hardwood removal, silvicultural and thinning data
provided by prior owners of the Coastal forest to project the forest's future
growth. The Option A plan requires that we establish sample plots to monitor
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<PAGE> 82
tree growth. The results we obtain from monitoring these plots are used as the
basis for possible adjustments in the volume projections in the Option A plan,
as well as possible adjustments in the management of the Coastal forest. Our
projected conifer growth depends, among other factors, on the long-term
reduction of hardwood stocking levels, which is required under our Option A plan
and timber harvest plans. We did not complete hardwood removal from a small
portion of our Coastal forest by December 31, 1998 as required by one of our
timber harvest plans. We expect that on the affected acres hardwood will be
treated during 1999. We are in the process of reviewing hardwood treatment areas
to ensure future compliance with these requirements. The small number of acres
on which our hardwood treatment has been delayed does not affect growth rates
modeled on the Coastal forest by Mason, Bruce & Girard.
The Louisiana Property
Canal Forest Resources' estimate of merchantable timber volume was
determined using customary sampling methods and standards used in Louisiana. 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>
Minimum top diameter is measured inside the tree bark at the top of the log
cut, to the nearest whole inch. We classify poles, a premium-priced form of
timber, as sawtimber.
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 nine months
between June 30, 1998 and March 31, 1999. 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.
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<PAGE> 83
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
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 Restrictions
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 -- Forestry, 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 where harvesting is not entirely prohibited, but is currently
restricted -- for instance at specified times of the year, to protect mating
seasons, or with volume limitations, to preserve minimum shade or nesting areas.
<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>
78
<PAGE> 84
<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 in 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. By operating
these properties as part of an integrated whole, we anticipate that we can
enhance the productivity of our overall portfolio. 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. We currently plan to sell approximately 67% of the
current merchantable timber volume on our Louisiana property by the end of 2003.
Over this same period, growth will add to merchantable timber volume. At the end
of 2003, we expect to have approximately 54% of the merchantable inventory we
now have in Louisiana. By contrast, the Coastal forest is relatively immature
and is growing at its peak rate. We currently plan to sell by the end of 2003
approximately 11% of the current merchantable timber volume in our Coastal
forest. At the end of 2003, after accounting for timber growth, we expect to
have approximately 127% of the merchantable inventory we now have in the Coastal
forest.
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 the Commander and Washington properties calls for
removing large portions of this slower-growing timber in the next three to five
years and replanting with seedlings selected for superior genetic
characteristics to increase the stands' total growth rates. We currently plan to
sell by the end of 2003 approximately 49% of the current merchantable timber
volume in our Commander forest. At the end of 2003, after accounting for timber
growth, we expect to have approximately 74% of the merchantable timber volume we
now have in the Commander forest. Due to its relatively small size, we do not
manage the Washington property to generate consistent annual harvests. We
currently plan to sell by the end of 2003 approximately 80% of the current
merchantable timber volume on the Washington property. At the end of 2003, after
accounting for timber growth, we expect to have approximately 31% of the
merchantable timber volume we now have on the Washington property.
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 reflects moderate initial harvests over the next five
years to allow the younger trees to mature and to maintain the property's
overall balanced condition. We currently plan to sell by the end of 2003
approximately 39% of the current merchantable timber volume on our Oregon
property. At the end of 2003, after accounting for timber growth, we expect to
have approximately 91% of the merchantable timber volume we now have on the
Oregon property.
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<PAGE> 85
California, Oregon and Washington require us to submit an application or
harvest plan to the appropriate state agency prior to harvesting. We currently
have obtained regulatory approval of timber harvest plans that allow harvest in
1999 of approximately 4.7 million board feet of softwood timber and
approximately 0.7 million board feet of hardwood timber from our Coastal forest
and approximately 32.1 million board feet of timber from our Commander forest.
We have submitted timber harvest plans to the California Department of Forestry
and Fire Protection for the remainder of the timber on the Commander forest we
plan to sell in 1999, although we cannot assure you that these plans will be
approved. We are in the process of preparing timber harvest plans for future
harvests on our Coastal and Commander forests. We have also received approval to
harvest in 1999 approximately 38 million board feet of timber from our
Washington property. In accordance with customary practice in Oregon, we will
file required notices with the Oregon Department of Forestry prior to allowing
harvests on our Oregon property. We have received or expect to receive approvals
to permit us to achieve our timber sales plan in 1999. We will continue to seek
approvals to allow us to achieve our timber sales plan in future years, but we
cannot assure you that we will be able to obtain any future approvals, including
those we have applied for but that have not yet been approved. See "Risk
Factors -- Forestry, environmental and endangered species regulations restrict
timber harvesting and may otherwise restrict our ability to conduct our
business" and "-- Federal and State Regulations -- State Forestry Regulations."
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. Our current timber sales plan is consistent with
applicable California, Louisiana, Oregon and Washington law. This timber sales
plan is subject to change on account of local market conditions, regulatory
restrictions or other reasons, and we expect to make frequent adjustments in our
plan to take account of these factors. 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.................... 9 20 13 30 18 40 24 55 24 55
Commander.................. 47 105 40 90 27 60 13 30 13 30
Louisiana (thousand tons).... 695 245 738 260 780 275 780 275 823 290
Oregon (million board
feet)...................... 22 50 22 50 33 75 33 75 33 75
Washington (million board
feet)...................... 33 75 24 55 20 45 16 35 11 25
--- --- --- --- ---
Total................ 495 485 495 470 475
=== === === === ===
</TABLE>
Our currently approved timber harvest plans for the Coastal forest
contemplate the harvesting of both softwoods and hardwoods. The current market
for hardwood timber from the Coastal forest is primarily for wood chips, which
is a low-value use for this timber. Of the nine million board feet to be
harvested from the Coastal forest in 1999, approximately two million board feet
consists of hardwoods. We sell hardwoods from this forest so we can grow more
valuable softwoods in place of hardwoods. We expect to generate little if any
profit, and could generate a loss, from hardwood sales. We expect that future
timber harvest plans for the Coastal forest will also include both hardwood and
softwood harvesting. See "-- Initial Timberland Properties -- The California
Timberlands."
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. Our
future
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<PAGE> 86
timber sales plans are subject to change due to regulatory restrictions, changes
in demand for our timber, timber growth, acquisitions of additional timberlands,
or other reasons. Based on our current assessment of these issues, we anticipate
that the timber sales from our initial timberlands will average approximately
435,000 cunits per year from 1999 to 2008. We expect timber sales from these
timberlands for the period from 2009 to 2018 to average approximately 255,000
cunits per year. Under our timber sales plan, we expect the growth on our
initial timberlands to increase from approximately 350,000 cunits in 1999 to
approximately 430,000 cunits in 2009 and to average approximately 485,000 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 6.3 million cunits in 2009, but will increase to
approximately 8.2 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.
As of June 15, 1999, we have entered into contracts providing for harvests
for 1999 valued at approximately $46.3 million. We have recognized $13.9 million
under these contracts for harvests that have been conducted to date. We have
contracts with ten separate buyers, including Boise Cascade Corporation, Hunt
Forest Products, Inc., Louisiana-Pacific Corp., Sierra-Pacific Industries, Inc.,
Temple-Inland Inc. and Wiergate Forest Products Company. These contracts provide
for 1999 harvests of up to 453,000 tons of timber from the Louisiana property
and up to 91.1 million board feet of timber from our Pacific Northwest
properties.
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 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.
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.
Furthermore, although we believe our overall timber sales plan is reasonable, we
cannot have the same level of confidence in the plan that we would have if we
had operated our timberlands for a number of years.
THE LOUISIANA PROPERTY
As of March 31, 1999, the Louisiana property consisted of approximately
82,000 acres located in southwest Louisiana. According to Canal Forest
Resources, approximately 79% of the acreage of the Louisiana property contains
merchantable timber. Canal Forest Resources estimates that approximately 83% of
all pine sawtimber on the Louisiana property is mature pine. Mature timber, or
timber over 35 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.
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<PAGE> 87
Our Louisiana property is categorized as set forth below, as verified by
Canal Forest Resources as of March 31, 1999:
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........................................... 2,944 3.6%
------ -----
Total Acreage..................................... 81,991 100.0%
====== =====
</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. See "-- Our Customers."
Estimated timber volumes on the Louisiana property are as set forth below,
as verified by Canal Forest Resources as of March 31, 1999.
LOUISIANA PROPERTY
MERCHANTABLE TIMBER BY PRODUCT
<TABLE>
<CAPTION>
TIMBER INVENTORY AMOUNT PERCENTAGE
---------------- --------- ----------
(TONS)
<S> <C> <C>
Pine sawtimber.............................................. 3,809,882 67.3%
Pine pulpwood............................................... 787,661 13.9%
Hardwood sawtimber.......................................... 513,165 9.1%
Hardwood pulpwood........................................... 550,566 9.7%
--------- -----
Total............................................. 5,661,274 100.0%
========= =====
</TABLE>
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."
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<PAGE> 88
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 2.3% 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.
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
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<PAGE> 89
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 contained approximately
122,000 acres as of March 31, 1999.
The Coastal forest is located in Mendocino and Sonoma Counties, California,
and consists of two blocks. Together, they included approximately 79,000 acres
of coastal timberland as of March 31, 1999.
According to Mason, Bruce & Girard, there are 23 mills in the North Coast
resource area, the market area for our Coastal forest. These mills consume an
estimated 902 million board feet annually. Our planned timber sales in 1999 from
our Coastal forest would represent 1.0% 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]
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<PAGE> 90
Our Coastal forest is categorized as set forth below, as verified by Mason,
Bruce & Girard as of March 31, 1999:
COASTAL FOREST
ACREAGE BY TYPE
<TABLE>
<CAPTION>
TYPE ACRES PERCENTAGE
---- ----- ----------
<S> <C> <C>
Merchantable and pre-merchantable timber.................... 77,366 97.9%
Open/non-forested........................................... 1,660 2.1%
--- -----
Total Acreage.......................................... 79,026 100.0%
===== =====
</TABLE>
There are few acres in the Coastal forest that are dedicated to or that
contain only pre-merchantable timber as a separate age class. All forested acres
have multiple age categories that could be classified as merchantable or
pre-merchantable timber.
The Coastal forest contains a blend of species as shown below, as verified
by Mason, Bruce & Girard as of March 31, 1999:
COASTAL FOREST
MERCHANTABLE TIMBER BY SPECIES
<TABLE>
<CAPTION>
SPECIES BOARD FEET PERCENTAGE
------- ----------------- ----------
(IN THOUSANDS)
-----------------
<S> <C> <C>
Young-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 California. The above amounts include timber with a minimum
diameter at the top of the cut segment of at least 5 inches. Mason, Bruce &
Girard has confirmed that this 5-inch diameter merchantability specification is
in accord with industry standards currently employed by timber owners and
professional foresters and appraisers in determining merchantable timber volumes
in the Coastal forest area. In the Coastal forest market area, most mills are
currently purchasing logs with a minimum 6-inch diameter top, although many of
these same mills are processing smaller logs produced from their own
timberlands. Our current timber sales plan contemplates harvest of timber from
our Coastal forest that will produce at least one log with a minimum of a 6-inch
diameter top. If we used a 6-inch specification, we would show merchantable
timber inventory for the Coastal forest of approximately 713 million board feet.
See "-- Methodology for Determining Inventories -- The Pacific Northwest
Properties."
The determination of softwood 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.
We expect to generate little if any profit, and could generate a loss, from
hardwood sales. Regulations require us to remove a substantial portion of the
hardwoods in this forest. If we cannot sell these hardwoods, we would be
required to remove them, which would result in out-of-pocket costs to us. We
plan to grow more valuable softwoods in place of hardwoods.
Young-growth redwood timber is the predominant species in our Coastal
forest. Young-growth redwoods are redwoods that have regrown after a virgin
stand or any successor stand was logged or otherwise removed. Some tracts
containing these redwoods in our Coastal forest have been harvested more
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<PAGE> 91
than once. Referring to redwood as "young-growth" does not denote its age, but
rather indicates that it is not virgin or "old growth" redwood. Young-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. 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. The Option A plan is
a management tool that 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 Department. The 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. Harvests may not
exceed 10% of the acreage of the property in one year. We intend to manage the
property in accordance with the Option A plan, as revised based on a
re-inventory of the Coastal forest in 1999. We expect to increase harvesting
volumes and revenues from the Coastal forest as compared with recent historical
results, while limiting our harvests over a ten-year measurement period to
growth within that same period. See "Risk Factors -- Forestry, environmental and
endangered species regulations restrict timber harvesting and may otherwise
restrict our ability to conduct our business" and "-- Federal and State
Regulations -- State Forestry Regulations -- Coastal Forest."
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, under an option agreement signed
by Pioneer before we acquired that company, the former owner may have 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
may exercise this option only if the property sold will be used for vineyards or
orchards. We are not obligated, and we do not intend, to re-convey the property
if, in our reasonable discretion, we determine that the sale will adversely
affect our operation of the Coastal forest as a tree farm. The option agreement
provides that any disagreement between ourselves and the former owner regarding
the operation of the option will be resolved by binding arbitration.
As of March 31, 1999, the Commander forest consisted 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 45% various pine and fir
species. We intend to harvest over-mature timber to reinvigorate stand growth in
the Commander forest.
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<PAGE> 92
Our Commander forest is categorized as set forth below, as verified by
Mason, Bruce & Girard as of March 31, 1999:
COMMANDER FOREST
ACREAGE BY TYPE
<TABLE>
<CAPTION>
TYPE ACRES PERCENTAGE
- ---- ------ ----------
<S> <C> <C>
Merchantable and pre-merchantable timber.................... 39,771 91.8%
Open/non-forested........................................... 3,542 8.2%
------ -----
Total Acreage.......................................... 43,313 100.0%
====== =====
</TABLE>
There are few acres in the Commander forest that are dedicated to or that
contain only pre-merchantable timber as a separate age class. All forested acres
have multiple age categories that could be classified as merchantable or
pre-merchantable timber.
The Commander forest contains a blend of species as shown below, as
verified by Mason, Bruce & Girard as of March 31, 1999. 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................................................. 130,155 45.3%
White fir................................................... 70,260 24.4%
Ponderosa pine.............................................. 36,008 12.5%
Incense cedar............................................... 27,629 9.6%
Sugar pine.................................................. 23,019 8.0%
Other pine.................................................. 539 0.2%
------- ------
Total............................................. 287,610 100.0%
======= ======
</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 California. 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 19 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 964 million
board feet of timber annually. Our planned timber sales in 1999 from the
Commander forest would represent 4.9% of this amount.
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<PAGE> 93
[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 for the
Commander forest, 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
As of March 31, 1999, our Oregon timberlands consisted of approximately
230,000 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 356 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.
In addition to the 356 million board feet of timber on land that we own in
eastern Oregon, we also own approximately 15 million board feet of merchantable
timber under timber deeds in Oregon and
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<PAGE> 94
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.
Our Oregon property is categorized as set forth below, as verified by
Mason, Bruce & Girard as of March 31, 1999:
OREGON TIMBERLANDS
ACREAGE BY TYPE
<TABLE>
<CAPTION>
TYPE ACRES PERCENTAGE
---- ------- ----------
<S> <C> <C>
Merchantable and premerchantable timber..................... 204,502 88.8%
Open/non-forested........................................... 25,821 11.2%
------- -----
Total Acreage..................................... 230,323 100.0%
======= =====
</TABLE>
There are few acres on our Oregon property that are dedicated to or that
contain only pre-merchantable timber as a separate age class. All forested acres
have multiple age categories that could be classified as merchantable or
pre-merchantable timber.
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
March 31, 1999. 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.............................................. 148,084 39.9%
Douglas-fir................................................. 119,064 32.1%
White fir................................................... 62,707 16.9%
Western larch............................................... 29,815 8.0%
Lodgepole pine.............................................. 9,742 2.6%
Other....................................................... 1,892 0.5%
------- ------
Total............................................. 371,304 100.0%
======= ======
</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 Oregon. 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 13 mills within the market area of our
Oregon timberlands is estimated to be 473 million board feet. Our planned timber
sales in 1999 from Oregon timberlands would represent 4.7% of this amount.
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<PAGE> 95
[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.
In March 1999, we sold 2,300 acres of grasslands and timberlands on our
Oregon property. In April 1999, we sold 9,771 acres of ranch lands on our Oregon
property. These two tracts contained nominal amounts of timber.
THE WASHINGTON TIMBERLANDS
Our Washington timberlands are located in Lewis and Grays Harbor counties
and consisted, as of March 31, 1999, 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.
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<PAGE> 96
Our Washington property is categorized as set forth below, as verified by
Mason, Bruce & Girard as of March 31, 1999:
WASHINGTON TIMBERLANDS
ACREAGE BY TYPE
<TABLE>
<CAPTION>
TYPE ACRES PERCENTAGE
---- ----- ----------
<S> <C> <C>
Merchantable timber......................................... 5,611 51.8%
Pre-merchantable timber..................................... 4,153 38.4%
Open/non-forested........................................... 1,058 9.8%
------ -----
Total Acreage..................................... 10,822 100.0%
====== =====
</TABLE>
The Washington timberlands contain a blend of species as shown below, as
verified by Mason, Bruce & Girard as of March 31, 1999. 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 Washington. 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 1.05 billion board feet. Our planned timber sales
from our Washington timberlands in 1999 would represent approximately 3.1% 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.
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<PAGE> 97
[GRAPHIC DEPICTING LOCATION OF WASHINGTON TIMBERLANDS AND CONVERSION
FACILITIES IN MARKET AREA OF WASHINGTON TIMBERLANDS APPEARS HERE]
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.
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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. 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.
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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 of the portions of our timberlands we intend to harvest, 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 and prohibited for each property. These surveys were
performed for the purpose of harvesting specific tracts and were conducted in
accordance with U.S. Fish & Wildlife Service specifications and state forestry
regulations. For example, the survey process for northern spotted owls includes
obtaining information from state agencies and adjacent landowners, determining
the habitat type using aerial photographs, estimating the impact on the habitat
under the proposed silvicultural plan, preparing a layout for the survey based
on the foregoing information, and conducting the surveys on the ground. The
column entitled "Approximate Number of Known Restricted Acres" includes all
acres known by us to be subject to some restriction, even if the restriction is
seasonal or temporary.
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF APPROXIMATE NUMBER OF
PROPERTY SPECIES KNOWN TO BE PRESENT KNOWN RESTRICTED ACRES KNOWN PROHIBITED ACRES
- -------- --------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
California -- Coastal
Forest.................... Coho salmon
American peregrine falcon
Northern spotted owl
5,730 2,104
California -- Commander
Forest.................... Steelhead trout
Bald eagle
American peregrine falcon
Northern spotted owl
2,875 155
Louisiana................... None 0 0
Oregon...................... Bull trout
Bald eagle
8,231 2,245
Washington.................. Bald eagle
Coho salmon
Steelhead trout
977 20
------ -----
Total............. 17,813 4,524
</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
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
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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. These surveys also showed that the Longview tract is within the
range of the bald eagle, peregrine falcon and marbled murrelet, though none of
these species is currently known to reside on the property. The range of a
species is broader than the species's current habitat. 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
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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. The survey also
showed that the Willits Woods/Williams Ranch tract is within the range of the
bald eagle and the marbled murrelet, though neither 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 neither species is 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.
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.
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Coastal Forest. We manage our Coastal forest under an "Option A" timber
management 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. We expect to increase harvesting volumes and
revenues from the property as compared with recent historical results, while
limiting our harvests over a 10-year measurement period to growth within that
same period. The Option A plan is a management tool and is not intended to be in
any way a timberland evaluation or appraisal. It:
- provides a detailed survey of the volume and species of timber in the
forest, and
- provides an estimate of the timber that can be harvested in the period
and the long-term sustained yield plan for the forest, while accounting
for limits imposed by consideration of other factors, such as
environmental and wildlife concerns.
The Option A plan was originally submitted in 1994 and took four years to
be approved by the California Department of Forestry and Fire Protection in its
present form. During this four-year period, the prior landowner engaged in
extensive negotiations and discussions with the Department regarding the
procedures for estimating the current tree volumes in the forest, as well as
expected growth rates. Environmental and silvicultural conditions, particularly
requirements on reducing levels of hardwoods in the forest, were reviewed,
revised and accepted by the Department.
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 Department. The 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 currently contemplates the harvest of up to approximately
40 million board feet of timber from the Coastal forest per year on average
through 2006. As discussed below, however, it is likely that the maximum
permitted harvest under our Option A plan will be reduced. Harvests also may not
exceed 10% of the acreage of the property in one year. Actual harvest plans will
be separately reviewed by the Department to ensure overall compliance with the
purpose of the plan. For the decade following 2006, the Option A plan, under
current inventory levels and growth projections, would allow up to approximately
56 million board feet to be harvested each year at the Coastal forest. In order
to ensure our objective and the state's goal of maximum sustained production of
high-quality timber products on our forest, we plan to conduct a new inventory
of the entire Coastal forest this year. This data will be used to adjust future
levels of harvest as appropriate. Meanwhile, we have reduced our current harvest
plans to allow for the data to be collected and analyzed. These harvest levels
are reflected in our timber sales plan. See "-- Timberland Management Strategy."
The California Department of Forestry and Fire Protection and we want a
sustained yield to be realized on this property, and the Department has agreed
that a reduced current harvest level, new inventory and modification to future
harvest levels based on the new inventory will achieve this objective.
We currently have obtained approval of timber harvest plans that allow
harvest of up to 4.7 million board feet of softwood timber and 0.7 million board
feet of hardwood timber from our Coastal forest. Even though we cannot obtain
approval for additional harvests under our Option A plan for 1999, we can apply
for approval of timber harvest plans under Option C. We expect to be able to
meet our timber sales plan for the Coastal forest for 1999 by obtaining
approvals under Option C. Option C will not be available after 1999. Thus, our
timber sales plan for the Coastal forest for 2000 and future years depends on
our completion of the new inventory of the Coastal forest and obtaining approval
of timber harvest plans under our revised Option A plan.
Sales and harvest levels are dependent on many factors, not all of which
are within our control, including market prices, technological and product
developments, forestry and environmental regulation, and buyer needs. All of
these factors are expected to change during the first decade of the operation of
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Option A. They may also change in different respects for each of our properties,
including the Coastal forest.
An Option A plan is reviewed annually by the Department. If the Department
determines that the inventory is no longer consistent with the Option A plan
projections, the Department may request a modification of the plan or it may
suspend or terminate the effectiveness of the plan. We have recently agreed with
the Department that we will conduct a complete re-inventory of our Coastal
forest in 1999, and that we will revise our maximum projected harvest levels
under our Option A plan based on that re-inventory. This revision is likely to
cause us to decrease the maximum projected harvests shown in that plan. The
amount of any decrease may be significant, although it is not possible to
quantify until the re-inventory is complete. The Option A plan requires that we
establish sample plots to monitor tree growth. The results we obtain from
monitoring these plots are used as the basis for possible adjustments in the
volume projections in the Option A plan, as well as possible adjustments in the
management of the Coastal forest. Our projected conifer growth depends, among
other factors, on the long-term reduction of hardwood stocking levels, which is
required under our Option A plan and timber harvest plans. We did not complete
hardwood removal from a small portion of our Coastal forest by December 31, 1998
as required by one of our timber harvest plans. We are in the process of
reviewing hardwood treatment areas to ensure future compliance with these
requirements.
The Option A plan required us to submit the first data results from our
monitoring of these sample plots by March 1, 1999. When we revisited the sample
plots to collect the necessary data, we could not find all the trees in the
sample that had been tagged with tree identification numbers, and, for that
reason, we were not able to collect the necessary data. We responded to this
problem by working with the Department to develop a new sampling design. We used
this new design to perform a more intense inventory than would have been
possible under the original design. This process delayed our submission of data
until April 22, 1999.
During the period from March 1, 1999 until April 22, 1999, the Option A
plan could not have been used as the basis for submitting timber harvest plans
for the Coastal forest. By letter dated May 4, 1999, the Department confirmed
that our submission of the inventory data reinstated the Option A plan. As
discussed above, however, the Department will not approve new timber harvest
plans submitted under the Option A plan for the Coastal forest until a
re-inventory of the property is complete. See "Risk Factors -- Forestry,
environmental and endangered species regulations restrict timber harvesting and
may otherwise restrict our ability to conduct our business."
Commander Forest. 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 California Department
of Forestry and Fire Protection timber harvest plans for specific tracts within
the Commander forest containing sustained production and environmental impact
analyses. We currently have obtained approval of timber harvest plans that allow
harvest of up to 32.1 million board feet from our Commander forest. 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, a landowner must notify the
Oregon Department of Forestry no less than 15 days prior to beginning a timber
harvest. The notice must describe the activities to be conducted, including
estimated harvest volumes and proximity to sensitive areas. A landowner must
also submit a written harvest plan if harvesting operations will be conducted
within:
- 100 feet of a large lake or stream, or
- 300 feet of any "resource site," which is defined to include sensitive
bird sites, significant wetlands and sites used by threatened or
endangered species,
or if a clear-cut will exceed 120 acres or a planned road fill is over 15 feet
deep for permanent stream crossings. A landowner may not commence harvesting
until the Department of Forestry approves the notice and, if applicable, the
harvest plan. The Department of Forestry has 5 working days after expiration
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of the 15-day notice period to approve, object to or request more information
regarding a notice or a harvest plan. Failure by the Department of Forestry to
issue a decision within this 5-day period is deemed approval to begin
harvesting. A person who is adversely affected by a harvest plan and files
comments on the harvest plan may request a hearing before the Oregon State Board
of Forestry. In accordance with customary practice in Oregon, we will file
required notices with the Department of Forestry prior to allowing harvests on
our Oregon property.
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. A landowner may not commence
harvesting until the Department of Natural Resources approves the application.
If the Department of Natural Resources does not issue a decision on an
application by the end of the 30- or 60-day period, the application is deemed
approved. 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. We currently have obtained approval to harvest up to
approximately 38 million board feet from our Washington property.
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,
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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 timberlands and selling standing timber.
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. 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. Mason, Bruce & Girard has estimated that 24,400 acres of our California
timberlands may be subject to limitations and obligations imposed by these
regulators as a result of their TMDL analysis, which could include harvesting
restrictions on these acres, such as increasing the size of waterway buffer
zones to prevent erosion. We expect that the TMDL process 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.
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
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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 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.
As of June 15, 1999, we have entered into contracts providing for harvests
for 1999 valued at approximately $46.3 million. We have recognized $13.9 million
under these contracts for harvests that have been conducted to date. We have
contracts with ten separate buyers, including Boise Cascade
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Corporation, Hunt Forest Products, Inc., Louisiana-Pacific Corp., Sierra-Pacific
Industries, Inc., Temple-Inland Inc. and Wiergate Forest Products Company. These
contracts provide for 1999 harvests of up to 453,000 tons of timber from the
Louisiana property and up to 91.1 million board feet of timber from our Pacific
Northwest properties.
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.
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.
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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 June 15, 1999, these entities employed 34 salaried full-time
employees. Of these employees, eight are part of senior management, 18 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.
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 included, as of March 31, 1999, a
total of approximately 445,000 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 $270.9 million of indebtedness, or $224.6 million if the
underwriters exercise in full their over-allotment option. This will constitute
approximately 37.9% of our total market capitalization after giving effect to
this offering, or 31.2% 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.......... 37 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
The Board of Directors and shareholders of Strategic Timber have approved
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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<PAGE> 119
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 approximately 19.3 million board feet of a
variety of timber species from our eastern Oregon timberlands to Kinzua
Resources, LLC, a sawmill company controlled by Gregory M. Demers, for $5.6
million. Mr. Demers is currently a beneficial owner of more than 5% of our
partnership units. In June 1999, we agreed in principle to sell to Frontier
Resources LLP, another entity controlled by Mr. Demers, another 18.0 million
board feet of our eastern Oregon timber, consisting of a variety of species, for
$4.0 million. These transactions with affiliates of Mr. Demers were conducted at
arm's length and at market prices. Kinzua Resources has regularly acquired and
used wood from the eastern Oregon timberlands in the past, and we may continue
to sell timber from these lands to entities controlled by Mr. Demers 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.
After the completion of this offering, we will pay approximately $798,000
to Broom Resource Investments, LLC. This amount includes reimbursement of
approximately $320,000 in expenses paid on behalf of Strategic Timber, $440,000
in fees due to BRI in connection with our acquisition of the Louisiana property
and approximately $38,000 in interest, based on a simple interest rate of 5.5%
per annum. 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.
Sutherland Asbill & Brennan LLP was involved in our founding and was one of
our original shareholders. In connection with the formation of Strategic Timber
and Strategic Timber II, Sutherland Asbill & Brennan LLP received 46,651 shares
of common stock and interests in Strategic Timber II that will be converted into
51,617 partnership units in Strategic Timber Partners at the closing of this
offering. Sutherland Asbill & Brennan LLP has served as our legal counsel since
the formation of Strategic Timber in April 1998. Since that time, we have paid
Sutherland Asbill & Brennan LLP $1,185,000 in fees for legal services rendered.
At the closing of this offering, we will pay that firm an additional $1,275,000
in fees for legal services in connection with this offering and our obtaining
the new credit facility.
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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. The common stock has been approved 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. Limited partners have no
right to manage or control the business of Strategic Timber Partners.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a unit from a limited
partner, grants to the general partner a power of attorney to execute and file
documents that it deems appropriate 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.
These transfer restrictions do not prohibit Strategic Timber from transferring
units to affiliates, or in connection with its pledge of its shares of Strategic
Timber Operating Co. to our lenders.
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,
- 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.
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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. 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.
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 or other
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damages to Strategic Timber Partners or any limited partner for losses sustained
or liabilities incurred as a result of errors in judgment or any act or omission
if it is in good faith, and not the result of intentional misconduct or a
knowing violation of law. In addition, Strategic Timber Operating Co. is not
liable for any misconduct or negligence on the part of its 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 damages 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 this 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 a written affirmation from the
indemnitee that the indemnitee has satisfied the requisite standard of conduct,
and an agreement that the indemnitee will repay the expenses advanced if it is
ultimately determined that the standard of conduct was not met. 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.
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
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- 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
- 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
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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.
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
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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 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 --
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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 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.
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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.
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.
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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.
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
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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 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
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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. 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.
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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' 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.
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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 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
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- 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 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.
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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 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.
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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
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.
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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.
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.
148
<PAGE> 154
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.
149
<PAGE> 155
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.
150
<PAGE> 156
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.
The common stock has been approved 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 $5.1
million.
151
<PAGE> 157
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 the related 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 the related
market, 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. The reports of Mason, Bruce & Girard and Canal
Forest Resources have been filed as exhibits to the registration statement of
which this prospectus forms a part.
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 will
receive 51,617 partnership units in Strategic Timber Partners. See "Transactions
with Related Parties."
152
<PAGE> 158
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.
153
<PAGE> 159
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.
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 desired trees.
"Pre-commercial thinning" refers to thinning that
does not produce merchantable timber.
154
<PAGE> 160
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.
YOUNG-GROWTH REDWOOD Redwood that has regrown after a virgin stand or
any successor stand was logged or otherwise
removed. These redwoods may be harvested for
commercial purposes. Some tracts containing these
redwoods in our Coastal forest have been harvested
more than once. Referring to redwood as
"young-growth" does not denote its age, but rather
indicates that it is not virgin or "old growth"
redwood. This term is synonymous with the industry
term "second-growth redwood."
155
<PAGE> 161
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 Sheets -- December 31, 1998 and March
31, 1999 (unaudited)................................... F-3
Consolidated Statements of Operations -- For the Period
from Inception (April 21, 1998) to December 31, 1998
and the Three Months Ended March 31, 1999
(unaudited)............................................ F-4
Consolidated Statements of Changes in Shareholders'
Deficit -- For the Period from Inception (April 21,
1998) to December 31, 1998 and the Three Months Ended
March 31, 1999 (unaudited)............................. F-5
Consolidated Statements of Cash Flows -- For the Period
from Inception (April 21, 1998) to December 31, 1998
and the Three Months Ended March 31, 1999
(unaudited)............................................ 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-14
Consolidated Balance Sheets -- December 31, 1998 and March
31, 1999 (unaudited)................................... F-15
Consolidated Statements of Operations -- For the Period
from Inception (October 9, 1998) to December 31, 1998
and the Three Months Ended March 31, 1999
(unaudited)............................................ F-16
Consolidated Statements of Changes in Members'
Deficit -- For the Period from Inception (October 9,
1998) to December 31, 1998 and the Three Months Ended
March 31, 1999 (unaudited)............................. F-17
Consolidated Statements of Cash Flows -- For the Period
from Inception (October 9, 1998) to December 31, 1998
and the Three Months Ended March 31, 1999
(unaudited)............................................ F-18
Notes to Consolidated Financial Statements................ F-19
Pioneer Resources, LLC and Subsidiaries Consolidated
Financial Statements:
Report of Independent Public Accountants.................. F-26
Consolidated Balance Sheets -- December 31, 1996 and
1997................................................... F-27
Consolidated Statements of Operations -- Years Ended
December 31, 1996 and 1997 and the Period from January
1, 1998 to October 8, 1998............................. F-28
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-29
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1996 and 1997 and the Period from January
1, 1998 to October 8, 1998............................. F-30
Notes to Consolidated Financial Statements................ F-31
</TABLE>
F-1
<PAGE> 162
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> 163
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1999
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 310,284 $ 1,099,917
Trade accounts receivable................................. 56,708 459,844
Prepaid expenses.......................................... 1,311,988 1,933,552
Due from affiliates....................................... -- 153,802
------------ ------------
Total current assets.............................. 1,678,980 3,647,115
TIMBERLANDS................................................. 251,597,386 248,804,406
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... 8,395 93,488
Furniture and fixtures.................................... 5,918 8,661
Leasehold improvements.................................... 2,820 2,820
------------ ------------
17,133 104,969
Less -- Accumulated depreciation.......................... (1,588) (3,478)
------------ ------------
15,545 101,491
LAND SUBJECT TO REPURCHASE (Note 5)......................... 3,000,000 3,000,000
DEFERRED FINANCING COSTS, net............................... 4,586,000 3,932,375
------------ ------------
Total assets...................................... $260,877,911 $259,485,387
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bridge loan............................................... $ 85,000,000 $ 85,000,000
Revolving line of credit.................................. 133,787,034 139,297,034
Accounts payable and other accrued liabilities............ 1,688,260 1,999,646
Accrued interest.......................................... 2,053,397 1,887,513
Due to affiliates......................................... 2,236,244 797,921
Deferred revenue.......................................... 3,537,015 3,862,600
------------ ------------
Total current liabilities......................... 228,301,950 232,844,714
MINORITY INTEREST........................................... 46,919,256 46,218,093
SHAREHOLDERS' DEFICIT:
Common stock ($.01 par value, 200,000,000 shares
authorized, 671,770 shares issued and outstanding)..... 1,000 1,000
Accumulated deficit....................................... (14,344,295) (19,578,420)
------------ ------------
(14,343,295) (19,577,420)
------------ ------------
Total liabilities and shareholders' deficit....... $260,877,911 259,485,387
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-3
<PAGE> 164
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (APRIL 21, 1998) TO DECEMBER 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(APRIL 21, THREE MONTHS
1998) TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
-------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Timber and property sales................................. $ 322,954 $ 2,693,774
Other..................................................... 183,985 132,979
------------ -----------
Total revenues.................................... 506,939 2,826,753
OPERATING EXPENSES:
Cost of timber and property sold.......................... 402,614 2,792,980
Amortization of deferred financing costs.................. 1,743,000 653,625
General and administrative expenses....................... 1,820,288 474,942
------------ -----------
Operating loss.................................... (3,458,963) (1,094,794)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (13,781,366) (4,841,108)
Interest income........................................... 33,324 614
------------ -----------
Loss before minority interest..................... (17,207,005) (5,935,288)
MINORITY INTEREST IN LOSS OF SUBSIDIARY PARTNERSHIP......... 2,862,710 701,163
------------ -----------
Net loss.......................................... $(14,344,295) $(5,234,125)
============ ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
F-4
<PAGE> 165
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (APRIL 21, 1998) TO DECEMBER 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1999
<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)
Net loss(unaudited).................................. -- (5,234,125) (5,234,125)
------ ------------ ------------
SHAREHOLDERS' DEFICIT, March 31, 1999(unaudited)....... $1,000 $(19,578,420) $(19,577,420)
====== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
F-5
<PAGE> 166
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (APRIL 21, 1998) TO DECEMBER 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION THREE MONTHS
(APRIL 21, 1998) ENDED
TO DECEMBER 31, MARCH 31,
1998 1999
---------------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (14,344,295) $(5,234,125)
Adjustments to reconcile net loss to net cash used in
operating activities --
Minority interest in net loss of subsidiary
partnership.......................................... (2,862,710) (701,163)
Depletion.............................................. 402,614 2,792,980
Depreciation and amortization.......................... 1,744,458 655,515
Non-cash compensation.................................. 1,000 --
Changes in assets and liabilities:
Increase in trade accounts receivable.................. (56,708) (403,136)
Increase in prepaid expenses........................... (7,223) (621,564)
Increase in accounts payable and other accrued
liabilities.......................................... 383,625 311,386
Increase (decrease) in accrued interest................ 2,053,397 (165,884)
Increase (decrease) in due from/to affiliates.......... 2,236,244 (1,592,125)
Increase in deferred revenue........................... 3,537,015 325,585
------------- -----------
Net cash used in operating activities............. (6,912,583) (4,632,531)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of timberlands.................................. (205,218,034) --
Purchases of property and equipment....................... (17,133) (87,836)
------------- -----------
Net cash used in investing activities............. (205,235,167) (87,836)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge loan................................. 85,000,000 --
Proceeds from borrowings under revolving line of credit... 138,787,034 5,510,000
Repayments of revolving line of credit.................... (5,000,000) --
Deferred financing costs.................................. (6,329,000) --
------------- -----------
Net cash provided by financing activities......... 212,458,034 5,510,000
------------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 310,284 789,633
CASH AND CASH EQUIVALENTS, beginning of period.............. -- 310,284
------------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 310,284 $ 1,099,917
============= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 11,727,968 $ 4,969,071
============= ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
F-6
<PAGE> 167
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
statements of operations and minority interest in the accompanying consolidated
balance sheets.
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> 168
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, growth, and harvest volumes.
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> 169
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 $21,400,000
(unaudited) at March 31, 1999.
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 and for the three months ended March 31, 1999, though, we did
not incur any state or local income tax liabilities due to our operating losses.
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 statements 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.
UNAUDITED INTERIM FINANCIAL INFORMATION --
The financial information as of and for the three months ended March 31,
1999 is unaudited, but includes all adjustments, consisting of only normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position as of March 31, 1999 and our operations and cash flows for
the three months then ended. Operating results for the three months ended March
31, 1999 are not necessarily indicative of results that may be expected for the
entire year.
2. DEBT:
We have the following debt instruments outstanding as of December 31, 1998
and March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revolving credit line(a)...................... $133,787,034 $139,297,034
Bridge loan(b)................................ 85,000,000 85,000,000
------------ ------------
$218,787,034 $224,297,034
============ ============
</TABLE>
(a) At December 31, 1998, we had a senior revolving credit line that provided a
maximum borrowing of $215,000,000, subject to formula. Effective March 17,
1999, we reduced the maximum borrowing amount to $155.0 million. 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% and 7.50% at December 31, 1998 and March 31, 1999,
respectively. 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.
F-9
<PAGE> 170
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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% and 9.00% at December 31, 1998 and March 31,
1999, respectively. 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 March 31, 1999. In addition, we are not permitted to make
distributions to our shareholders under these debt agreements.
All debt has been classified as current in the accompanying consolidated
balance sheets. 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 and March 31, 1999.
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% and 5.00% at December 31, 1998 and March 31, 1999,
respectively. At December 31, 1998 and March 31, 1999, we have recorded a
payable of approximately $77,000 and $87,000, respectively, 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 March 31, 1999. At this date, the fair
value of this swap is a payable of approximately $1,556,000.
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:
The limited partnership agreement of Strategic Timber Partners granted
certain redemption and put rights to Louisiana Timber Partners including (a) at
the closing of an initial public offering, Louisiana Timber Partners will be
redeemed in cash or shares with a value of approximately $50 million and (b) if
certain events had not occurred by January 31, 1999 (e.g. the filing of a
registration statement with the SEC), Louisiana Timber Partners had the right to
put its units to Strategic Timber for $50 million in cash. In accordance with
the above rights, 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.
F-10
<PAGE> 171
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 March 31, 1999, 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 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, in 1998 we 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 sheets. 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 were $5,000 and $5,250
per month during 1998 and 1999, respectively. These payments totaled
approximately $40,000 and $16,000 (unaudited) for the period from inception to
December 31, 1998 and for the three months ended March 31, 1999, respectively.
We also have a payable of approximately $760,000 and $798,000 (unaudited)
at December 31, 1998 and March 31, 1999, respectively, 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. This payable bears interest at an annual simple rate of 5.5%.
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 and for
the three months ended March 31, 1999, we charged Strategic Timber Trust II, LLC
approximately $624,000 and $337,000 (unaudited), respectively, for services
provided, and costs paid, on their behalf.
F-11
<PAGE> 172
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 or for the three months ended
March 31, 1999.
7. NON-CASH INVESTING AND FINANCING ACTIVITIES:
At our inception, our founding shareholders received 587,798 shares of
common stock in exchange for services valued at approximately $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, as we
believed that the fair value of the shares issued was more reliably measurable
than the value of the services rendered.
In addition, at our inception, 46,651 shares of our common stock were
issued to our outside legal counsel. These shares were issued for services
rendered in connection with the conceptual development of Strategic Timber's
initial REIT structure. These services were performed prior to our April 21,
1998 formation and were viewed by us and outside legal counsel as being of
comparable value to the activities performed by the other founding shareholders.
Accordingly, we valued these services at a de minimis amount based on the
estimated initial fair value of Strategic Timber, as we believed that the fair
value of the shares issued was more reliably measurable than the value of the
services rendered.
On June 15, 1998, we issued 37,321 shares to an employee who joined our
company on that date. Similar to those issued to our founding shareholders,
these shares were issued in exchange for services rendered. These services were
valued at a de minimis amount. The value of these services was determined based
on the estimated fair value of Strategic Timber at the date the shares were
issued, as we believed that the fair value of the shares issued was more
reliably measurable than the value of the services rendered.
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.
8. MAJOR CUSTOMERS:
For the period ended December 31, 1998, all of our timber sales were
derived from two customers and were limited to salvage operations. For the three
months ended March 31, 1999, sales to four customers accounted for 33.2%, 23.8%,
20.6% and 15.6% of our total revenues during the period.
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.
We are 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.
F-12
<PAGE> 173
STRATEGIC TIMBER TRUST, INC. AND SUBSIDIARIES
(A GEORGIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The closing of the new credit facility is conditioned
on the completion of this offering. 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 June 28,
1999, the aggregate amount that we would distribute to our shareholders would
approximate $66,000, or $76,000 if the underwriters exercise in full their
over-allotment option. We intend to fund this distribution using borrowings
under our new credit facility. The new credit facility permits borrowing to fund
distributions. The distribution will not cause us to be in default under our new
credit facility.
Strategic Timber has been informed by its insurance carrier that, based on
a preliminary analysis, any amounts ultimately due by Strategic Timber under a
potential casualty claim would not be covered by Strategic Timber's insurance
policies. We are currently in discussions with our insurance carrier regarding
their preliminary conclusions. We believe that we are entitled to, and intend to
pursue, coverage under our insurance policies. If we are unsuccessful in
obtaining insurance coverage for this potential claim, we estimate that the
total exposure to Strategic Timber would range from approximately $350,000 to
$700,000.
F-13
<PAGE> 174
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-14
<PAGE> 175
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1999
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,842,918 $ 3,781,804
Trade accounts receivable................................. 108,857 34,710
Prepaid expenses.......................................... 145,837 157,584
Due from affiliate........................................ 1,476,244 --
------------ ------------
Total current assets.............................. 7,573,856 3,974,098
TIMBERLANDS................................................. 354,298,144 352,136,526
PROPERTY AND EQUIPMENT:
Vehicles.................................................. 123,166 123,166
Machinery and equipment................................... 93,390 99,236
------------ ------------
216,556 222,402
Less -- Accumulated depreciation.................. (30,892) (47,099)
------------ ------------
185,664 175,303
DEFERRED FINANCING COSTS, net............................... 7,024,096 6,478,333
------------ ------------
Total assets...................................... $369,081,760 $362,764,260
============ ============
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Bridge loan............................................... $ 35,000,000 $ 35,000,000
Current portion of long-term debt......................... 2,500,000 5,000,000
Accounts payable and other accrued liabilities............ 530,126 268,114
Accrued interest.......................................... 4,844,870 4,745,923
Due to affiliate.......................................... -- 153,802
Obligations under interest rate swaps..................... 3,316,300 3,316,300
------------ ------------
Total current liabilities......................... 46,191,296 48,484,139
LONG-TERM DEBT.............................................. 252,500,000 247,950,000
MINORITY INTEREST........................................... 72,413,153 70,298,483
MEMBERS' DEFICIT............................................ (2,022,689) (3,968,362)
------------ ------------
Total liabilities and members' deficit............ $369,081,760 $362,764,260
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-15
<PAGE> 176
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (OCTOBER 9, 1998) TO DECEMBER 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 9, 1998) THREE MONTHS ENDED
TO DECEMBER 31, MARCH 31,
1998 1999
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Timber sales.............................................. $ 9,017,504 $ 5,032,376
Property sales............................................ -- 736,500
Other..................................................... -- 25,736
----------- -----------
Total Revenues.................................... 9,017,504 5,794,612
OPERATING EXPENSES:
Cost of timber sold....................................... 5,746,026 2,228,717
Cost of property sold..................................... -- 180,629
Amortization of deferred financing costs.................. 499,116 545,763
General and administrative expenses....................... 1,737,587 938,270
----------- -----------
Operating income.................................. 1,034,775 1,901,233
OTHER INCOME (EXPENSE):
Interest expense.......................................... (5,656,745) (5,975,627)
Interest income........................................... 12,434 14,051
----------- -----------
Loss before minority interest..................... (4,609,536) (4,060,343)
MINORITY INTEREST IN LOSS OF SUBSIDIARY PARTNERSHIP......... 2,586,847 2,114,670
----------- -----------
Net loss.......................................... $(2,022,689) $(1,945,673)
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
F-16
<PAGE> 177
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (OCTOBER 9, 1998) TO DECEMBER 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<S> <C>
MEMBERS' EQUITY, October 9, 1998............................ $ --
Net loss.................................................. (2,022,689)
-----------
MEMBERS' DEFICIT, December 31, 1998......................... (2,022,689)
Net loss (unaudited)...................................... (1,945,673)
-----------
MEMBERS' DEFICIT, March 31, 1999 (unaudited)................ $(3,968,362)
===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
F-17
<PAGE> 178
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 9, 1998) TO DECEMBER 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 9, THREE MONTHS
1998) TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
-------------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (2,022,689) $(1,945,673)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Minority interest in net loss of subsidiary
partnership........................................... (2,586,847) (2,114,670)
Depletion.............................................. 5,703,128 2,337,203
Depreciation and amortization.......................... 530,008 561,970
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable....... (108,857) 74,147
Increase in prepaid expenses........................... (145,837) (11,747)
(Increase) decrease in due from/to affiliate........... (1,476,244) 1,630,046
Increase (decrease) in accounts payable and other
accrued liabilities................................... 530,126 (262,012)
Increase (decrease) in accrued interest................ 4,844,870 (98,947)
------------- -----------
Net cash provided by operating activities......... 5,267,658 170,317
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Pioneer.................................... (295,000,000) --
Reforestation activities.................................. (101,272) (175,585)
Purchases of property and equipment....................... (116,556) (5,846)
------------- -----------
Net cash used in investing activities............. (295,217,828) (181,431)
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 --
Repayments of revolving line of credit.................... -- (2,050,000)
Deferred financing costs.................................. (4,206,912) --
------------- -----------
Net cash provided by financing activities......... 295,793,088 (2,050,000)
------------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 5,842,918 (2,061,114)
CASH AND CASH EQUIVALENTS, beginning of period.............. -- 5,842,918
------------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 5,842,918 $ 3,781,804
============= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 811,875 $ 6,074,574
============= ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
F-18
<PAGE> 179
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 363,000 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.
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-19
<PAGE> 180
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 sheets and minority interest expense in the accompanying consolidated
statements 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 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, growth, and harvest volumes.
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-20
<PAGE> 181
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 statements of operations.
UNAUDITED INTERIM FINANCIAL INFORMATION --
This financial information as of and for the three months ended March 31,
1999 is unaudited, but includes all adjustments, consisting of only normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position as of March 31, 1999 and our operations and cash flows for
the three months then ended. Operating results for the three months ended March
31, 1999 are not necessarily indicative of results that may be expected for the
entire year.
2. DEBT:
We have the following debt instruments outstanding as of December 31, 1998
and March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Revolving credit line(a)................................ $ 55,000,000 $ 52,950,000
Term loan(b)............................................ 200,000,000 200,000,000
Bridge loan(c).......................................... 35,000,000 35,000,000
------------ ------------
$290,000,000 $287,950,000
============ ============
</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% and
7.57% at December 31, 1998 and March 31, 1999, respectively, while the
remaining portion bears interest at the base rate plus a margin, 8.75% and
7.50% at December 31, 1998 and March 31, 1999 respectively. 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 will
be put in place at the time of the offering, conditioned on the closing of
the offering.
F-21
<PAGE> 182
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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% and 7.57% at December 31,
1998 and March 31, 1999, respectively. 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 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 March 31, 1999.
Contractual maturities of debt 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 and March 31, 1999.
F-22
<PAGE> 183
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 MARCH 31, MARCH 31,
COUNTERPARTY AMOUNT PAYS RECEIVES 1999 1999
- ------------ ------------ ------- ------------- ---------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
First Union................. $ 25,000,000 6.69% 3 month LIBOR 5.06% $(1,299,048)
Bank of America............. 25,000,000 6.69% 3 month LIBOR 5.06% (1,206,329)
ABN Amro.................... 50,000,000 5.77% 3 month LIBOR 5.06% (424,215)
------------
$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 from September 30, 2003 to October
14, 2003. At December 31, 1998 and March 31, 1999, we have recorded a payable of
approximately $189,000 and $250,000 (unaudited), respectively, related to the
net interest payment due, with the offsetting charge applied to interest
expense.
We have also 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
F-23
<PAGE> 184
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 March 31, 1999, we do not have any material commitments under
non-cancelable operating leases.
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 and the three
months ended March 31, 1999, we recognized expenses of approximately $624,000
and $337,000 (unaudited), respectively, allocated to us by Strategic Timber for
services they provided, and costs they paid, on our behalf.
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 and for the three months ended March 31, 1999.
7. NON-CASH INVESTING AND FINANCING ACTIVITIES:
At our inception, our founding shareholders received approximately 2,810
units in exchange for services valued at $100. These services were provided in
lieu of funding the required initial capital contributions to form Strategic
Timber II. The value of these services was determined based on the estimated
initial fair value of Strategic Timber II as we believed that the fair value of
the units issued was more reliably measurable than the value of the services
rendered.
F-24
<PAGE> 185
STRATEGIC TIMBER TRUST II, LLC AND SUBSIDIARIES
(A GEORGIA LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 for the period ended December 31, 1998 were derived
from two customers, including the related party transaction discussed in Note 5.
During the three months ended March 31, 1999, one customer accounted for
approximately 85.1% of our total revenues.
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.
We are 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-25
<PAGE> 186
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-26
<PAGE> 187
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-27
<PAGE> 188
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-28
<PAGE> 189
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-29
<PAGE> 190
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-30
<PAGE> 191
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-31
<PAGE> 192
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-32
<PAGE> 193
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-33
<PAGE> 194
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-34
<PAGE> 195
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-35
<PAGE> 196
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-36
<PAGE> 197
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-37
<PAGE> 198
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-38
<PAGE> 199
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-39
<PAGE> 200
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-40
<PAGE> 201
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-41
<PAGE> 202
[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> 203
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16,600,000 SHARES
STRATEGIC TIMBER TRUST, INC.
COMMON STOCK
(STRATEGIC TIMBER TRUST, INC. 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> 204
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.......................... 95,000
Blue Sky fees and expenses.................................. 5,000
Accounting fees and expenses................................ 800,000
Legal fees and expenses..................................... 1,000,000
Financial advisory fee...................................... 2,158,000
Printing and engraving expenses............................. 450,000
Registrar and Transfer Agent's fees......................... 15,500
Directors' and Officers' liability insurance................ 162,000
Miscellaneous fees and expenses............................. $ 300,000
----------
Total............................................. $5,127,448
==========
</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> 205
(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> 206
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> 207
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> 208
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
3.9* Fourth Amended and Restated Operating Agreement of Pioneer
Resources, LLC
4.1* Form of Common Stock Certificate
</TABLE>
II-5
<PAGE> 209
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
4.2* Form of Lock-up and Registration Rights Agreement by and
among the Registrant, Strategic Timber Partners, LP and the
Holders named therein (included as Schedule 2 to Exhibit
2.3)
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
10.6.1+ 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
10.6.2 Amendment No. 1 to Loan Agreement by and among Strategic
Timber Partners, LP, ABN AMRO Bank N.V., and the other
lenders which are or become parties thereto, dated as of
April 22, 1999
10.6.3 Amendment No. 2 to Loan Agreement by and among Strategic
Timber Partners, LP, ABN AMRO Bank N.V., and the other
lenders which are or become parties thereto, dated as of May
17, 1999
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
10.17.1* 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
</TABLE>
II-6
<PAGE> 210
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.17.2 Amendment No. 1 to 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 as of May 17, 1999
10.18 Option Agreement, dated July 2, 1998, between Pioneer
Resources, LLC and Coastal Forestlands, Ltd.
10.19.1 Act of Sale, effective as of December 29, 1998, from
Strategic Timber Partners, LP to C. Edward Broom
10.19.2 Option Agreement, dated as of December 29, 1998, between
Strategic Timber Partners, LP and C. Edward Broom
10.20 Form of Timber Purchase Agreement between Frontier
Resources, LLC and Pioneer Resources, LLC (including
Statutory Bargain and Sale Timber Deed)
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
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., dated May 6, 1999
99.6* Report of Canal Forest Resources, Inc., dated May 6, 1999
</TABLE>
- ---------------
* Previously filed.
+ 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.
II-7
<PAGE> 211
(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-8
<PAGE> 212
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 21st day
of June, 1999.
STRATEGIC TIMBER TRUST, INC.
By: /s/ C. EDWARD BROOM
----------------------------------
C. Edward Broom
President and Chief Executive
Officer
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>
/s/ C. EDWARD BROOM President, Chief Executive June 21, 1999
- ----------------------------------------------------- Officer and Chairman of the
C. Edward Broom Board of Directors
(Principal Executive
Officer)
/s/ KENNETH L. CHUTE Senior Vice President and June 21, 1999
- ----------------------------------------------------- Chief Financial Officer
Kenneth L. Chute (Principal Financial and
Accounting Officer)
* Executive Vice President, June 21, 1999
- ----------------------------------------------------- Chief Investment Officer
Christopher J. Broom and Director
/s/ THOMAS P. BROOM Executive Vice President, June 21, 1999
- ----------------------------------------------------- Chief Operating Officer and
Thomas P. Broom Director
*By: /s/ C. EDWARD BROOM
------------------------------------------------
C. Edward Broom
Attorney-in-fact
</TABLE>
II-9
<PAGE> 213
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
</TABLE>
<PAGE> 214
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
4.2* Form of Lock-up and Registration Rights Agreement by and
among the Registrant, Strategic Timber Partners, LP and the
Holders named therein (included as Schedule 2 to Exhibit
2.3)
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
10.6.1+ 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
10.6.2 Amendment No. 1 to Loan Agreement by and among Strategic
Timber Partners, LP, ABN AMRO Bank N.V., and the other
lenders which are or become parties thereto, dated as of
April 22, 1999
10.6.3 Amendment No. 2 to Loan Agreement by and among Strategic
Timber Partners, LP, ABN AMRO Bank N.V., and the other
lenders which are or become parties thereto, dated as of May
17, 1999
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
</TABLE>
<PAGE> 215
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
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
10.17.1* 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
10.17.2 Amendment No. 1 to 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 as of May 17, 1999
10.18 Option Agreement, dated July 2, 1998, between Pioneer
Resources, LLC and Coastal Forestlands, Ltd.
10.19.1 Act of Sale, effective as of December 29, 1998, from
Strategic Timber Partners, LP to C. Edward Broom
10.19.2 Option Agreement, dated as of December 29, 1998, between
Strategic Timber Partners, LP and C. Edward Broom
10.20 Form of Timber Purchase Agreement between Frontier
Resources, LLC and Pioneer Resources, LLC (including
Statutory Bargain and Sale Timber Deed)
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
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., dated May 6, 1999
99.6* Report of Canal Forest Resources, Inc., dated May 6, 1999
</TABLE>
- ---------------
* Previously filed.
+ 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 1.1
STRATEGIC TIMBER TRUST, INC.
16,600,000 Shares(1)
Common Stock
($.01 par value)
Underwriting Agreement
New York, New York
June , 1999
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.
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Strategic Timber Trust, Inc., a corporation organized under the laws of
the State of Georgia (the "Company"), proposes to sell to the several
underwriters named in Schedule I hereto (the "Underwriters"), for whom you (the
"Representatives") are acting as representatives, 16,600,000 shares of Common
Stock, $.01 par value ("Common Stock"), of the Company (said shares to be issued
and sold by the Company being hereinafter called the "Underwritten Securities").
The Company also proposes to grant to the Underwriters an option to purchase up
to 2,490,000 additional shares of Common Stock to cover over-allotments (the
"Option Securities"; the Option Securities, together with the Underwritten
Securities, being hereinafter called the "Securities"). To the extent there are
no additional Underwriters listed on Schedule I other than you, the term
Representatives as used herein shall mean you, as Underwriters, and the terms
Representatives and Underwriters shall mean either the singular or plural as the
context requires. Certain terms used herein are defined in Section 17 hereof.
As part of the offering contemplated by this Agreement, Salomon Smith
Barney Inc. ("Salomon Smith Barney") has agreed to reserve out of the Securities
set forth opposite its name on
- --------
(1) Plus an option to purchase from the Company up to 2,490,000 additional
Securities to cover over-allotments.
<PAGE> 2
the Schedule I to this Agreement, up to 830,000 shares for sale to the Company's
employees, officers and directors and certain other parties associated with the
Company (collectively, "Participants") (the "Directed Share Program"). The
Shares to be sold by Salomon Smith Barney pursuant to the Directed Share Program
(the "Directed Shares") will be sold by Salomon Smith Barney pursuant to this
Agreement at the public offering price. Any Directed Shares not orally confirmed
for purchase by any Participants by the end of the business day on which this
Agreement is executed will be offered to the public by Salomon Smith Barney as
set forth in the Prospectus.
At or prior to the Closing Date (as defined herein), the Company,
Strategic Timber Partners, LP, a Delaware limited partnership (the
"Partnership"), and certain predecessor entities will complete a series of
transactions described in the Prospectus under the caption "Structure and
Formation of Strategic Timber". As part of these transactions, (i) the
Partnership will obtain ownership, directly or through Pioneer Resources, LLC,
an Oregon limited liability company ("Pioneer"), of approximately 435,700 acres
of timberlands (the "Timberlands") and certain other properties, including
timber owned under timber deeds described in the Prospectus, (together with the
Timberlands, the "Properties"), (ii) certain members of the Company's management
and certain other investors will receive an aggregate of 4,966,205 limited
partnership interests ("Units") in the Partnership and an aggregate of 671,770
shares of Common Stock and approximately $47 million in cash, (iii) Strategic
Timber Partners II, LP, a Georgia limited partnership ("STP2"), Strategic Timber
Trust II, LLC, a Georgia limited liability company ("STT2"), and Strategic
Timber Two Operating Co., LLC, a Georgia limited liability company ("STTOC"),
will be merged into the Partnership, leaving Pioneer as a wholly owned
subsidiary of the Partnership, (iv) the Company will issue and sell 16,600,000
shares of Common Stock and contribute approximately $_____ million of the net
proceeds in exchange for limited partnership Units in the Partnership, so that
immediately following the offering, the Company will own 76.7% of the Units as a
limited partner and will own 100% of the common stock of Strategic Timber
Operating Co., a corporation organized under the laws of the State of Delaware
("STOC"), which in turn will own 1% of the Units as the sole general partner of
the Partnership, and (v) the Company will apply the remaining net proceeds from
the sale of the Securities, together with amounts drawn under its new credit
facility to be implemented as of the Closing Date (the "New Credit Facility"),
to the payment of outstanding indebtedness and as otherwise described under the
caption "Use of Proceeds" in the Prospectus. To the extent any portion of the
over-allotment option is exercised at the Closing Date, the relevant share and
Unit numbers and percentages set forth in this paragraph will be adjusted
accordingly. Additionally, to the extent any portion of the over-allotment
option is exercised subsequent to the Closing Date, the Company will contribute
the proceeds from the sale of the Option Securities to the Partnership in
exchange for an equivalent number of Units. As used herein, the term "Formation
Transactions" shall mean the occurrence of the events described in this
paragraph and the transactions related thereto.
2
<PAGE> 3
1. Representations and Warranties. Each of the Company and the
Partnership, jointly and severally, represents and warrants to, and agrees with,
each Underwriter as set forth below in this Section 1.
(a) The Company has prepared and filed with the Commission a
registration statement (file number 333-71291) on Form S-11, including
a related preliminary prospectus, for registration under the Act of the
offering and sale of the Securities. The Company may have filed one or
more amendments thereto, including a related preliminary prospectus,
each of which has previously been furnished to you. The Company will
file with the Commission either (1) prior to the Effective Date of such
registration statement, a further amendment to such registration
statement (including the form of final prospectus) or (2) after the
Effective Date of such registration statement, a final prospectus in
accordance with Rules 430A and 424(b). In the case of clause (2), the
Company has included in such registration statement, as amended at the
Effective Date, all information (other than Rule 430A Information)
required by the Act and the rules thereunder to be included in such
registration statement and the Prospectus. As filed, such amendment and
form of final prospectus, or such final prospectus, shall contain all
Rule 430A Information, together with all other such required
information, and, except to the extent the Representatives shall agree
in writing to a modification, shall be in all substantive respects in
the form furnished to you prior to the Execution Time or, to the extent
not completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior to
the Execution Time, will be included or made therein.
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date and on any date on
which Option Securities are purchased, if such date is not the Closing
Date (a "Settlement Date"), the Prospectus (and any supplements
thereto) will, comply in all material respects with the applicable
requirements of the Act and the rules thereunder; on the Effective Date
and at the Execution Time, the Registration Statement did not or will
not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order
to make the statements therein not misleading; and, on the Effective
Date, the Prospectus, if not filed pursuant to Rule 424(b), will not,
and on the date of any filing pursuant to Rule 424(b) and on the
Closing Date and any Settlement Date, the Prospectus (together with any
supplement thereto) will not, include any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to the information
contained in or omitted from the Registration Statement, or the
Prospectus (or any supplement thereto) in reliance upon and in
conformity with information furnished in writing to the Company by or
on behalf of any Underwriter through the Representatives specifically
for inclusion in the Registration Statement or the Prospectus (or any
supplement thereto).
3
<PAGE> 4
(c) Each of the Company and STOC has been duly organized and
is validly existing as a corporation in good standing under the laws of
the jurisdiction in which it is chartered with full corporate power and
authority to own or lease, as the case may be, and to operate its
properties and conduct its business as described in the Prospectus, and
is duly qualified to do business as a foreign corporation and is in
good standing under the laws of each jurisdiction where it owns or
leases material properties or conducts material business and where the
failure to be so qualified would, individually or in the aggregate,
have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
or STOC. Except with respect to the Partnership and STOC, the Company
owns no material amounts of stock or other beneficial interest in any
corporation, partnership, joint venture or other business entity.
(d) Each of Pioneer, STT2 and STTOC has been duly organized
and is validly existing as a limited liability company in good standing
under the laws of the jurisdiction in which it is organized with full
limited liability company power and authority to own or lease, as the
case may be, and to operate its properties and conduct its business as
described in the Prospectus, and is duly qualified to do business as a
foreign company and is in good standing under the laws of each
jurisdiction where it owns or leases material properties or conducts
material business and where the failure to be so qualified would,
individually or in the aggregate, have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of Pioneer, STT2 or STTOC, as the case may be. Upon
consummation of the Formation Transactions, the Partnership will own
all of the member interests in Pioneer and such member interests will
have been duly authorized and validly issued and will be fully paid and
nonassessable and will be owned by the Partnership, free and clear of
any perfected security interest or any other security interests,
claims, liens or encumbrances, except such security interests, claims,
liens or encumbrances arising under (i) the New Credit Facility and
(ii) the Partnership Agreement described below (collectively,
"Permitted Liens").
(e) The Second Amended and Restated Agreement of Limited
Partnership of the Partnership (the "Partnership Agreement") has been
duly and validly authorized, executed and delivered by STOC and the
Company and is a valid and binding agreement of STOC and the Company
enforceable in accordance with its terms. The Partnership has been duly
formed and is validly existing as a limited partnership in good
standing under the laws of the State of Delaware with full partnership
power and authority to own or lease, as the case may be, and to operate
its properties and conduct its business as described in the Prospectus
and is duly qualified or registered as a foreign partnership and is in
good standing in each jurisdiction where it owns or leases material
properties or conducts material business and where the failure to be so
qualified would, individually or in the aggregate, have a material
adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Partnership. STOC is, and,
immediately after the Closing Date, will be, the sole general partner
of the Partnership. Immediately after the Closing Date, the Company,
directly or through STOC, will be the holder of approximately 77.7% of
the Units, if the over-allotment
4
<PAGE> 5
option is not exercised. As of the Closing Date, the Partnership will
have no subsidiaries other than Pioneer.
(f) All the outstanding shares of capital stock of STOC have
been duly and validly authorized and issued and are fully paid and
nonassessable, and are owned by the Company free and clear of any
perfected security interest or any other security interests, claims,
liens or encumbrances, except such security interests, claims, liens or
encumbrances arising under the New Credit Facility and the Partnership
Agreement.
(g) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable; the
Securities have been duly and validly authorized, and, when issued and
delivered to and paid for by the Underwriters pursuant to this
Agreement, will be fully paid and nonassessable; the Securities are
duly listed, and admitted and authorized for quotation, subject to
official notice of issuance and evidence of satisfactory distribution,
on the Nasdaq National Market; the certificates for the Securities are
in valid and sufficient form; the Company has duly reserved a
sufficient number of shares of Common Stock for issuance upon exchange
of outstanding Units in the Partnership; the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive
or other rights to subscribe for the Securities; and, except as set
forth in the Prospectus, no options, warrants or other rights to
purchase, agreements or other obligations to issue, or rights to
convert any obligations into or exchange any securities for, shares of
capital stock or Units of or ownership interests in the Company or the
Partnership are outstanding.
(h) The Units to be issued in connection with the Formation
Transactions, including, without limitation, the Units to be issued to
the Company and STOC, have been duly authorized for issuance by the
Partnership to the holders or prospective holders thereof, and on the
Closing Date will be validly issued, fully paid, nonassessable and
owned in the percentage amounts set forth in the Prospectus by the
Company and STOC and by the entities or persons described in the
Prospectus. Such Units owned by the Company and STOC are owned free and
clear of any perfected security interest or any other security
interests, claims, liens or encumbrances, except such security
interests, claims, liens or encumbrances arising under the New Credit
Facility and the Partnership Agreement. Immediately after the Closing
Date and not including any Units issued in exchange for proceeds
received by the Company in connection with the sale of the Option
Securities, 22,237,975 Units will be issued and outstanding. The Units
have been and will be offered and sold at or prior to the Closing Date
in compliance with all applicable laws (including, without limitation,
federal and state securities laws).
(i) Consummation of each of the Formation Transactions and
compliance by the Company, Pioneer, STOC, STT2, STTOC, STP2, the
Partnership and certain investors, including Mach One Partners, LLC,
Louisiana Timber Partners, LLC, Old Pioneer LLC, and
5
<PAGE> 6
Gregory M. Demers (such investors, the "Continuing Investors") with
their respective obligations under each of the documents relating to
the Formation Transactions (collectively, the "Transaction Documents")
have been duly authorized by all necessary corporate, partnership or
limited liability company action, as the case may be, and did not and
will not violate or conflict with or constitute a breach of, or default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any of the Properties or any other properties or
assets of the Company, Pioneer, STOC, STT2, STTOC, STP2, the
Partnership or the Continuing Investors pursuant to any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or
instrument, including, without limitation, any partnership agreement or
operating agreement to which the Company, Pioneer, STOC, STT2, STTOC,
STP2, the Partnership or any of the Continuing Investors is or was a
party or by which it or any of them may be bound or affected, or to
which any of the Properties or any other properties or assets of the
Company, Pioneer, STOC, STT2, STTOC, STP2, the Partnership or any of
the Continuing Investors is subject, except pursuant to (i) indentures,
contracts, leases, mortgages, deeds of trust, note agreements, loan
agreements or other agreements, obligations, conditions, covenants or
instruments which shall be paid in full or terminated as of the Closing
Date and (ii) liens or encumbrances under the New Credit Facility, the
Partnership Agreement, the "lock-up" agreements as set forth in Exhibit
A hereto, and the Lock-up and Registration Rights Agreement among the
Company, the Partnership and the holders of Units and restricted shares
of Common Stock (collectively, "Permitted Liens"); none of the
Formation Transactions resulted or will result in the violation of any
provisions of the charter, bylaws, articles of organization or
operating agreement of the Company, Pioneer, STOC, STT2, STTOC, or any
Continuing Investor or any agreement, certificate of limited
partnership or other governing document of the Partnership, STP2 or any
Continuing Investor or any applicable law, administrative regulation or
administrative or court decree; and all authorizations, consents and
approvals necessary to consummate the Formation Transactions were, or
as of the Closing Date will be, timely obtained; and the offer,
issuance and exchange of the general and limited partnership interests
in the Partnership will be exempt from the registration requirements of
the Act and applicable state securities and blue sky laws. On or prior
to the Closing Date, each of the Formation Transactions will have
occurred in the manner described in the Prospectus under the caption
"Structure and Formation of Strategic Timber."
(j) Each of the Transaction Documents to which the Company,
the Partnership, any Continuing Investor, Pioneer, STOC, STT2, STTOC or
STP2 is a party has been duly authorized, executed and delivered by
such party and constitutes the binding agreement of such party,
enforceable against such party in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights
generally and by general principles of equity.
(k) The Company will be organized in conformity with the
requirements for qualification as a real estate investment trust under
the Internal Revenue Code of 1986, as amended (the "Code"), and its
operations to date and proposed method of operation will
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<PAGE> 7
enable it to meet the requirements for taxation as a real estate
investment trust under the Code commencing with the Company's taxable
year ending December 31, 1998.
(l) The Company, STOC, Pioneer and the Partnership own,
possess, license or have other rights to use, on reasonable terms, all
patents, patent applications, trade and service marks, trade and
service mark registrations, trade names, copyrights, licenses,
inventions, trade secrets, technology, know-how and other intellectual
property (collectively, the "Intellectual Property") necessary for the
conduct of their respective businesses as now conducted or as proposed
in the Prospectus to be conducted. There is no pending or threatened
action, suit, proceeding or claim by others challenging the rights of
the Company, STOC, Pioneer or the Partnership in or to any such
Intellectual Property, and neither the Company nor the Partnership is
aware of any facts which would form a reasonable basis for any such
claim. There is no pending or threatened action, suit, proceeding or
claim by others challenging the validity or scope of any such
Intellectual Property, and neither the Company nor the Partnership is
aware of any facts which would form a reasonable basis for any such
claim. There is no pending or threatened action, suit, proceeding or
claim by others that the Company, STOC, Pioneer or the Partnership
infringes or otherwise violates any patent, trademark, copyright, trade
secret or other proprietary rights of others, and neither the Company
nor the Partnership is aware of any other fact which would form a
reasonable basis for any such claim.
(m) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectus
under the headings "Federal Income Tax Consequences," "ERISA
Considerations," "Description of Capital Stock," "Policies With Respect
to Certain Activities," "Structure and Formation of Strategic Timber,"
"Transactions with Related Parties," "The Partnership Agreement,"
"Certain Provisions of Georgia Law and Strategic Timber's Articles of
Incorporation and Bylaws That May Have an Anti-Takeover Effect,"
"Shares Available For Future Sale" and "Business and Properties -
Federal and State Regulations" and "- Legal Proceedings" fairly
summarize the matters therein described.
(n) This Agreement has been duly authorized, executed and
delivered by each of the Company and the Partnership and constitutes a
valid and binding obligation of the Company and the Partnership
enforceable in accordance with its terms.
(o) None of the Company, Pioneer, STOC or the Partnership is,
and, after giving effect to the offering and sale of the Securities and
the application of the proceeds thereof as described in the Prospectus,
none of the Company, Pioneer, STOC or the Partnership will
be, an "investment company" or an entity "controlled by" an "investment
company" as defined in the Investment Company Act of 1940, as amended.
(p) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection
with the transactions contemplated
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<PAGE> 8
herein, except such as have been obtained under the Act and such as may
be required under the blue sky laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the
Underwriters in the manner contemplated herein and in the Prospectus.
(q) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation or imposition of any lien, charge or encumbrance
(other than Permitted Liens) upon any property or assets of the
Company, STOC, Pioneer or the Partnership pursuant to (i) the charter
or by-laws of the Company or STOC or the articles of organization or
operating agreement of Pioneer, (ii) the Partnership Agreement, (iii)
the terms of any indenture, contract, lease, mortgage, deed of trust,
note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company, STOC, Pioneer
or the Partnership is a party or bound or to which its or their
property is subject, or (iv) any statute, law, rule, regulation,
judgment, order or decree applicable to the Company, Pioneer, STOC or
the Partnership of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction
over the Company, Pioneer, STOC or the Partnership or any of their
properties.
(r) No holders of securities of the Company or the Partnership
have rights to the registration of such securities except as set forth
in the Prospectus.
(s) The financial statements and schedules included in the
Prospectus and the Registration Statement present fairly in all
material respects the financial condition, results of operations and
cash flows of the respective entity or entities therein as of the dates
and for the periods indicated, comply as to form with the applicable
accounting requirements of the Act and have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis throughout the periods involved. The selected financial
information set forth under the caption "Selected Historical Financial
and Operating Information" in the Prospectus and Registration Statement
fairly presents, on the basis stated in the Prospectus and the
Registration Statement, the information included therein. The pro forma
financial statements included in the Prospectus and the Registration
Statement include assumptions that provide a reasonable basis for
presenting the significant effects directly attributable to the
transactions and events described therein, and the related pro forma
adjustments give appropriate effect to those assumptions. The pro forma
financial statements included in the Prospectus and the Registration
Statement comply as to form in all material respects with the
applicable accounting requirements of Regulation S-X under the Act and
the pro forma adjustments have been properly applied to the historical
amounts in the compilation of those statements.
(t) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company, the Partnership, STOC or Pioneer or its or their property is
pending or, to the best knowledge of the Company and the Partnership,
threatened that (i) could reasonably be expected to have a material
adverse effect on the performance of this Agreement or the consummation
of any of the transactions contemplated hereby or (ii) could reasonably
be expected to have a material adverse effect
8
<PAGE> 9
on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, the Partnership, STOC or
Pioneer, whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(u) Neither the Company nor STOC is in violation or default of
any provision of its charter or bylaws; Pioneer is not in violation or
default of its articles of organization or operating agreement; and the
Partnership is not in violation of the Partnership Agreement. None of
the Company, STOC, Pioneer or the Partnership is in violation or
default of (i) the terms of any indenture, contract, lease, mortgage,
deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which it is a party or
bound or to which its property is subject, or (ii) any statute, law,
rule, regulation, judgment, order or decree of any court, regulatory
body, administrative agency, governmental body, arbitrator or other
authority having jurisdiction over the Company, STOC, Pioneer or the
Partnership or any of their respective properties, as applicable, which
violations or defaults would have a material adverse effect on the
condition (financial or otherwise), prospects, business, earnings or
properties of the Company, STOC, Pioneer and the Partnership taken as a
whole.
(v) Arthur Andersen LLP, who have certified certain financial
statements and delivered their report with respect to such audited
consolidated financial statements and schedules included in the
Prospectus, are independent public accountants within the meaning of
the Act and the applicable published rules and regulations thereunder.
(w) There are no transfer taxes or other similar fees or
charges under federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance by the Company
or sale by the Company of the Securities.
(x) Each of the Company, STOC, the Partnership and Pioneer has
filed all foreign, federal, state and local tax returns that are
required to be filed or has requested extensions thereof (except in any
case in which the failure so to file would not have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, STOC, Pioneer and the
Partnership, taken as a whole, whether or not arising from transactions
in the ordinary course of business) except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto)
and has paid all taxes required to be paid by it and any other
assessment, fine or penalty levied against it, to the extent that any
of the foregoing is due and payable, except for any such assessment,
fine or penalty that is currently being contested in good faith or as
would not have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company,
STOC, Pioneer and the Partnership, taken as a whole, whether or not
arising from transactions in the ordinary course of business, except as
set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
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<PAGE> 10
(y) No labor problem or dispute with the employees of the
Company, Pioneer or the Partnership exists or, to the knowledge of the
Company or the Partnership, is threatened or imminent, and neither the
Partnership nor the Company is aware of any existing or imminent labor
disturbance by the employees of any of the principal suppliers,
contractors or customers of the Company, the Partnership or Pioneer,
that could have a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the
Company, STOC, Pioneer and the Partnership, taken as a whole, whether
or not arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto).
(z) The Company, Pioneer, STOC and the Partnership are
insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as are prudent and customary in
the businesses in which they are engaged; all policies of insurance
insuring the Company, Pioneer, STOC or the Partnership or their
respective businesses, assets, employees, officers and directors and
managers are in full force and effect; the Company, Pioneer, STOC and
the Partnership are in compliance with the terms of such policies and
instruments in all material respects; and there are no claims by the
Company, Pioneer, STOC or the Partnership under any such policy or
instrument as to which any insurance company is denying liability or
defending under a reservation of rights clause where such denial of
liability would have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties
of the Company, Pioneer, STOC and the Partnership, taken as a whole,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto); none of the Company, Pioneer,
STOC or the Partnership has been refused any insurance coverage sought
or applied for; and none of the Company, Pioneer, STOC or the
Partnership has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, Pioneer, STOC and the
Partnership, taken as a whole, whether or not arising from transactions
in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(aa) None of Pioneer, the Partnership or STOC is currently
prohibited, directly or indirectly, from paying any dividends or from
otherwise making any other distribution on its membership interests,
partnership interests or capital stock, from repaying to the Company
any loans or advances to Pioneer or the Partnership or STOC from the
Company or from transferring any of their property or assets to the
Company or any other subsidiary of the Company, except as described in
or contemplated by the Prospectus.
(bb) The Company, STOC, Pioneer and the Partnership possess,
and operate in compliance in all material respects with, all licenses,
certificates, permits and other authorizations issued by the
appropriate federal, state or foreign regulatory authorities necessary
to conduct their respective businesses, and none of the Company, STOC,
Pioneer
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<PAGE> 11
or the Partnership has received any notice of proceedings relating to
the revocation or modification of any such certificate, authorization
or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, STOC, Pioneer and the
Partnership, taken as a whole, whether or not arising from transactions
in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(cc) The Company, STOC, Pioneer, STT2, STTOC, STP2 and the
Partnership maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(dd) None of the Continuing Investors, the Partnership or the
Company or any of its officers, directors or controlling persons has
taken, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result,
under the Exchange Act or otherwise, in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Securities.
(ee) The Company, Pioneer, STOC, STT2, STTOC, STP2 and the
Partnership are (i) in compliance with any and all applicable foreign,
federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) have received and are in compliance with all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii)
have not received notice of any actual or potential liability for the
investigation or remediation of any disposal or release of hazardous or
toxic substances or wastes, pollutants or contaminants, except where
such non-compliance with Environmental Laws, failure to receive
required permits, licenses or other approvals, or liability would not,
individually or in the aggregate, have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company, Pioneer, the Partnership and STOC, taken as
a whole, whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto). None of the Company,
the Partnership, Pioneer, STOC, STT2, STTOC, STP2 or any of the
Continuing Investors has been informed it is a "potentially responsible
party" under the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, with respect to any of the
Properties.
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<PAGE> 12
(ff) In the ordinary course of its business, the Company and
the Partnership periodically review the effect of Environmental Laws on
the business, operations and properties of the Company, STOC, Pioneer
and the Partnership, in the course of which they identify and evaluate
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws, or any permit,
license or approval, any related constraints on operating activities
and any potential liabilities to third parties). On the basis of such
review, the Company and the Partnership have reasonably concluded that
such associated costs and liabilities would not, singly or in the
aggregate, have a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the
Company, STOC, Pioneer and the Partnership, taken as a whole, whether
or not arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto).
(gg) The Company, Pioneer, STOC, STT2, STTOC, STP2 and the
Partnership are in compliance with any and all applicable foreign,
federal, state and local laws and regulations relating to the
protection of threatened or endangered species ("TES Laws"), and have
received and are in compliance with all permits, licenses or other
approvals required of them under applicable TES Laws to conduct their
respective businesses, except where such non-compliance with TES Laws
or failure to receive required permits, licenses or other approvals
would not, individually or in the aggregate, have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, Pioneer, the Partnership and
STOC, taken as a whole, whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated in
the Prospectus (exclusive of any supplement thereto).
(hh) In the ordinary course of its business, the Company and
the Partnership periodically review the effect of TES Laws on the
business, operations and properties of the Company, STOC, Pioneer and
the Partnership, in the course of which they identify and evaluate
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for compliance with TES
Laws, or any permit, license or approval, any related constraints on
operating activities and any potential liabilities to third parties).
On the basis of such review, the Company and the Partnership have
reasonably concluded that such associated costs and liabilities would
not, singly or in the aggregate, have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company, STOC, Pioneer and the Partnership, taken as
a whole, whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(ii) Upon consummation of the Formation Transactions, (i) the
Partnership and Pioneer will have good and marketable title in fee
simple to all real property and improvements described in the
Prospectus as owned by the Partnership and Pioneer, including, but not
limited to, the Properties, in each case free and clear of all liens,
encumbrances and defects other than those that are described in the
Prospectus or those
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<PAGE> 13
which do not and will not materially affect the value of such property
or materially interfere with the use made and proposed to be made of
such property by the Partnership or Pioneer; (ii) all liens, charges,
encumbrances, claims, or restrictions on or affecting the properties
and assets to be held by the Partnership and Pioneer pursuant to the
Transaction Documents which are required to be disclosed in the
Prospectus are disclosed therein; (iii) any real property and buildings
held under lease by the Company, Pioneer, STOC or the Partnership are
held under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company,
Pioneer, STOC or the Partnership;
(jj) The Partnership or Pioneer has title insurance on all
properties and assets described in the Prospectus as owned by the
Partnership or Pioneer in an amount at least equal to the cost of
acquisition of such property or assets.
(kk) None of the Company, the Partnership, Pioneer or STOC
maintains, or has at any time maintained, any "plan" (as defined in
Section 3(3) of the United States Employee Retirement Income Security
Act of 1974 ("ERISA") and the regulations and published interpretations
thereunder) that is subject to the minimum funding standards of Section
302 of ERISA.
(ll) The Partnership, Pioneer, STOC and the Company are
implementing a comprehensive, detailed program to analyze and address
the risk that the computer hardware and software used by them may be
unable to recognize and properly execute date-sensitive functions
involving certain dates prior to and any dates after December 31, 1999
(the "Year 2000 Problem") and reasonably believe that such risk will be
remedied on a timely basis without material expense and will not have a
material adverse effect upon the financial condition and results and
operations of the Partnership, Pioneer, STOC and the Company, taken as
a whole; and the Partnership and the Company believe, after due
inquiry, that each supplier, vendor, customer or financial service
organization used or serviced by the Company, STOC, Pioneer or the
Partnership has remedied or will remedy on a timely basis the Year 2000
Problem, except to the extent that a failure to remedy by any such
supplier, vendor, customer or financial service organization would not
have a material adverse effect on the Company, the Partnership, Pioneer
and STOC, taken as a whole. The Company, the Partnership, STOC and
Pioneer are in compliance with the Commission's Release dated July 29,
1998 related to Year 2000 compliance, as amended to date.
(mm) None of the environmental engineering firms or
individuals who prepared environmental inspection reports with respect
to the Timberlands, was employed for such purpose on a contingent basis
or has any ownership interest in the Company, the Partnership, STOC or
Pioneer; none of them and none of their directors, officers or
employees is connected with the Company, the Partnership or Pioneer as
a promoter, selling agent, voting trustee, director, officer or
employee.
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<PAGE> 14
(nn) The Company has not offered, or caused the Underwriters
to offer, Securities to any person pursuant to the Directed Share
Program with the specific intent to unlawfully influence (i) a customer
or supplier of the Company, Pioneer or the Partnership to alter the
customer's or supplier's level or type of business with the Company,
Pioneer or the Partnership or (ii) a trade journalist or publication to
write or publish favorable information about the Company, Pioneer or
the Partnership or their properties.
Any certificate signed by any officer of the Company, STOC, Pioneer or
the Partnership and delivered to the Representatives or counsel for the
Underwriters in connection with the offering of the Securities shall be deemed a
representation and warranty by the Company, STOC, Pioneer or the Partnership,
respectively, as to matters covered thereby, to each Underwriter.
2. Purchase and Sale. (a) Subject to the terms and conditions
and in reliance upon the representations and warranties herein set forth, the
Company agrees to sell to each Underwriter, and each Underwriter agrees,
severally and not jointly, to purchase from the Company, at a purchase price of
$ per share, the number of the Underwritten Securities set forth opposite such
Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby
grants an option to the several Underwriters to purchase, severally and
not jointly, up to 2,490,000 Option Securities at the same purchase
price per share as the Underwriters shall pay for the Underwritten
Securities less an amount equal to any per share distribution payable
by the Company on the Underwritten Securities and not payable on the
Option Securities. Said option may be exercised only to cover
over-allotments in the sale of the Underwritten Securities by the
Underwriters. Said option may be exercised in whole or in part at any
time (but not more than once) on or before the 30th day after the date
of the Prospectus upon written or telegraphic notice by the
Representatives to the Company setting forth the number of shares of
the Option Securities as to which the several Underwriters are
exercising the option and the settlement date, which unless otherwise
agreed, will not be earlier than two business days after the exercise
of the option. The number of Option Securities to be purchased by each
Underwriter shall be the same percentage of the total number of shares
of the Option Securities to be purchased by the several Underwriters as
such Underwriter is purchasing of the Underwritten Securities, subject
to such adjustments as you in your absolute discretion shall make to
eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
June , 1999, or at such time on such later date not more than three Business
Days after the foregoing date as the Representatives shall designate, which date
and time may be postponed by agreement between the Representatives and the
Company or as provided in Section 9 hereof (such date and time of delivery and
payment for the Securities being herein called the "Closing Date"). Delivery of
the Securities shall be made to the Representatives for the respective accounts
of the
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<PAGE> 15
several Underwriters against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company by wire transfer payable in same-day funds to an account specified by
the Company. Delivery of the Underwritten Securities and the Option Securities
shall be made through the facilities of The Depository Trust Company unless the
Representatives shall otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company will deliver
the Option Securities (at the expense of the Company) to the Representatives, at
388 Greenwich Street, New York, New York, on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of the Company by wire transfer payable in
same-day funds to an account specified by the Company. If settlement for the
Option Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements. Each of the Partnership and the Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment
thereof, to become effective. Prior to the termination of the offering
of the Securities, the Company will not file any amendment of the
Registration Statement or supplement to the Prospectus or any Rule
462(b) Registration Statement unless the Company has furnished you a
copy for your review prior to filing and will not file any such
proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
cause the Prospectus, properly completed, and any supplement thereto to
be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. The Company
will promptly advise the Representatives (1) when the Registration
Statement, if not effective at the Execution Time, shall have become
effective, (2) when the Prospectus, and any supplement thereto, shall
have been filed (if required) with the Commission pursuant to Rule
424(b) or when any Rule 462(b) Registration Statement shall have been
filed with the Commission, (3) when, prior to termination of the
offering of the Securities, any amendment to the Registration Statement
shall have been filed or become effective, (4) of any request by the
Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement,
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<PAGE> 16
or for any supplement to the Prospectus or for any additional
information, (5) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (6)
of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the institution or threatening of any proceeding for
such purpose. The Company will use its best efforts to prevent the
issuance of any such stop order or the suspension of any such
qualification and, if issued, to obtain as soon as possible the
withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act or the rules thereunder, the Company
promptly will (1) notify the Representatives of any such event, (2)
prepare and file with the Commission, subject to the second sentence of
paragraph (a) of this Section 5, an amendment or supplement which will
correct such statement or omission or effect such compliance; and (3)
supply any supplemented Prospectus to you in such quantities as you may
reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(d) The Company will furnish to the Representatives and
counsel for the Underwriters copies of the signed Registration
Statement (including exhibits thereto) and to each other Underwriter a
copy of the Registration Statement (without exhibits thereto) and, so
long as delivery of a prospectus by an Underwriter or dealer may be
required by the Act, as many copies of each Preliminary Prospectus and
the Prospectus and any supplement thereto as the Representatives may
reasonably request.
(e) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the Representatives may designate and will maintain
such qualifications in effect so long as required for the distribution
of the Securities; provided that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take any action that would subject it to service
of process in suits, other than those arising out of the offering or
sale of the Securities, in any jurisdiction where it is not now so
subject.
(f) Neither the Company nor the Partnership will, without the
prior written consent of Salomon Smith Barney, for a period of one year
from the Closing Date, offer, sell or contract to sell, or otherwise
dispose of (or enter into any transaction which is designed
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<PAGE> 17
to result in the disposition (whether by actual disposition or
effective economic disposition due to cash settlement or otherwise) by
the Company or the Partnership) directly or indirectly, or announce the
offering of, any other shares of Common Stock or Units or any
securities convertible into, or exchangeable for, shares of Common
Stock or Units; provided, however, that (i) the Company may issue and
sell Common Stock and issue options to purchase Common Stock pursuant
to any employee stock option plan or stock ownership plan of the
Company in effect at the Execution Time, (ii) the Partnership may issue
Units as partial or full payment for the acquisition of properties,
(iii) the Company may issue shares of Common Stock in redemption of
Units and may announce the registration of the original issuance or
resale of such shares following the one-year anniversary of the Closing
Date and (iv) the Partnership may issue Units to the Company in
exchange for the Company's contribution of the proceeds of the sale of
the Securities.
(g) Neither the Company nor the Partnership nor any of their
officers, directors or controlling persons has taken or will take,
directly or indirectly, any action designed to or which has constituted
or which might reasonably be expected to cause or result, under the
Exchange Act or otherwise, in stabilization or manipulation of the
price of any security of the Company or the Partnership to facilitate
the sale or resale of the Securities.
(h) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or reproduction
and filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary
Prospectus, the Prospectus, and each amendment or supplement to any of
them; (ii) the printing (or reproduction) and delivery (including
postage, air freight charges and charges for counting and packaging) of
such copies of the Registration Statement, each Preliminary Prospectus,
the Prospectus, and all amendments or supplements to any of them, as
may, in each case, be reasonably requested for use in connection with
the offering and sale of the Securities; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the
Securities, including any stamp or transfer taxes in connection with
the original issuance and sale of the Securities; (iv) the printing (or
reproduction) and delivery of this Agreement, any blue sky memorandum
and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Securities; (v) the
registration of the Securities under the Exchange Act and the listing
of the Securities on the Nasdaq National Market; (vi) any registration
or qualification of the Securities for offer and sale under the
securities or blue sky laws of the several states (including filing
fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such registration and qualification); (vii)
any filings required to be made with the National Association of
Securities Dealers, Inc. (the "NASD"), including filing fees and the
reasonable fees and expenses of counsel for the Underwriters relating
to such filings; (viii) the transportation and other expenses incurred
by or on behalf of Company representatives in connection with
presentations to prospective purchasers of the Securities; (ix) the
fees and expenses of the Company's accountants and the fees and
expenses of counsel for the Company; (x) all fees and disbursements of
counsel incurred by the Underwriters in connection with the Directed
Share Program and stamp duties, similar taxes or duties or other taxes,
if any, incurred by the
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<PAGE> 18
Underwriters in connection with the Directed Share Program; and (xi)
all other costs and expenses incident to the performance by the Company
and the Partnership of their obligations hereunder.
(i) The Company and the Partnership will use the net proceeds
from the sale of the Securities, together with amounts drawn under the
New Credit Facility, in the manner specified in the Prospectus under
the caption "Use of Proceeds."
(j) The Company will use its best efforts to meet the
requirements to qualify, commencing with the tax year ending December
31, 1998, as a "real estate investment trust" under the Code.
(k) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the NASD or the NASD rules from sale, transfer, assignment,
pledge or hypothecation for a period of three months following the date
of the effectiveness of the Registration Statement. Salomon Smith
Barney will notify the Company as to which Participants will need to be
so restricted. The Company will direct the transfer restrictions upon
such period of time.
6. Conditions to the Obligations of the Underwriters. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Partnership
contained herein as of the Execution Time, the Closing Date and any Settlement
Date pursuant to Section 3 hereof, to the accuracy of the statements of the
Company and the Partnership made in any certificates pursuant to the provisions
hereof, to the performance by the Company and the Partnership of their
obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become
effective not later than (i) 6:00 PM New York City time on the date of
determination of the public offering price, if such determination
occurred at or prior to 3:00 PM New York City time on such date or (ii)
9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Prospectus,
or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and
within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have requested and caused Sutherland
Asbill & Brennan LLP, counsel for the Company, to have furnished to the
Representatives their opinion, dated the Closing Date and addressed to
the Representatives, to the effect that:
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<PAGE> 19
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the
laws of the state of Georgia.
(ii) STOC has been duly organized and is validly
existing as a corporation in good standing under the laws of
the state of Delaware.
(iii) Each of the Company, STOC, the Partnership and
Pioneer has the corporate, limited liability company or
limited partnership, as the case may be, power and authority
to own or lease its properties and to conduct its business as
described in the Prospectus.
(iv) All the outstanding shares of capital stock of
STOC have been duly authorized and validly issued and are
fully paid and nonassessable, and are owned by the Company
free and clear of any perfected security interest and, to the
knowledge of such counsel, any other security interest, claim,
lien or encumbrance, except such security interests, claims,
liens or encumbrances arising under the New Credit Facility
and the Partnership Agreement.
(v) Pioneer has been duly organized and is validly
existing as a limited liability company in good standing under
the laws of the state of Oregon.
(vi) Upon consummation of the Formation
Transactions, the Partnership will own all of the member
interests in Pioneer and such member interests will have been
duly authorized and validly issued and will be fully paid and
nonassessable and will be owned by the Partnership, free and
clear of any perfected security interest and, to the knowledge
of such counsel, any other security interest, claim, lien or
encumbrance, except such security interests, claims, liens or
encumbrances arising under the New Credit Facility and the
Partnership Agreement.
(vii) The Partnership Agreement has been duly and
validly authorized, executed and delivered by STOC and the
Company and is a valid and binding agreement of STOC and the
Company enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors'
rights generally and by general principles of equity. The
Partnership has been duly formed and is validly existing as a
limited partnership in good standing under the laws of the
State of Delaware.
(viii) STOC is, and immediately after the Closing
Date, will be, the sole general partner of the Partnership.
The Partnership has no subsidiaries other than Pioneer.
(ix) All of the issued and outstanding Units have
been duly authorized and validly issued, are fully paid and
nonassessable and are owned by the Company, STOC and the
entities or persons described in the Prospectus. Such Units
owned by
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<PAGE> 20
the Company and STOC are owned free and clear of any perfected
security interest and, to the knowledge of such counsel, any
other security interest, claim, lien or encumbrance, except
such security interests, claims, liens or encumbrances arising
under the New Credit Facility and the Partnership Agreement.
The Units were offered and sold at or prior to the Closing
Date in compliance with all applicable laws (including,
without limitation, federal securities laws).
(x) The Company's authorized equity capitalization is
as set forth in the Prospectus; the capital stock of the
Company conforms in all material respects to the description
thereof contained in the Prospectus; the outstanding shares of
Common Stock have been duly and validly authorized and issued
and are fully paid and nonassessable; the Securities have been
duly and validly authorized, and, when issued and delivered to
and paid for by the Underwriters pursuant to this Agreement,
will be fully paid and nonassessable; the certificates for the
Securities are in valid and sufficient form under Georgia law
and the rules of the Nasdaq National Market; the Company has
duly reserved a sufficient number of shares of Common Stock
for issuance upon exchange of outstanding Units in the
Partnership; the holders of outstanding shares of capital
stock of the Company are not entitled to preemptive or other
rights to subscribe for the Securities; and, except as set
forth in the Prospectus, no options, warrants or other rights
to purchase, agreements or other obligations to issue, or
rights to convert any obligations into or exchange any
securities for, shares of capital stock or Units of or
ownership interests in the Company or the Partnership are
outstanding.
(xi) To the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before
any court or governmental agency, authority or body or any
arbitrator involving the Company, the Partnership, STOC or
Pioneer or its or their property of a character required to be
disclosed in the Registration Statement which is not
adequately disclosed in the Prospectus; and to the knowledge
of such counsel, there is no franchise, contract or other
document of a character required to be described in the
Registration Statement or Prospectus, or to be filed as an
exhibit thereto, which is not described or filed as required;
and the statements included in the Prospectus under the
headings "Federal Income Tax Consequences," "ERISA
Considerations," "Description of Capital Stock," "Transactions
with Related Parties," "The Partnership Agreement," "Certain
Provisions of Georgia Law and Strategic Timber's Articles of
Incorporation and Bylaws That May Have an AntiTakeover
Effect," "Shares Available for Future Sale,""Business and
Properties-Federal and State Regulations" and "- Legal
Proceedings", to the extent they include descriptions of
agreements or other legal documents or include summaries of
law, are accurate and fair summaries.
(xii) The Registration Statement has become effective
under the Act. Any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made in
the manner and within the time period required by
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<PAGE> 21
Rule 424(b); and to the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration
Statement has been issued, no proceedings for that purpose
have been instituted or threatened and the Registration
Statement and the Prospectus (other than the financial
statements and other financial information contained therein,
as to which such counsel need express no opinion) comply as to
form in all material respects with the applicable requirements
of the Act and the rules thereunder.
(xiii) This Agreement has been duly authorized,
executed and delivered by the Company and the Partnership.
(xiv) None of the Company, Pioneer, STOC or the
Partnership is, and, after giving effect to the offering and
sale of the Securities and the application of the proceeds
thereof as described in the Prospectus, none of the Company,
Pioneer, STOC or the Partnership will be, an "investment
company" or an entity "controlled" by an "investment company"
as such terms are defined in the Investment Company Act of
1940, as amended.
(xv) No consent, approval, authorization, filing
with or order of any court or governmental agency or body is
required in connection with the transactions contemplated
herein, except such as have been obtained under the Act and
such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution
of the Securities by the Underwriters in the manner
contemplated in this Agreement and in the Prospectus.
(xvi) The Company has all legal right, power and
authority necessary to qualify as a "real estate investment
trust" under the Code. The Company has been duly organized in
conformity with the requirements for qualification and
taxation as a real estate investment trust under the Code, and
its proposed method of operation as described in the
Prospectus will enable it to meet the requirements for
taxation as a real estate investment trust under the Code,
commencing with the Company's taxable year ending December 31,
1998.
(xvii) Neither the issue and sale of the Securities,
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will
result in a breach or violation of or imposition of any lien,
charge or encumbrance upon any property or assets of the
Company, STOC, Pioneer or the Partnership pursuant to, (i) the
charter or by-laws of the Company or STOC, or the articles of
organization or operating agreement of Pioneer, (ii) the
Partnership Agreement, (iii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant
or instrument known to such counsel to which the Company,
STOC, Pioneer or the Partnership is a party or bound or to
which its or their property is subject, other than those which
shall be paid in full or terminated as of the Closing Date, or
(iv) any
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<PAGE> 22
statute, law, rule, regulation, judgment, order or decree that
is known to such counsel to be directly applicable to the
Company, STOC, Pioneer or the Partnership of any court,
regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the
Company, STOC, Pioneer or the Partnership or any of its or
their properties, which violation or default would, in the
case of clauses (iii) and (iv) above, either individually or
in the aggregate with all other violations and defaults
referred to in this numbered paragraph (xvii) (if any), have a
material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the
Company, STOC, Pioneer and the Partnership, taken as a whole,
whether or not arising from transactions in the ordinary
course of business.
(xviii) Consummation of each of the Formation
Transactions and compliance by the Company, Pioneer, STOC,
STT2, STTOC, STP2, the Partnership, Mach One Partners, LLC and
Louisiana Timber Partners, LLC with their respective
obligations under each of the Transaction Documents have been
duly authorized by all necessary corporate, partnership or
limited liability company action, as the case may be, and did
not and will not violate or conflict with or constitute a
breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the
Properties or any other properties or assets of the Company,
Pioneer, STOC, STT2, STTOC, STP2, the Partnership, Mach One
Partners, LLC or Louisiana Timber Partners, LLC pursuant to
any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument known to such counsel,
including, without limitation, any partnership agreement or
operating agreement to which the Company, Pioneer, STOC, STT2,
STTOC, STP2, the Partnership, Mach One Partners, LLC or
Louisiana Timber Partners, LLC is or was a party or by which
it or any of them may be bound, or to which any of the
Properties or any other properties or assets of the Company,
Pioneer, STOC, STT2, STTOC, STP2, the Partnership, Mach One
Partners, LLC or Louisiana Timber Partners, LLC is subject,
except pursuant to indentures, contracts, leases, mortgages,
deeds of trust, note agreements, loan agreements or other
agreements, obligations, conditions, covenants or instruments
which shall be paid in full or terminated as of the Closing
Date and except for Permitted Liens; none of the Formation
Transactions resulted or will result in the violation of any
provisions of the charter, bylaws, articles of organization or
operating agreement of the Company, Pioneer, STOC, STT2,
STTOC, Mach One Partners, LLC or Louisiana Timber Partners,
LLC, or any agreement, certificate of limited partnership or
other governing document of the Partnership, STP2, Mach One
Partners, LLC or Louisiana Timber Partners, LLC or any
applicable law, administrative regulation or administrative or
court decree; and all authorizations, consents and approvals
necessary to consummate the Formation Transactions were timely
obtained; and the offer, issuance and exchange of the general
and limited partnership interests in the Partnership are
exempt from the registration requirements of the Act and
applicable state securities and blue sky laws.
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<PAGE> 23
(xix) Each of the Transaction Documents, to which the
Company, the Partnership, Mach One Partners, LLC, Louisiana
Timber Partners, LLC, Pioneer, STOC, STT2, STTOC, STP2 or any
affiliate of any such entity is a party has been duly
authorized, executed and delivered by such party and
constitutes the binding agreement of such party, enforceable
against such party in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors'
rights generally and by general principles of equity.
(xx) No holders of securities of the Company or the
Partnership have rights to the registration of such securities
except as set forth in the Prospectus.
Such counsel shall also confirm that the Company is qualified to do
business as a foreign corporation in the State of New Hampshire; STOC
is qualified to do business as a foreign corporation in the States of
New Hampshire and Louisiana; Pioneer is qualified to do business as a
foreign limited liability company in the States of California, New
Hampshire and Washington; and the Partnership is qualified to do
business as a foreign limited partnership in the States of Louisiana
and New Hampshire.
Such counsel shall also confirm that such counsel has no reason to
believe that on the Effective Date or at the Execution Time the
Registration Statement contained any untrue statement of a material
fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or
that the Prospectus as of its date and on the Closing Date included or
includes any untrue statement of a material fact or omitted or omits to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading
(in each case, other than the financial statements and other financial
and statistical information contained therein (including numerical data
concerning timber inventories, volumes and acreage), as to which such
counsel need express no opinion).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
laws of the State of Georgia, the General Corporation Laws and the
Limited Partnership Act of the State of Delaware or the Federal laws of
the United States, to the extent they deem proper and specified in such
opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the
Underwriters and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and
public officials. References to the Prospectus in this paragraph (b)
include any supplements thereto at the Closing Date.
(c) The Representatives shall have received from Schwabe,
Williamson & Wyatt, P.C., counsel to Old Pioneer, LLC and Gregory M.
Demers, such opinion, dated the Closing Date and addressed to the
Representatives, with respect to Old Pioneer, LLC and Gregory M. Demers
as the Representatives may reasonably require.
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(d) The Representatives shall have received from Andrews &
Kurth L.L.P., counsel for the Underwriters, such opinion or opinions,
dated the Closing Date and addressed to the Representatives, with
respect to the issuance and sale of the Securities, the Registration
Statement, the Prospectus (together with any supplement thereto) and
other related matters as the Representatives may reasonably require,
and the Company shall have furnished to such counsel such documents as
they reasonably request for the purpose of enabling them to pass upon
such matters.
(e) The Company and the Partnership shall have furnished to
the Representatives a certificate of such parties, signed by the
President and Chief Executive Officer and the Senior Vice President and
Chief Financial Officer of the Company, and by the general partner of
the Partnership, dated the Closing Date, to the effect that the signers
of such certificates have carefully examined the Registration
Statement, the Prospectus, any supplements to the Prospectus and this
Agreement and that:
(i) the representations and warranties of the Company
and the Partnership in this Agreement are true and correct in
all material respects on and as of the Closing Date with the
same effect as if made on the Closing Date and each of the
Company and the Partnership has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse change
in the condition (financial or otherwise), prospects,
earnings, business or properties of the Partnership, Pioneer,
STOC, STT2, STTOC, STP2 and the Company, taken as a whole,
whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in
the Prospectus (exclusive of any supplement thereto).
(f) The Company shall have requested and caused Arthur
Andersen LLP to have furnished to the Representatives, at the Execution
Time and at the Closing Date, letters, dated respectively as of the
Execution Time and as of the Closing Date, in form and substance
satisfactory to the Representatives, and substantially in the form
heretofore approved by the Representatives.
(g) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change in
total assets or in stockholders' equity of the Company or any change in
partners' capital of
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<PAGE> 25
the Partnership or any increase in long-term debt or short-term debt of
the Company or the Partnership or any change in net income or EBITDDA
from that set forth or contemplated in the Prospectus or (ii) any
change, or any development involving a prospective change, in or
affecting the condition (financial or otherwise), prospects, earnings,
business or properties of Pioneer, the Partnership, the Company and
STOC, taken as a whole, whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated in
the Prospectus (exclusive of any supplement thereto) the effect of
which, in any case referred to in clause (i) or (ii) above, is, in the
sole judgment of the Representatives, so material and adverse as to
make it impractical or inadvisable to proceed with the offering or
delivery of the Securities as contemplated by the Registration
Statement (exclusive of any amendment thereof) and the Prospectus
(exclusive of any supplement thereto).
(h) Prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates
and documents as the Representatives may reasonably request.
(i) At or prior to the Closing Date, the Securities shall have
been listed and admitted and authorized for quotation on the Nasdaq
National Market, and satisfactory evidence of such actions shall have
been provided to the Representatives.
(j) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A
hereto from each officer and director of the Company and Louisiana
Timber Partners, LLC, Mach One Partners, LLC, Gregory M. Demers and Old
Pioneer, LLC.
(k) At or prior to the Closing Date, each of the Formation
Transactions shall have occurred.
(l) On the Closing Date, the Company shall have paid in full
the Strategic Timber bridge loan, the Strategic Timber II bridge loan,
the Strategic Timber Partners credit facility and the Pioneer credit
facility (as such terms are used in the Prospectus).
(m) At or prior to the Execution Time, each of Mason Bruce &
Girard, Inc. and Canal Forest Resources, Inc. shall have furnished a
letter addressed to the Representatives, dated on or before the
Execution Time, and substantially in the form heretofore approved by
the Representatives.
(n) On or prior to the Closing Date, the New Credit Facility
shall have been executed and delivered and become effective in
substantially the form filed as an exhibit to the Registration
Statement.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
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<PAGE> 26
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of Sutherland Asbill & Brennan LLP, counsel for the
Company, at 999 Peachtree Street, NE, Atlanta, Georgia 30309, on the Closing
Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company or the Partnership to
perform any agreement herein or comply with any provision hereof other than by
reason of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally through Salomon Smith Barney on demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Securities.
8. Indemnification and Contribution. (a) Each of the
Partnership and the Company, jointly and severally, agrees to indemnify and hold
harmless each Underwriter, the directors, officers, employees and agents of each
Underwriter and each person who controls any Underwriter within the meaning of
either the Act or the Exchange Act against any and all losses, claims, damages
or liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the registration statement for the registration of the Securities
as originally filed or in any amendment thereof, or in any Preliminary
Prospectus or the Prospectus, or in any amendment thereof or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and agrees to reimburse each such indemnified
party, as incurred, for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company and the Partnership
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion therein. This indemnity agreement will be in addition
to any liability which the Company or the Partnership may otherwise have.
(b) Each of the Partnership and the Company, jointly and
severally, agrees to indemnify and hold harmless Salomon Smith Barney and each
person, if any, who controls Salomon Smith Barney within the meaning of either
Section 15 of the Securities Act or Section 20 of the
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Exchange Act ("Salomon Smith Barney Entities"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by the failure of any
Participant to pay for and accept delivery of the shares which immediately
following the effectiveness of the Registration Statement, were subject to a
properly confirmed agreement to purchase; or (ii) related to, arising out of, or
in connection with the Directed Share Program, provided that, the Company and
the Partnership shall be not responsible under this subparagraph (ii) for any
losses, claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of Salomon Smith Barney Entities.
(c) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company and the Partnership, each of their
directors, each of their officers who signs the Registration Statement, and each
person who controls the Company and the Partnership within the meaning of either
the Act or the Exchange Act, to the same extent as the foregoing indemnity from
the Company and the Partnership to each Underwriter, but only with reference to
written information relating to such Underwriter furnished to the Company by or
on behalf of such Underwriter through the Representatives specifically for
inclusion in the documents referred to in the foregoing indemnity. This
indemnity agreement will be in addition to any liability which any Underwriter
may otherwise have. The Company and the Partnership acknowledge that the
statements set forth in the last paragraph of the cover page regarding delivery
of the Securities, and under the heading "Underwriting", (i) the list of
Underwriters and their respective participation in the sale of the Securities,
(ii) the sentences relating to concessions and reallowances and (iii) the
paragraph relating to stabilization, syndicate covering transactions and penalty
bids in any Preliminary Prospectus and the Prospectus constitute the only
information furnished in writing by or on behalf of the several Underwriters for
inclusion in any Preliminary Prospectus or the Prospectus.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a), (b) or (c) above unless
and to the extent it did not otherwise learn of such action and such failure
results in the forfeiture by the indemnifying party of substantial rights and
defenses and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a), (b) or (c) above. The indemnifying party
shall be entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential
27
<PAGE> 28
defendants in, or targets of, any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, (iii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of the institution of such action or (iv)
the indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to Section
8(b) hereof in respect of such action or proceeding, then in addition to such
separate firm for the indemnified parties, the indemnifying party shall be
liable for the reasonable fees and expenses of not more than one separate firm
(in addition to any local counsel) for Salomon Smith Barney for the defense of
any losses, claims, damages and liabilities arising out of the Directed Share
Program, and all persons, if any, who control Salomon Smith Barney within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a),
(b) or (c) of this Section 8 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company and the Partnership and the
Underwriters severally agree to contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with investigating or defending same) (collectively "Losses") to
which the Company and the Partnership and one or more of the Underwriters may be
subject in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Partnership on the one hand and by the
Underwriters on the other from the offering of the Securities; provided,
however, that in no case shall any Underwriter (except as may be provided in any
agreement among underwriters relating to the offering of the Securities) be
responsible for any amount in excess of the underwriting discount or commission
applicable to the Securities purchased by such Underwriter hereunder. If the
allocation provided by the immediately preceding sentence is unavailable for any
reason, the Company and the Partnership and the Underwriters severally shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Partnership
on the one hand and of the Underwriters on the other in connection with the
statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Company and the
Partnership shall be deemed to be equal to the total net proceeds from the
offering (before deducting expenses) received by the Company, and benefits
received by the Underwriters shall be deemed to be equal to the total
underwriting discounts and commissions, in each case as set forth on the cover
page of the Prospectus. Relative fault shall be determined by reference to,
among other things, whether any untrue or any alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information provided by the Company or the Partnership on the one
hand or the Underwriters on the
28
<PAGE> 29
other, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company, the Partnership and the Underwriters agree that it would
not be just and equitable if contribution were determined by pro rata allocation
or any other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer, employee and
agent of an Underwriter shall have the same rights to contribution as such
Underwriter, and each person who controls the Company or the Partnership within
the meaning of either the Act or the Exchange Act, each officer of the Company
who shall have signed the Registration Statement and each director of the
Company shall have the same rights to contribution as the Company or the
Partnership, subject in each case to the applicable terms and conditions of this
paragraph (e). For purposes of this paragraph (e), the Company and the
Partnership shall be deemed one party jointly and severally liable for any
obligations hereunder.
9. Default by an Underwriter. If any one or more Underwriters
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in order that the
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if any, to
the Company and any nondefaulting Underwriter for damages occasioned by its
default hereunder.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if at any
time prior to such time (i) trading in the Company's Common Stock shall have
been suspended by the Commission or the Nasdaq Stock Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq Stock Market
shall have been suspended or limited or minimum prices shall have been
established on such Exchange, (ii) a banking moratorium shall have been declared
either by Federal or New York State authorities or (iii) there shall have
29
<PAGE> 30
occurred any outbreak or escalation of hostilities, declaration by the United
States of a national emergency or war, or other calamity or crisis the effect of
which on financial markets is such as to make it, in the sole judgment of the
Representatives, impractical or inadvisable to proceed with the offering or
delivery of the Securities as contemplated by the Prospectus (exclusive of any
supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or the Partnership or their officers and of the Underwriters set forth
in or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter or the
Company or the Partnership or any of the officers, directors or controlling
persons referred to in Section 8 hereof, and will survive delivery of and
payment for the Securities. The provisions of Sections 7 and 8 hereof shall
survive the termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telefaxed to the Salomon Smith Barney General Counsel (fax
no.: (212) 816-7912) and confirmed to him at 388 Greenwich Street, New York, New
York, 10013, Attention: General Counsel; or, if sent to the Company or the
Partnership, will be mailed, delivered or telefaxed to the General Counsel of
Strategic Timber Trust, Inc. (fax no: (603) 526-7811) and confirmed to him at 5
North Pleasant Street, New London, NH 03257, Attention: General Counsel.
13. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
30
<PAGE> 31
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in New York
City.
"Commission" shall mean the Securities and Exchange
Commission.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at
the Execution Time, in the form in which it shall become effective)
and, in the event any post-effective amendment thereto or any Rule
462(b) Registration Statement becomes effective prior to the Closing
Date, shall also mean such registration statement as so amended or such
Rule 462(b) Registration Statement, as the case may be. Such term shall
include any Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a) hereof.
31
<PAGE> 32
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company, the Partnership and the several Underwriters.
Very truly yours,
Strategic Timber Trust, Inc.
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Strategic Timber Partners, LP
By Strategic Timber Operating Co., as
General Partner of Strategic Timber Partners, LP
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
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.
By: Salomon Smith Barney Inc.
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
For themselves and the other several Underwriters named in Schedule I to the
foregoing Agreement.
32
<PAGE> 33
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF UNDERWRITTEN
UNDERWRITER SECURITIES TO BE PURCHASED
----------- --------------------------
<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 Bank................................................................
Morgan Keegan & Company, Inc.................................................
----------
Total.................................................................. 16,600,000
==========
</TABLE>
<PAGE> 34
EXHIBIT A
[LETTERHEAD OF OFFICER, DIRECTOR OR MAJOR SHAREHOLDER OF
CORPORATION OR MAJOR UNITHOLDER OF THE PARTNERSHIP]
Strategic Timber Trust, Inc.
Public Offering of Common Stock
, 1999
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.
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement"), among Strategic
Timber Trust, Inc., a Georgia corporation (the "Company"), Strategic Timber
Partners, LP, a Delaware limited partnership (the "Partnership"), and you as
representatives of a group of Underwriters named therein, relating to an
underwritten public offering of Common Stock, $.01 par value (the "Common
Stock"), of the Company.
In order to induce you and the other Underwriters to enter
into the Underwriting Agreement, the undersigned will not, without the prior
written consent of Salomon Smith Barney Inc., offer, sell, contract to sell,
pledge or otherwise dispose of, or file (or participate in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any limited partnership interests of
the Partnership ("Units") or any securities convertible into or exercisable or
exchangeable for such capital stock or Units, or publicly announce an intention
to effect any such transaction, for a period of one year after the Closing Date
(as defined in the Underwriting Agreement), other than:
(a) shares of Common Stock or Units disposed of as bona fide
gifts approved by Salomon Smith Barney Inc. where each of the
transferees (i) is an "accredited investor" within the meaning of Rule
501(a) of Regulation D under the Securities Act of 1933, as amended,
and (ii) agrees to be bound by the terms of this letter;
<PAGE> 35
(b) shares of Common Stock or Units transferred to members of
the undersigned's family (spouse, parents, children or siblings), or to
trusts, family limited partnerships or family limited liability
companies for the benefit of any of them, so long as the undersigned or
the undersigned's family members retain the entire beneficial interest
in the Common Stock or Units, and where (i) each of the transferees is
an "accredited investor" and agrees to be bound by the terms of this
letter, and (ii) the undersigned has notified Salomon Smith Barney
Inc.; and
(c) shares of Common Stock or Units disposed of pursuant to a
pledge, grant of security interest or other encumbrance effected in a
bona fide transaction approved by Salomon Smith Barney Inc. with an
unrelated and unaffiliated pledgee where (i) the pledgee is an
"accredited investor" and agrees to be bound by the terms of this
agreement and (ii) the pledgee agrees that it will not under any
circumstances foreclose with respect to such shares or Units until
after one year from the Closing date.
If for any reason the Underwriting Agreement shall be
terminated prior to the Closing Date (as defined in the Underwriting Agreement),
the agreement set forth above shall likewise be terminated.
Yours very truly,
[SIGNATURE OF OFFICER, DIRECTOR OR
MAJOR STOCKHOLDER OR MAJOR UNITHOLDER]
[NAME AND ADDRESS OF OFFICER, DIRECTOR OR MAJOR
STOCKHOLDER OR MAJOR UNITHOLDER]
<PAGE> 1
EXHIBIT 10.6.2
AMENDMENT NO. 1 TO LOAN AGREEMENT
(STRATEGIC TIMBER PARTNERS, LP)
THIS AMENDMENT NO. 1 TO LOAN AGREEMENT dated as of April 22, 1999
("Amendment"), is entered into by and among STRATEGIC TIMBER PARTNERS, LP, a
Delaware limited partnership (the "Borrower"), as the borrower, the LENDERS
party to the Loan Agreement (as defined below), and ABN AMRO BANK N.V., not in
its individual capacity but solely in its capacity as the agent on behalf of
the Lenders (in such capacity, the "Agent").
RECITALS
A. The Borrower, the Lenders and the Agent have entered into that
Loan Agreement dated as of April 27, 1998 (the "Loan Agreement"), pursuant to
which the Lenders have extended and have agreed to extend and make available to
the Borrower certain advances of credit in accordance with their respective
Commitments and upon the terms and conditions set forth in the Loan Agreement
and other Loan Documents.
B. The Borrower desires to amend the Loan Agreement as provided
below and the Lenders are willing to so amend the Loan Agreement, on the terms
and conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS. Capitalized terms used but not defined in
this Amendment shall have the meanings given to them in the Loan Agreement.
SECTION 2. AMENDMENTS. Effective as of the Effective Date (as
defined below), and subject to the terms of and conditions precedent to the
effectiveness of this Amendment, the Loan Agreement is amended as follows:
1.1 The definition of "Borrowing Base" set forth in
Section 1.1 of the Loan Agreement is deleted in its entirety and is replaced
with the following:
"Borrowing Base" means, as calculated for the Borrower 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-one and
two-tenths percent (61.2%) of the Value of Merchantable Timber. The
Borrowing Base advance rate percentage applicable under clause (b),
above, shall be reduced automatically to fifty-eight percent (58.0%)
on May 31, 1999 and thereafter shall be reduced incrementally and
automatically by two percent (2.0%) on each succeeding anniversary of
the Closing Date (i.e., to 56% on the second anniversary of the
Closing Date, 54% on the third anniversary, and so on).
<PAGE> 2
1.2 Section 2.8 of the Loan Agreement is amended by
inserting at the end thereof, after the words "together with all accrued and
unpaid interest thereon", the following parenthetical:
(provided, however, that notwithstanding anything to the
contrary contained in this SECTION 2.8, the mandatory
prepayment, if any, required by this SECTION 2.8 in
connection with any Over Advance arising or occurring on May
31, 1999 as a result of the scheduled reduction to
fifty-eight percent (58.0%) of the Borrowing Base advance
rate percentage applicable to the Value of Merchantable
Timber shall be payable by June 9, 1999 and failure to make
payment in full of such Over Advance by June 9, 1999 shall
be an Event of Default under SECTION 10.1(A)).
SECTION 3. LIMITATIONS ON AMENDMENTS.
(A) The amendments set forth in SECTION 2 above is
effective for the purposes set forth herein and shall be limited precisely as
written and shall not be deemed to (i) be a consent to any other amendment,
waiver or modification of any other term or condition of any Loan Document, or
(ii) otherwise prejudice any right or remedy which the Lenders or the Agent may
now have or may have in the future under or in connection with any Loan
Document.
(B) This Amendment shall be construed in connection with
and as part of the Loan Documents and all terms, conditions, representations,
warranties, covenants and agreements set forth in the Loan Documents, except as
herein waived or amended, are hereby ratified and confirmed and shall remain in
full force and effect.
SECTION 4. REAFFIRMATION AND ACKNOWLEDGEMENT. The Borrower hereby
reaffirms its obligations under each Loan Document to which it is a party and
ratifies and reaffirms the validity and enforceability of all of the Liens and
security interests heretofore granted, pursuant to the Collateral Documents to
the Agent, for itself and on behalf of the Lenders, as collateral security for
the Obligations, and acknowledges that all of such Liens and security
interests, and all Collateral heretofore pledged as security for the
Obligations, continues to be and remain collateral for the Obligations from and
after the date hereof.
SECTION 5. REPRESENTATIONS AND WARRANTIES. In order to induce the
Lenders and the Agent to enter into this Amendment, the Borrower hereby
represents and warrants to each Lender and the Agent as follows:
(A) Immediately after giving effect to this Amendment (i)
the representations and warranties contained in the Loan Documents (other than
those which expressly speak as of a different date) are true, accurate and
complete in all material respects as of the date hereof and (ii) no Default or
Event of Default has occurred and is continuing;
(B) The Borrower has the power and authority to execute
and deliver this Amendment and to perform its obligations under the Loan
Agreement, as amended by this Amendment, and each of the other Loan Documents
to which it is a party;
(C) The execution and delivery by the Borrower of this
Amendment and the performance by Borrower of its obligations under the Loan
Agreement, as amended by this
2
<PAGE> 3
Amendment, and each of the other Loan Documents to which it is a party have
been duly authorized by all necessary partnership action on the part of the
Borrower;
(D) The execution and delivery by the Borrower of this
Amendment and the performance by the Borrower of its obligations under the Loan
Agreement, as amended by this Amendment, and each of the other Loan Documents
to which it is a party do not and will not contravene (i) any law or regulation
binding on or affecting the Borrower, (ii) the Borrower Partnership Agreement,
(iii) any order, judgment or decree of any court or other governmental or
public body or authority, or subdivision thereof, binding on the Borrower, or
(iv) any contractual restriction with a Person other than an Affiliate binding
on the Borrower;
(E) The execution and delivery by the Borrower of this
Amendment and the performance by the Borrower of its obligations under the Loan
Agreement, as amended by this Amendment, and each of the other Loan Documents
to which it is a party do not require any order, consent, approval, license,
authorization or validation of, or filing, recording or registration with, or
exemption by any governmental or public body or authority, or subdivision
thereof, binding on the Borrower, except as already has been obtained or made;
and
(F) This Amendment has been duly executed and delivered by
the Borrower and is the binding obligation of the Borrower, enforceable against
it in accordance with its terms, except as such enforceability may be limited
by bankruptcy, insolvency, reorganization, liquidation, moratorium or other
similar laws of general application and equitable principles relating to or
affecting creditors' rights.
SECTION 6. COUNTERPARTS. This Amendment may be executed in any
number of counterparts and all of such counterparts taken together shall be
deemed to constitute one and the same instrument.
SECTION 7. EFFECTIVENESS. This Amendment shall be deemed
effective on the date (the "Effective Date") upon which is satisfied the final
of the following conditions precedent (provided that all such conditions shall
be satisfied prior to 5:00 p.m., Chicago, Illinois time, April 29, 1999):
(A) The Borrower, the Lenders and the Agent shall have
duly executed and delivered this Amendment to the Agent.
(B) The Borrower shall have paid to the Agent, for the
benefit of the Lenders, an amendment fee of $232,500 by wire transfer or
otherwise in immediately available funds (which represents 0.15% of the
Aggregate Commitment).
SECTION 8. RELEASE AND WAIVER.
(A) The Borrower hereby acknowledges and agrees that: (a)
it has no claim, right or cause of action of any kind against any Lender or the
Agent or any parent, subsidiary or affiliate of any Lender or any of such
Lender's or the Agent's officers, directors, employees, attorneys or other
representatives or agents (all of which parties other than the Lenders and the
Agent being, collectively, the "Lender Agents") in connection with the Loan
Agreement and the
3
<PAGE> 4
other Loan Documents, the Loans advanced or the transactions contemplated
therein; (b) it has no offset or defense of any kind against any of its
respective obligations, indebtedness or contracts in favor of the Lenders or
the Agent; and (c) it recognizes that each of the Lenders and the Agent has
heretofore properly performed and satisfied in a timely manner all of its
respective obligations to and contracts with the Borrower.
(B) Although each of the Lenders and the Agent regards its
respective conduct as proper and does not believe the Borrower to have any
claim, right, cause of action, offset or defense against such Lender or the
Agent or any Lender Agent in connection with the Loan Agreement or any of the
other Loan Documents, the Loans advanced or the transactions contemplated
therein, each Lender and the Agent wishes and the Borrower agrees to eliminate
any possibility that any past conditions, acts, omissions, events,
circumstances or matters could impair or otherwise affect any rights,
interests, contracts or remedies of the Lenders or the Agent. Therefore, the
Borrower unconditionally, freely, voluntarily and after consultation with
counsel, releases, waives and forever discharges (i) any and all liabilities,
indebtedness and obligations, whether known or unknown, of any kind of any
Lender or the Agent or of any Lender Agent to the Borrower except the
obligations remaining to be respectively performed by the Lenders or the Agent
as expressly stated in the Loan Agreement, this Agreement and the other Loan
Documents; (ii) any legal, equitable or other obligations or duties, whether
known or unknown, of any Lender, the Agent or any Lender Agent to the Borrower
(and any rights of the Borrower against any Lender, the Agent, or any Lender
Agent) besides those expressly stated in the Loan Agreement, this Agreement and
the other Loan Documents; (iii) any and all claims under any oral or implied
agreement, obligation or understanding with any Lender, the Agent or any Lender
Agent, whether known or unknown, which is different from or in addition to the
express terms of the Loan Agreement, this Agreement or any of the other Loan
Documents; and (iv) all other claims, rights, causes of action, counterclaims
or defenses of any kind whatsoever (if any), whether known or unknown, which
the Borrower might otherwise have against any Lender, the Agent or any Lender
Agent on account of any condition, act, omission, event, contract, liability,
obligation, indebtedness, claim, right, cause of action, defense, circumstance
or matter of any kind whatsoever which existed, arose or occurred at any time
prior to the execution and delivery of this Agreement or which could arise
concurrently with the effectiveness of this Agreement.
SECTION 9. GOVERNING LAW. THIS CONSENT SHALL BE GOVERNED BY AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
ILLINOIS.
IN WITNESS WHEREOF, the parties hereto have caused this Consent to be
executed as of the date first written above.
THE BORROWER STRATEGIC TIMBER PARTNERS, L.P., a Delaware limited
partnership
By: STRATEGIC TIMBER OPERATING CO., a Delaware
corporation, its general partner
By: /s/ Kenneth L. Chute
----------------------------------------------------
Printed Name: Kenneth L. Chute
------------------------------------------
Title: Senior V.P. and CFO
-------------------------------------------------
4
<PAGE> 5
THE LENDERS ABN AMRO BANK N.V.
By: /s/ [illegible] for Leif H. Olsson
----------------------------------------------
Printed Name: Leif H. Olsson
Title: Senior Vice President
By: /s/ Wayne Rancourt
----------------------------------------------
Printed Name: Wayne Rancourt
Title: Vice President
NATIONSBANK, N.A.
By: /s/ Joseph L. Corah
----------------------------------------------
Printed Name: Joseph L. Corah
------------------------------------
Title: Vice President
-------------------------------------------
AMSOUTH BANK
By: /s/ Donald M. Sinclair
----------------------------------------------
Printed Name: Donald M. Sinclair
------------------------------------
Title: Vice President
-------------------------------------------
THE BANK OF NOVA SCOTIA
By: /s/ Paula MacDonald
----------------------------------------------
Printed Name: Paula MacDonald
------------------------------------
Title: Relationship Manager
-------------------------------------------
SOCIETE GENERALE
By: /s/ J. Blaine Shaum
----------------------------------------------
Printed Name: J. Blaine Shaum
------------------------------------
Title: Managing Director
-------------------------------------------
SOUTH TRUST BANK, N.A.
By: /s/ W. Spencer Ragland
----------------------------------------------
Printed Name: W. Spencer Ragland
------------------------------------
Title: Vice President
-------------------------------------------
5
<PAGE> 6
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Henry G. Montgomery
----------------------------------------------
Printed Name: Henry G. Montgomery
------------------------------------
Title: Vice President
-------------------------------------------
THE AGENT ABN AMRO BANK N.V., as Agent
By: /s/ Leif H. Olsson
----------------------------------------------
Printed Name: Leif H. Olsson
Title: Senior Vice President
By: /s/ Wayne Rancourt
----------------------------------------------
Printed Name: Wayne Rancourt
Title: Vice President
6
<PAGE> 1
EXHIBIT 10.6.3
AMENDMENT NO. 2 TO LOAN AGREEMENT
(STRATEGIC TIMBER PARTNERS, LP)
THIS AMENDMENT NO. 2 TO LOAN AGREEMENT dated as of May 17, 1999 (this
"Amendment"), is entered into by and among STRATEGIC TIMBER PARTNERS, LP, a
Delaware limited partnership (the "Borrower"), as the borrower, the LENDERS
party to the Loan Agreement (as defined below), and ABN AMRO BANK N.V., not in
its individual capacity but solely in its capacity as the agent on behalf of
the Lenders (in such capacity, the "Agent").
RECITALS
A. The Borrower, the Lenders and the Agent have entered into that
Loan Agreement dated as of April 27, 1998, as amended by that Amendment No. 1
to Loan Agreement dated as of April 22, 1999 (as so amended, the "Loan
Agreement"), pursuant to which the Lenders have extended and have agreed to
extend and make available to the Borrower certain advances of credit in
accordance with their respective Commitments and upon the terms and conditions
set forth in the Loan Agreement and other Loan Documents.
B. The Borrower desires to amend the Loan Agreement as provided
below and the Lenders are willing to so amend the Loan Agreement, on the terms
and conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meanings given to them in the Loan Agreement.
SECTION 2. AMENDMENTS. Effective as of the Effective Date (as defined
below), and subject to the terms of and conditions precedent to the
effectiveness of this Amendment, the Loan Agreement is amended as follows:
1.1 The definition of "Borrowing Base" set forth in
Section 1.1 of the Loan Agreement is deleted in its entirety and is replaced
with the following:
"Borrowing Base" means, as calculated for the Borrower 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-one and
two-tenths percent (61.2%) of the Value of Merchantable Timber. The
Borrowing Base advance rate percentage applicable under clause (b),
above, shall be reduced automatically to fifty-eight percent (58.0%)
on June 30, 1999 and thereafter shall be reduced incrementally and
automatically by two
<PAGE> 2
percent (2.0%) on each succeeding anniversary of the Closing Date
(i.e., to 56% on the second anniversary of the Closing Date, 54% on
the third anniversary, and so on).
1.2 Section 2.8 of the Loan Agreement is amended by
inserting at the end thereof, after the words "together with all accrued and
unpaid interest thereon", the following parenthetical:
(provided, however, that notwithstanding anything to the
contrary contained in this SECTION 2.8, the mandatory
prepayment, if any, required by this SECTION 2.8 in
connection with any Over Advance arising or occurring on June
30, 1999 as a result of the scheduled reduction to
fifty-eight percent (58.0%) of the Borrowing Base advance
rate percentage applicable to the Value of Merchantable
Timber shall be payable by June 30, 1999 and failure to make
payment in full of such Over Advance by June 30, 1999 shall
be an Event of Default under SECTION 10.1(a)).
SECTION 3. LIMITATIONS ON AMENDMENTS.
(a) The amendments set forth in SECTION 2 above is
effective for the purposes set forth herein and shall be limited precisely as
written and shall not be deemed to (i) be a consent to any other amendment,
waiver or modification of any other term or condition of any Loan Document, or
(ii) otherwise prejudice any right or remedy which the Lenders or the Agent may
now have or may have in the future under or in connection with any Loan
Document.
(b) This Amendment shall be construed in connection with
and as part of the Loan Documents and all terms, conditions, representations,
warranties, covenants and agreements set forth in the Loan Documents, except as
herein waived or amended, are hereby ratified and confirmed and shall remain in
full force and effect.
SECTION 4. REAFFIRMATION AND ACKNOWLEDGEMENT. The Borrower hereby
reaffirms its obligations under each Loan Document to which it is a party and
ratifies and reaffirms the validity and enforceability of all of the Liens and
security interests heretofore granted, pursuant to the Collateral Documents to
the Agent, for itself and on behalf of the Lenders, as collateral security for
the Obligations, and acknowledges that all of such Liens and security
interests, and all Collateral heretofore pledged as security for the
Obligations, continues to be and remain collateral for the Obligations from and
after the date hereof.
SECTION 5. REPRESENTATIONS AND WARRANTIES. In order to induce the
Lenders and the Agent to enter into this Amendment, the Borrower hereby
represents and warrants to each Lender and the Agent as follows:
(a) Immediately after giving effect to this Amendment (i)
the representations and warranties contained in the Loan Documents (other than
those which expressly speak as of a different date) are true, accurate and
complete in all material respects as of the date hereof and (ii) no Default or
Event of Default has occurred and is continuing;
(b) The Borrower has the power and authority to execute
and deliver this Amendment and to perform its obligations under the Loan
Agreement, as amended by this Amendment, and each of the other Loan Documents
to which it is a party;
2
<PAGE> 3
(c) The execution and delivery by the Borrower of this
Amendment and the performance by Borrower of its obligations under the Loan
Agreement, as amended by this Amendment, and each of the other Loan Documents
to which it is a party have been duly authorized by all necessary partnership
action on the part of the Borrower;
(d) The execution and delivery by the Borrower of this
Amendment and the performance by the Borrower of its obligations under the Loan
Agreement, as amended by this Amendment, and each of the other Loan Documents
to which it is a party do not and will not contravene (i) any law or regulation
binding on or affecting the Borrower, (ii) the Borrower Partnership Agreement,
(iii) any order, judgment or decree of any court or other governmental or
public body or authority, or subdivision thereof, binding on the Borrower, or
(iv) any contractual restriction with a Person other than an Affiliate binding
on the Borrower;
(e) The execution and delivery by the Borrower of this
Amendment and the performance by the Borrower of its obligations under the Loan
Agreement, as amended by this Amendment, and each of the other Loan Documents
to which it is a party do not require any order, consent, approval, license,
authorization or validation of, or filing, recording or registration with, or
exemption by any governmental or public body or authority, or subdivision
thereof, binding on the Borrower, except as already has been obtained or made;
and
(f) This Amendment has been duly executed and delivered
by the Borrower and is the binding obligation of the Borrower, enforceable
against it in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or
other similar laws of general application and equitable principles relating to
or affecting creditors' rights.
SECTION 6. COUNTERPARTS. This Amendment may be executed in any number
of counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
SECTION 7. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Amendment shall
be effective and shall be deemed effective as of May 31, 1999 (the "Effective
Date") if each of the following conditions precedent shall be satisfied prior
to 5:00 p.m., Chicago, Illinois time, May 31, 1999:
(a) STT shall have printed the preliminary prospectus for
the IPO (as defined in the Loan Agreement dated as of April 9, 1999, by and
among the Borrower and Pioneer Resources, LLC, an Oregon limited liability
company, as co-borrowers, the lenders party thereto, and ABN AMRO Bank, N.V.,
as the administrative agent);
(b) STT shall have commenced the roadshow meetings with
prospective equity investors in respect of the IPO;
(c) The Borrower, the Lenders and the Agent shall have
duly executed and delivered this Amendment to the Agent.
3
<PAGE> 4
SECTION 8. RELEASE AND WAIVER.
(a) The Borrower hereby acknowledges and agrees that: (a)
it has no claim, right or cause of action of any kind against any Lender or the
Agent or any parent, subsidiary or affiliate of any Lender or any of such
Lender's or the Agent's officers, directors, employees, attorneys or other
representatives or agents (all of which parties other than the Lenders and the
Agent being, collectively, the "Lender Agents") in connection with the Loan
Agreement and the other Loan Documents, the Loans advanced or the transactions
contemplated therein; (b) it has no offset or defense of any kind against any
of its respective obligations, indebtedness or contracts in favor of the
Lenders or the Agent; and (c) it recognizes that each of the Lenders and the
Agent has heretofore properly performed and satisfied in a timely manner all of
its respective obligations to and contracts with the Borrower.
(b) Although each of the Lenders and the Agent regards
its respective conduct as proper and does not believe the Borrower to have any
claim, right, cause of action, offset or defense against such Lender or the
Agent or any Lender Agent in connection with the Loan Agreement or any of the
other Loan Documents, the Loans advanced or the transactions contemplated
therein, each Lender and the Agent wishes and the Borrower agrees to eliminate
any possibility that any past conditions, acts, omissions, events,
circumstances or matters could impair or otherwise affect any rights,
interests, contracts or remedies of the Lenders or the Agent. Therefore, the
Borrower unconditionally, freely, voluntarily and after consultation with
counsel, releases, waives and forever discharges (i) any and all liabilities,
indebtedness and obligations, whether known or unknown, of any kind of any
Lender or the Agent or of any Lender Agent to the Borrower except the
obligations remaining to be respectively performed by the Lenders or the Agent
as expressly stated in the Loan Agreement, this Agreement and the other Loan
Documents; (ii) any legal, equitable or other obligations or duties, whether
known or unknown, of any Lender, the Agent or any Lender Agent to the Borrower
(and any rights of the Borrower against any Lender, the Agent, or any Lender
Agent) besides those expressly stated in the Loan Agreement, this Agreement and
the other Loan Documents; (iii) any and all claims under any oral or implied
agreement, obligation or understanding with any Lender, the Agent or any Lender
Agent, whether known or unknown, which is different from or in addition to the
express terms of the Loan Agreement, this Agreement or any of the other Loan
Documents; and (iv) all other claims, rights, causes of action, counterclaims
or defenses of any kind whatsoever (if any), whether known or unknown, which
the Borrower might otherwise have against any Lender, the Agent or any Lender
Agent on account of any condition, act, omission, event, contract, liability,
obligation, indebtedness, claim, right, cause of action, defense, circumstance
or matter of any kind whatsoever which existed, arose or occurred at any time
prior to the execution and delivery of this Agreement or which could arise
concurrently with the effectiveness of this Agreement.
SECTION 9. GOVERNING LAW. THIS CONSENT SHALL BE GOVERNED BY AND SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Consent to be
executed as of the date first written above.
THE BORROWER STRATEGIC TIMBER PARTNERS, L.P., a Delaware limited
partnership
By: STRATEGIC TIMBER OPERATING CO., a Delaware
corporation, its general partner
By: /s/ Kenneth L. Chute
-----------------------------------------------
Printed Name: Kenneth L. Chute
Title: Senior VP and CFO
THE LENDERS ABN AMRO BANK N.V.
By: /s/ Leif H. Olsson
-----------------------------------------------
Printed Name: Leif H. Olsson
Title: Senior Vice President
By: /s/ Wayne Rancourt
-----------------------------------------------
Printed Name: Wayne Rancourt
Title: Vice President
NATIONSBANK, N.A.
By: /s/ Joseph L. Corah
-----------------------------------------------
Printed Name: Joseph L. Corah
Title: Vice President
AMSOUTH BANK
By: /s/ Donald M. Sinclair
-----------------------------------------------
Printed Name: Donald M. Sinclair
Title: Vice President
THE BANK OF NOVA SCOTIA
By: /s/ M. R. Bradley
-----------------------------------------------
Printed Name: M. R. Bradley
Title: Authorized Signatory
5
<PAGE> 6
SOCIETE GENERALE
By: /s/ Maureen E. Kelly
-----------------------------------------------
Printed Name: Maureen E. Kelly
Title: Director
SOUTH TRUST BANK, N.A.
By: /s/ W. Spencer Ragland
-----------------------------------------------
Printed Name: W. Spencer Ragland
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Henry G. Montgomery
-----------------------------------------------
Printed Name: Henry G. Montgomery
Title: Vice President
THE AGENT ABN AMRO BANK N.V., as Agent
By: /s/ Leif H. Olsson
-----------------------------------------------
Printed Name: Leif H. Olsson
Title: Senior Vice President
By: /s/ Wayne Rancourt
-----------------------------------------------
Printed Name: Wayne Rancourt
Title: Vice President
6
<PAGE> 1
EXHIBIT 10.17.2
AMENDMENT NO. 1 TO LOAN AGREEMENT
(STRATEGIC TIMBER PARTNERS, LP
AND
PIONEER RESOURCES, LLC)
THIS AMENDMENT NO. 1 TO LOAN AGREEMENT dated as of May 17, 1999
("Amendment"), is entered into by and among STRATEGIC TIMBER PARTNERS, LP, a
Delaware limited partnership, and Pioneer Resources, LLC, an Oregon limited
liability company, as co-borrowers (each, a "Borrower" and collectively, the
"Borrower"), the LENDERS party to the Loan Agreement (as defined below), and
ABN AMRO BANK N.V., not in its individual capacity but solely in its capacity
as the agent on behalf of the Lenders (in such capacity, the "Administrative
Agent").
RECITALS
A. The Borrowers, the Lenders and the Administrative Agent have
entered into that Loan Agreement dated as of April 9, 1999 (the "Loan
Agreement").
B. The Borrower desires to amend the Loan Agreement as provided
below and the Lenders are willing to so amend the Loan Agreement, on the terms
and conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound, the parties hereto agree as
follows:
DEFINITIONS
SECTION 1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meanings given to them in the Loan Agreement.
SECTION 2. AMENDMENTS. Effective as of the Effective Date (as defined
below), and subject to the terms of and conditions precedent to the
effectiveness of this Amendment, the Loan Agreement is amended as follows:
(a) Conditions Precedent to the Closing. The date "May 31, 1999"
referenced in the proviso of the first sentence of Section 4.1 is hereby
deleted and the date "June 30, 1999" is substituted therefor.
SECTION 3. LIMITATIONS ON AMENDMENTS.
(a) The amendment set forth in Section 2 above is effective for
the purposes set forth herein and shall be limited precisely as written and
shall not be deemed to (i) be a consent to any other amendment, waiver or
modification of any other term or condition
<PAGE> 2
of any Loan Document, or (ii) otherwise prejudice any right or remedy which the
Lenders or the Administrative Agent may now have or may have in the future
under or in connection with any Loan Document.
(B) This Amendment shall be construed in connection with and as
part of the Loan Documents and all terms, conditions, representations,
warranties, covenants and agreements set forth in the Loan Documents, except as
herein waived or amended, are hereby ratified and confirmed and shall remain in
full force and effect.
SECTION 4. COUNTERPARTS. This Amendment may be executed in any number
of counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
SECTION 5. EFFECTIVENESS. This Amendment shall be deemed effective on
the date (the "Effective Date") upon which each Borrower, each Lender and the
Administrative Agent shall have duly executed and delivered this Amendment to
the Administrative Agent.
SECTION 6. GOVERNING LAW. THIS CONSENT SHALL BE GOVERNED BY AND SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS.
IN WITNESS WHEREOF, the parties hereto have caused this Consent to be
executed as of the date first written above.
THE BORROWERS STRATEGIC TIMBER PARTNERS, L.P., a Delaware limited
partnership
By: STRATEGIC TIMBER OPERATING CO., a Delaware
corporation, its general partner
By: /s/ Kenneth L. Chute
--------------------------
Printed Name: Kenneth L. Chute
Title: Senior VP and CFO
PIONEER RESOURCES, LLC, an Oregon limited liability
company
By: /s/ Joseph E. Rendini
---------------------------
Printed Name: Joseph E. Rendini
Title: Secretary and VP
2.
<PAGE> 3
THE ADMINISTRATIVE AGENT ABN AMRO BANK N.V., as Administrative Agent
By: /s/ Leif H. Olsson
----------------------------------------------
Printed Name: Leif H. Olsson
Title: Senior Vice President
By: /s/ Wayne Rancourt
----------------------------------------------
Printed Name: Wayne Rancourt
Title: Vice President
THE LENDERS ABN AMRO BANK N.V.
By: /s/ Leif H. Olsson
----------------------------------------------
Printed Name: Leif H. Olsson
Title: Senior Vice President
By: /s/ Wayne Rancourt
----------------------------------------------
Printed Name: Wayne Rancourt
Title: Vice President
NATIONSBANK, N.A.
By: /s/ Joseph L. Corah
----------------------------------------------
Printed Name: Joseph L. Corah
Title: Vice President
AMSOUTH BANK
By: /s/ Donald M. Sinclair
----------------------------------------------
Printed Name: Donald M. Sinclair
Title: Vice President
THE BANK OF MONTREAL
By: /s/ Amy K. Dumser
----------------------------------------------
Printed Name: Amy K. Dumser
Title: Director
3.
<PAGE> 4
THE BANK OF SCOTLAND
By: /s/ Janet Taffe
----------------------------------------------
Printed Name: Janet Taffe
Title: Asst. Vice President
CITIZENS BANK NEW HAMPSHIRE
By: /s/ Vernon T. Studer
----------------------------------------------
Printed Name: Vernon T. Studer
Title: Vice President
CREDIT AGRICOLE INDOSUEZ
By: /s/ Alan L. Schmelzer
----------------------------------------------
Printed Name: Alan L. Schmelzer
Title: Senior Relationship Manager
By: /s/ Katherine L. Abbott
----------------------------------------------
Printed Name: Katherine L. Abbott
Title: First Vice President/Managing Director
FIRST SECURITY BANK, N.A.
By: /s/ Mark C. Johnson
----------------------------------------------
Printed Name: Mark C. Johnson
Title: Senior V.P.
KEYBANK NATIONAL ASSOCIATION
By: /s/ Richard J. Ameny, Jr.
----------------------------------------------
Printed Name: Richard J. Ameny, Jr.
Title: Assistant Vice President
<PAGE> 5
NATEXIS BANQUE
By: /s/ Iain A. Whyte
----------------------------------------------
Printed Name: Iain A. Whyte
Title: Vice President
By:
----------------------------------------------
Printed Name:
-------------------------------------
Title:
--------------------------------------------
SOCIETE GENERALE
By: /s/ Maureen E. Kelly
----------------------------------------------
Printed Name: Maureen E. Kelly
Title: Director
SOUTH TRUST BANK, N.A.
By: /s/ W. Spencer Ragland
----------------------------------------------
Printed Name: W. Spencer Ragland
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Henry G. Montgomery
----------------------------------------------
Printed Name: Henry G. Montgomery
Title: Vice President
<PAGE> 1
EXHIBIT 10.18
OPTION AGREEMENT
THIS OPTION AGREEMENT (this "Agreement") made this 2nd day of July,
1998, by and between PIONEER RESOURCES, L.L.C. (hereinafter referred to as
"Seller") and COASTAL FORESTLANDS, LTD. (hereinafter referred to as
"Purchaser");
W I T N E S S E T H:
In consideration of $10 (hereinafter referred to as the "Option
Money"), Seller does hereby grant to Purchaser an option (hereinafter referred
to as the "Option") to purchase portions, up to but not exceeding an aggregate
total of 10,000 acres of land (but excluding the standing timber thereon) over
the entire term of this Agreement, of that tract or parcel of land located in
Mendocino and Sonoma Counties, California, and being more particularly described
in Schedule 1 attached hereto and hereby made a part hereof (the "Property"), on
the following terms and conditions:
1. Purchase Price; Exercise.
(a) The purchase price for the portions of the Property sold
pursuant hereto shall be paid at Closing and shall equal TWO THOUSAND DOLLARS
($2,000) per acre.
(b) Purchaser shall be entitled to exercise the Option as to
portions (up to but not exceeding said limit of 10,000 acres) of the Property up
to twenty-five (25) times, so that there will be no more than twenty-five (25)
separate parcels sold to Purchaser pursuant hereto (each separate parcel may
contain more than one noncontiguous plots, but will always remain one legal
parcel). Each exercise of the Option, if any, shall be made by Purchaser's
giving Seller notice of such exercise on or before the date which is ten (10)
years after the date hereof. Purchaser's notice shall contain a copy of the
survey required pursuant to paragraph 4(b) below and shall specify the portions
of the Property upon which the Option is being exercised. This Agreement shall
expire on the date which is ten (10) years from the date hereof.
2. Conveyances. If the Option is duly exercised, Seller agrees at
the time of closing to convey fee simple title to the portions of the Property
to be sold to Purchaser by grant deed subject to: (a) zoning ordinances
affecting the Property, (b) covenants, easements and restrictions of record, (c)
ad valorem taxes not yet due and payable, (d) all matters of record (subject to
the terms of paragraph 4(c) below), (e) any matters shown by survey or which
would be shown by a current, complete and accurate survey, and (f) any other
matters affecting the Property as of the date hereof, whether or not of record.
In addition, the grant deed to Seller will contain a reservation of the standing
timber on such property sold to Purchaser and restrictions providing that such
property will be used for agricultural purposes only (as vineyards and/or
orchards only), with no residences of any kind to be located on such property.
Furthermore, in the event that the Option is exercised prior to receipt of
agricultural conversion approval of the portion(s) of the Property sold to
Purchaser
1
<PAGE> 2
pursuant to such exercise, the grant deed to Purchase as to that portion of the
Property exercised on will contain an additional provision incorporating the
terms of paragraph 3(a) below. At the closing, Purchaser and Seller will enter
into a cutting agreement which provides for Seller's removal of the standing
timber from the portions of the portions of the Property sold to Purchaser
hereunder, which removal will occur within two (2) years from the date of the
closing (unless any timber harvest plans applicable to such property require a
longer period).
3. Use.
(a) Purchaser represents and warrants that it will not
exercise the Option unless it will use the portions of the Property sold to
Purchaser for vineyards and/or orchards. Purchaser acknowledges that Seller
would not agree to grant the Option to Purchaser if the Property would be put to
any use other than vineyards and/or orchards. Seller agrees to cooperate with
Purchaser in taking reasonable actions for the development of such vineyards
and/or orchards provided that Purchaser reimburses Seller for all costs incurred
by Seller in taking such actions. Notwithstanding the foregoing or any other
provision of this Agreement to the contrary, Purchaser will not take or pursue,
and Seller shall have no obligation to take or pursue or to join with or assist
Purchaser in taking or pursuing, any action, plan or program in support of
Purchaser's efforts to convert portions of the Property to agricultural use as
vineyards and/or orchards if Seller determines, in Seller's reasonable
discretion, that any such action, plan or program would or could restrict,
hinder, impede, limit, reduce, diminish or otherwise adversely affect in any way
(I) Seller's right or ability to operate or manage the Property (other than the
portions thereof sold to Purchaser) as a tree farm (as hereinafter defined ) or
to take any action or engage in any activity customary or incidental to the
operation of management of the Property as a tree farm, (ii) the amounts or
volumes of trees or timber (on a per acre basis) that Seller would be permitted
to harvest, cut or remove from the Property, or (iii) the value or suitability
of the Property (other than the portions thereof sold to Purchaser) for use as a
tree farm. For purposes of this Agreement, the term "tree farm" means land used
for the purpose of cultivating, planting, growing, cutting, harvesting and/or
otherwise exploiting standing timber for commercial and industrial purposes, and
all activities related thereto.
(b) Subject always to all of the foregoing limitations set
forth in this paragraph 3, (I) at the request of Purchaser, made at any time and
from time to time during the term of this Agreement, Seller shall cooperate and
join in the submission to relevant governmental authorities of applications for
approval of long term timber harvest programs which include agricultural
conversion proposals and participate in the process of review and approval of
those applications, including the preparation, review and certification of
environmental impact reports and rezoning of lands subject to the Option; (ii)
Seller and Buyer shall each cooperate to grant or reserve for the benefit of the
other easements for access, water development, erosion control or other
mitigation measures reasonably necessary to the operation of the tree farm on
Seller's property and vineyards and/or orchards on the portions of the Property
sold to Purchaser hereunder; and (iii) as part of the consideration for this
Agreement, Purchaser is hereby granted the right to purchase for $5,000,000 all
of the right to dedicate or cause Seller to dedicate such easements or other
devices to revert all the portions of the Property not sold to Purchaser
hereunder to acreage of no more than 15 parcels
2
<PAGE> 3
and foreclose the further subdivision and foreclose the further agricultural
conversion of the portions of the Property not sold to Purchaser during the term
of this Agreement. The parties agree that these rights may have a market value
greatly different than the price provided herein.
(c) In the event of any dispute between Seller and Purchaser
pursuant to the operation of this Agreement, such dispute will be resolved by
binding arbitration in accordance with the procedures and methods governed by
the American Arbitration Association.
4. Inspection; Survey; Title; "As-Is".
(a) Purchaser, and Purchaser's agents and representatives, at
Purchaser's expense and at reasonable times during normal business hours upon
appointment with Seller, shall have the right to enter upon the Property for the
purpose of inspecting, examining and surveying the Property. Purchaser assumes
all responsibility for Purchaser's acts and the acts of Purchaser's agents and
representatives in exercising the rights provided under this paragraph and
agrees to indemnify, defend and hold Seller harmless from and against any and
all liability, damage, loss, cost and expense (including but not limited to
attorney fees and expenses and costs of litigation) resulting therefrom. The
foregoing indemnification will survive each closing hereunder, and will survive
any termination of this Agreement.
(b) Purchaser, at Purchaser's sole cost and expense, will
cause a boundary survey to be performed to delineate each portion of the
Property to be purchased hereunder prior to Purchaser's exercise of the Option
as to such portion, which survey must be in form and substance reasonably
satisfactory to Seller, must state the acreage of such portion to the nearest
100th of an acre and must be provided to Seller in Purchaser's notice of
exercise of the Option.
(c) Purchaser agrees to take title to the portions of the
Property sold to Purchaser hereunder in the condition described in paragraph 2
above; provided, however, that Seller agrees that any matters that Seller puts
of record affecting the Property will be in the normal and customary course of
operating a tree farm (as defined above). In addition, Purchaser hereby
specifically consents to Seller's granting so-called "true oak" easements on and
over the Property.
(d) Except for the special warranty of title to be included in
the grant deed from Seller to Purchaser, Purchaser will purchase and Seller will
sell the Property in its "AS IS" condition and Seller has not made, does not
make and specifically disclaims any representations, warranties, guaranties,
commitments, promises or agreements of any kind, express or implied, with
respect to the nature, quality, quantity, condition, habitability, fitness,
suitability or usefulness of the Property, any of the materials relating to the
Property furnished by Seller or any other matter of any kind relating to the
Property.
5. Brokerage Commission. Purchaser represents to Seller that
Purchaser has not engaged or dealt with any broker or agent in regard to this
Agreement or to any sale and purchase contemplated hereby, and Purchaser agrees
to indemnify, defend and hold Seller harmless from and
3
<PAGE> 4
against any claim, loss, damage, liability, cost or expense (including but not
limited to attorney fees and expenses and costs of litigation) which Seller
shall suffer, incur or be threatened with because of any claim by any broker,
agent or other person or entity claiming by, through, or under Purchaser,
whether or not meritorious, for any fee, commission, other compensation with
respect hereto or the purchase and sale provided herein. This paragraph shall
survive each closing hereunder, the termination of this Agreement, or the
failure of Purchaser to exercise same.
6. Closing. Any purchase and sale hereunder shall be closed on or
before the expiration of sixty (60) days after Purchaser shall exercise the
Option as to all or any portion or portions of the Property, on the date and at
the time and place designated by Purchaser by not less than five (5) days'
written notice to Seller. At the closing each party shall execute and deliver
all documents necessary to effect and complete the closing. Purchaser shall pay
all transfer taxes, costs of recording, survey costs, and all other costs and
expenses in connection with the closing. Ad valorem taxes on the Property for
the year in which the purchase and sale hereunder is closed shall be prorated as
of the date of closing. In the event tax bills have not been issued for the year
of closing, taxes shall be prorated based on the previous year's tax bill and
shall be reprorated when the current year's tax bill is available. Seller shall
deliver possession of the portions of the Property so sold to Purchaser at
closing.
7. Cancellation, Non-Exercise, Default and Option Money. In the
event that the Option is exercised and any sale contemplated hereby is not
consummated because of Purchaser's inability, failure or refusal to perform any
of Purchaser's obligations hereunder, then Seller shall have the right, in
addition to any and all other rights which Seller may have at law or in equity
(except, however, that Seller shall not be entitled to terminate this Agreement
due to such failure by Purchaser), to retain the Option Money and to seek
specific performance of this Agreement, or to sue Purchaser for damages. In the
event that the Option is exercised and any sale contemplated hereby is not
consummated because of Seller's inability, failure or refusal to perform any of
Seller's obligations hereunder, Purchaser shall have the right, in addition to
any and all other rights which Purchaser may have at law or in equity, to seek
specific performance of this Agreement.
8. Notices. All notices or elections required or permitted by
this Agreement shall be in writing, signed by the party giving same and shall be
given personally or by mailing the same, postage prepaid, United States
certified or registered mail, or sent by reputable overnight courier, addressed
to the party intended to receive such notice at the address specified below, or
at such other address as may be specified by any party by notice hereunder from
time to time.
Purchaser: Coastal Forestlands, Ltd.
P. O. Box 537
Willits, California 95490
Attention: Mr. Richard L. Padula
4
<PAGE> 5
with a copy to: Ball Janik LLP
One Main Place
101 SW Main Street, Suite 1100
Portland, Oregon 97204-3219
Attention: Gary D. Cole
Seller: Pioneer Resources, L.L.C.
25310 Jeans Road
P.O. Box 876
Veneta, OR 97487
Attention: Mr. T. Yates Exley
with a copy to: Sutherland, Asbill & Brennan LLP
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
Attention: William H. Bradley
Any such notice shall be deemed given when personally delivered or mailed as
aforesaid.
9. Successors and Assigns. This Agreement shall inure to the
benefit of, and be binding upon, the parties hereto, their heirs, successors,
administrators, executors and assigns. If Purchaser transfers or assigns its
interest hereunder, it will provide Seller with notice of such transfer or
assignment within thirty (30) days thereafter. Nothing in this Agreement,
express or implied, is intended to confer upon anyone other than those mentioned
in this paragraph any rights or remedies under or by reason of this Agreement.
10. Captions. Titles or captions of articles, paragraphs or
sections contained in this Agreement are inserted only as a matter of
convenience and for reference, and in no way define, limit, extend or describe
the scope of this Agreement or the intent of any provision hereof.
11. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
12. Entire Agreement. This Agreement constitutes the sole and
entire agreement between the parties hereto and no modification of this
Agreement shall be binding unless attached hereto and signed by Seller and
Purchaser. No representation, promise or inducement not included in this
Agreement shall be binding upon any party hereto.
13. Time of Essence. Time is of the essence of each and every
provision and stipulation of this Agreement.
14. Memorandum of Agreement. The parties agree to record a
memorandum of this
5
<PAGE> 6
Agreement upon execution hereof.
15. Attorney's Fees. If either party commences an action against
the other arising out of or in connection with this Agreement, the prevailing
party shall be entitled to recover from the losing party reasonable attorneys'
fees and costs of suit.
16. Termination. This Agreement shall automatically terminate and
be of no further force or effect whatsoever (except as may be expressly provided
otherwise in this Agreement) on the tenth (10th) anniversary of the date of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal the day and year first above written.
PURCHASER:
COASTAL FORESTLANDS, LTD.
BY: COASTAL FORESTLANDS, INC., its sole
general partner
By:/s/ Richard L. Padula
------------------------------------
Richard L. Padula
President
SELLER:
PIONEER RESOURCES, LLC
By:/s/ Yates Exley
---------------------------------------
Yates Exley
Member
6
<PAGE> 7
ORDER NO. 210238 DN
SCHEDULE 1
LEGAL DESCRIPTION
The land referred to herein is situated in the State of California,
County of Mendocino, and is described as follows:
TRACT ONE:
ALL OF THE TIMBER AND TIMBER RIGHTS AS RESERVED IN THE DEED FROM COASTAL
FORESTLANDS, LTD., TO JAMES RATTO, ET UX, RECORDED MARCH 3, 1997 IN BOOK 2397 OF
OFFICIAL RECORDS, PAGE 272, MENDOCINO COUNTY RECORDS, IN AND TO THE FOLLOWING
DESCRIBED PARCELS ONE AND TWO:
PARCEL ONE:
That portion of the Northwest quarter of Northeast quarter of Section 11,
Township 11 North, Range 13 West, Mount Diablo Meridian, lying southwesterly of
the boundary line described in Book 386 of Official Records, Page 493, Mendocino
County Records.
PARCEL TWO:
All in Township 11 North, Range 13 West, Mount Diablo Meridian:
Section 3: Lots 5, 6, 7, 8
Section 4: Lots 5, 6, 7, 8, 9, 10, 11, 12,
South half of Northwest quarter
Section 5: Lot 1, Southeast quarter of Northeast quarter, Northeast
quarter of Southeast quarter
Section 9: Lots 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, Northeast quarter
of Southwest quarter
Section 10: Lots 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12
Section 11: Lots 2, 3, 4, 5, 6, 7, Southeast quarter of Northwest quarter
ALSO: South half of Northeast quarter of Section 11, Township 11 North, Range 13
West, Mount Diablo Meridian, lying South and West of the boundary line described
in the Boundary Line
7
<PAGE> 8
ORDER NO. 210238 DN
Agreement and deed recorded in Book 386 of Official Records, Page 493, Mendocino
County Records.
EXCEPTING THEREFROM any interest acquired by Ornbaun Livestock Company, a
California corporation, in the Agreement executed by Fred Brandt, et al, to
Ornbaun Livestock Company, a California Corporation, recorded January 19, 1949
in Book 239 of Official Records, page 329, Mendocino County Records.
ALSO: That portion of Lots 1 and 8 of Section 11, Township 11 North, Range 13
West, Mount Diablo Meridian, lying West of the boundary line described in the
Boundary Line Agreement and deed recorded in Book 386 of Official Records, Page
493, Mendocino County Records.
TRACT TWO:
PARCEL ONE:
In Township 11 North, Range 13 West, Mount Diablo Meridian Section 6: Government
Lot 14
Section 7: Government Lots 1 and 2
In Township 11 North, Range 13 West, Mount Diablo Meridian
Section 1: Northwest quarter, West half of northeast quarter, West half
of Southeast quarter, Southeast quarter of Southeast quarter, Southeast quarter
of Southwest quarter, Northwest quarter of Southwest quarter, and that part of
the Northeast quarter of northeast quarter lying South and West of the South
Fork of Robinson Creek
Section 2: Northwest quarter, North half of Southwest quarter
Section 3: North half of Northeast quarter Section 12; North half of
North half in Township 12 North, Range 14 West, Mount Diablo Meridian
Section 26: That part of the West half of Southwest quarter lying South
and West of the centerline of Rickard Ranch Road, also known as the Robinson
Creek Road
Section 27: That part of the Southeast quarter of Southeast quarter lying
South of the Centerline of Billings Creek
Section 34: East half of Northeast quarter, Northeast quarter of Southeast
quarter
8
<PAGE> 9
ORDER NO. 210238 DN
Section 35: ALL, excepting therefrom the Southwest quarter of Southwest
quarter ALSO EXCEPTING therefrom that portion of the Northwest quarter of
Northwest quarter and the West half of Northeast quarter of Northwest quarter
lying North of the centerline of Rickard Ranch Road, also known as the Robinson
Creek Road; ALSO EXCEPTING therefrom that portion of the balance of the section
lying North of Robinson Creek
Section 36: ALL, excepting therefrom that portion lying North of Robinson
Creek and north of the South Fork of Robinson Creek
PARCEL TWO:
THE EASEMENT granted in the deed from Sonoma Title Guaranty Company to Longview
Fibre Company, dated December 12, 1973, recorded January 30, 1974 in Book 951 of
Official Records, page 510, Mendocino County Records, as follows:
(a) "A right of way for general road purposes 60 feet in width, the
centerline of which is coincident with the centerline of the existing road known
as the Rickard Ranch Road, also known as the Robinson Creek Road, said 60 foot
right of way beginning at the point of intersection of the Robinson Creek Road
and Robinson Creek in the West 1/2 of Section 36, said point being PT "D" on
Exhibit "C" hereof, and running thence in a general Northwesterly direction to a
point on the Westerly line of the Northwest 1/4 of the Southwest 1/4 of Section
26, all in Township 12 North, Range 14 West, M.D.M.
(b) ALSO, TOGETHER WITH a right of way for general road purposes 60 feet in
width, the centerline of which is coincident with the centerline of the existing
road known as the Rickard Ranch Road, also known as the Robinson Creek Road,
said 60 foot right of way beginning at a point on the Westerly line of the
Northwest 1/4 of the South 1/4 of Section 26, and running thence in a Northerly
and Northwesterly direction to the point of intersection with Signal Ridge Road
in Section 22, all in Township 12 North, Range 14 West, M.D.M.
Rights of Way (a) and (b) hereinabove set forth are lying between and extend
from PT "A" to PT "B" and from PT "C" to PT "D", as so marked on Exhibits "B"
and "C" attached hereto and made a part hereof.
ALSO, TOGETHER WITH two (2) easements for general road and utility purposes,
each being 60 feet in width, and lying between the East line of the West 1/2 of
the Northeast 1/4 of the Northwest 1/4 of Section 35, and the point of
intersection of the Robinson Creek Road and Robinson Creek, said point being PT
"D" on Exhibit "C" hereof, in the West 1/2 of Section 36, all in Township 12
North, Range 14 West, M.D.M. Said easements to extend from the centerline of
Robinson Creek Road to the centerline of Robinson Creek, the locations of which
are to be determined by the grantee herein, its assigns or successors in
interest.
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<PAGE> 10
ORDER NO. 210238 DN
TRACT THREE:
The Northwest quarter of the Southeast quarter of Section 31, Township 13 North,
Range 15 West, Mount Diablo Base and Meridian.
TRACT FOUR:
PARCEL ONE:
Lot 1 and the South 1/2 of the Northeast quarter, the West 1/2 of the Southeast
quarter and the Southwest quarter of Section 3, Township 12 North, Range 16
West, Mount Diablo Base and Meridian, according to the official plat thereof.
PARCEL TWO:
West half of Southwest quarter and Southeast quarter of the Southwest quarter of
Section 2; East 1/2 of the Southeast quarter of Section 3; Northwest quarter,
the South 1/2, and Southwest diagonal 1/2 OF the Northeast quarter of Section
11, Township 12 North, Range 16 West, Mount Diablo Base and Meridian according
to the official plat thereof.
PARCEL THREE:
Northwest quarter, Southeast quarter and Northeast 1/4 of the Southwest quarter
of Section 2; Lots 2, 3, 4 and South 1/2 of Northwest quarter of Section 3;
Northeast 1/4 of the Northeast quarter of Section 11, Township 12 North, Range
16 West, Mount Diablo Base and Meridian, according to the official plat thereof.
The Northeast quarter of the Northeast quarter, the South 1/2 of the Northeast
quarter, the East 1/2 OF the Southwest quarter and the Southeast quarter of
Section 34; The Southwest quarter of the Southwest quarter of Section 35,
Township 13 North, Range 16 West, Mount Diablo Base and Meridian, according to
the official plat thereof. Southeast quarter of the Southeast quarter of Section
27, Township 13 North, Range 16 West, Mount Diablo Base and Meridian, according
to the official plat thereof.
EXCEPTING THEREFROM said Section 27 the following described parcels:
(1) That portion of said Southeast quarter of Southeast quarter lying Northerly
of the County Road.
(2) That portion of said Southeast quarter of Southeast quarter described in the
deed to the County of Mendocino in the Deed recorded June 18, 1968 in Book 766
of the Official Records, page 565, Mendocino County Records.
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<PAGE> 11
ORDER NO. 210238 DN
(3) That portion described in the Quit Claim Deed executed by Longview Fibre
Company to Florance Miller, et al, recorded January 7, 1983, Book 1381, Official
Records, Page 127.
ALSO EXCEPTING THEREFROM Parcels 1, 2 and 3 that portion described in the Quit
Claim Deed executed by Longview Fibre to William T. Scott, et ux, recorded May
18, 1987, Book 1624, Official Records, Page 235.
PARCEL FOUR:
That portion described in the Deed to Longview Fibre Company, recorded January
7, 1983, Book 1381, Official Records, Page 129.
TRACT FIVE:
Township 12 North, Range 15 West, Mount Diablo Meridian,
Section 15: East 1/2 of Southeast 1/4
Section 22: Northeast 1/4; East 1/2 of Southeast 1/4
Section 23: West 1/2 of Northwest Quarter; Southwest 1/4
Section 26: Northwest 1/4
TRACT SIX:
All that certain real property situate, lying and being in the County of
Mendocino, State of California, more particularly described as follows, to wit:
All Township and Range references are to Mount Diablo Base and Meridian.
PARCEL ONE:
Township 11 North, Range 13 West
Section 7: Lots 11 and 12
Township 11 North, Range 14 West
Section 1: Northeast 1/4 of Southwest 1/4, Southwest 1/4 of Southwest 1/4
Section 2: Lots 1 and 2, South 1/2 of Northeast 1/4, South 1/2 of
Southwest 1/4, Southeast 1/4
Section 3: Lots 3 and 4, South 1/2 of Northwest 1/4, South 1/2, South 1/2
of Northeast 1/4
11
<PAGE> 12
ORDER NO. 210238 DN
Section 4: Lots 1, 2, 3 and 4, South 1/2 of Northeast 1/4, Southeast 1/4, East
1/2 of Southwest 1/4, Southeast 1/4 of Northwest 1/4 and those portions of the
Southwest 1/4 of Northwest 1/4 and the Northwest 1/4 of Southwest 1/4 which are
the Northeasterly side of the main ridge crest that extends in a Southeasterly
direction from the West line of Section 4, about 30 chains South of the
Northwest corner of Section 4.
Section 5: Lots 1, 2, 3, 4
Those portions of the South 1/2 of Northwest 1/4 and the Southwest 1/4 of
Northeast 1/4 which are on the Northerly side of the main ridge crest that
extends in an Easterly direction from near the West 1/4 corner of Section 5.
Southeast 1/4 of Northeast 1/4 - EXCEPTING THEREFROM:
That portion of the Southeast 1/4 of Northeast 1/4 which is on the Southerly
side of the main ridge crest that extends in a Northwesterly direction from the
East line of Section 5, about 10 chains North of the East 1/4 corner of Section
5.
Section 6: East 1/2 of Lot 7, East 1/2 of Southeast 1/4 of Northeast 1/4
Section 9: East 1/2 of Southeast 1/4, Northeast 1/4, Northeast 1/4 of
Northwest1/4 and those portions of the Southeast 1/4 of Northwest 1/4, Northeast
1/4 of Southwest 1/4 and West 1/2 of Southeast 1/4 which are on the Easterly
Northerly sides of the main ridge crest that extends in a Northerly and Westerly
direction from the South line of Section 9 and about 25 chains West of the
Southeast corner of Section 9.
Section 10: ALL
Section 11: ALL
EXCEPTING an undivided 1/2 (50%) interest in all oil, gas and gasoline and other
hydro-carbon substances and all other minerals in, on, under and that may be
produced from the above described property, as reserved in the Deeds from Arthur
Lawrence Bolton, Jr., to Moores and Smith, a partnership, dated December 1,
1959, recorded January 4, 1961 in Book 557 of Official Records, Page 232, Serial
No. 20218, Mendocino County Records, and in the Deed from Mary Savior Bolton to
Moores & Smith, a partnership dated December 1, 1959, recorded January 4, 1961
in Book 557 of Official Records, Page 233, Serial No. 20219, Mendocino County
Records. (Affects Northwest 1/4 of Southwest 1/4 and Southeast 1/4 of Southwest
1/4 of Section 11, Township 11 North, Range 14 West)
Section 12: South 1/2 of Northwest 1/4, Southwest 1/4, South 1/2 of
Southeast 1/4
12
<PAGE> 13
ORDER NO. 210238 DN
Section 13: ALL
EXCEPTING 1/2 oil and minerals in and to the Northwest 1/4 of Southwest 1/4 as
excepted in the Deed from Lorin E. Fear, et ux, to Moores and Smith, a
partnership, dated May 21, 1959, recorded June 3, 1959 in Book 512 of Official
Records, Page 542, serial No. 4163, Mendocino County Records.
Section 14: ALL
Section 15: ALL
Section 16: ALL
EXCEPTING THEREFROM those portions of the Northeast 1/4, of the Northwest 1/4,
and of the Southwest 1/4 which are on the Northerly and Westerly sides of the
main ridge crest extending northeasterly from near the Southwest corner of
Section 16 to the North line of Section 16 at a point about 25 chains West of
its Northeast corner.
Section 21: Northeast 1/4, Southeast 1/4 of Southeast 1/4,
EXCEPTING that portion of the Southeast 1/4 of Southeast 1/4 which is on the
southwesterly side of the main ridge crest that extends in a southeasterly
direction across the north and East sides of the Southeast 1/4 of Southeast 1/4
near its Northeastern corner.
Those portions of the Northwest 1/4, Southwest 1/4 and North 1/2 of Southeast
1/4 which are on the Easterly and Northerly sides of the main ridge crest that
extends in a southeasterly direction from near the Northwest corner of Section
21.
Section 22: ALL
EXCEPTING THEREFROM that portion of the Southwest 1/4 of Southwest 1/4 of which
is on the Southwesterly side of the main ridge crest that extends in a
Southeasterly direction from near the Northwest corner of the Southwest 1/4 of
Southwest 1/4 to near its Southeast corner
Section 23: ALL
Section 24: ALL
EXCEPTING THEREFROM all rights to any and all minerals, ores, metals of every
character, gas and oil, in and under said land and the right of ingress and
egress for the purpose of exploration for and removal of any and all of said
minerals and substances, together with enough of the surface of said land as may
be necessary for the proper and convenient working of such minerals and
substances as reserved by Myrtle P. Cooley, et al, in Deed recorded May 25, 1956
in Book 431, Official Records, Page 538, Mendocino County Records.
13
<PAGE> 14
ORDER NO. 210238 DN
Township 12 North, Range 14 West
Section 3: Lots 19 and 20, South 1/2,
EXCEPTING THEREFROM that portion conveyed in the Deed from Oregon-Washington
Plywood Company, an Oregon corporation, to Ward H. Hanes and Ruth F. Hanes, his
wife as Joint Tenants, dated September 21, 1962, recorded December 24, 1962 in
Book 614 of Official Records, Page 274, Serial No. 41886, Mendocino County
Records.
ALSO EXCEPTING THEREFROM that portion conveyed in the Deed from
Oregon-Washington Plywood Company, an Oregon corporation, to Mailliard Ranch, a
partnership, dated October 1, 1964, recorded December 4, 1964, in Book 677 of
Official Records, Page 103, Mendocino County Records.
Section 4: Lots 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19 and 20,
South 1/2
EXCEPTING THEREFROM that portion conveyed in the Deed from Oregon-Washington
Plywood Company, an Oregon Corporation, to Ward H. Hanes and Ruth F. Hanes, his
wife as Joint Tenants, dated September 21, 1962, recorded December 24, 1962 in
Book 614 of Official Records, Page 274, Mendocino County Records.
Section 5: Lots 5, 6, 9, 10, 11, 12, 14, 15, 16, 17, 18, 19, South 1/2
EXCEPTING THEREFROM that portion conveyed in the Deed from Oregon-Washington
Plywood Company, an Oregon Corporation, to Ward H. Hanes and Ruth F. Hanes, his
wife as Joint Tenants, dated September 21, 1962, recorded December 24, 1962 in
Book 614, Official Records, Page 274, Mendocino County Records.
Section 6: Lots 1, 2, 9, 16, 21 and 22, East 1/2 of Southwest 1/4, West 1/2 of
Southeast 1/4, Southeast 1/4 of Southeast 1/4, Lot 11.
EXCEPTING THEREFROM that portion conveyed in the Deed from Oregon-Washington
Plywood Company, an Oregon corporation, to Ward H. Hanes and Ruth F. Hanes, his
wife as Joint Tenants, dated September 21, 1962, recorded December 24, 1962 in
Book 614, Official Records, Page 274, Mendocino County Records.
Section 7: ALL
Section 8: ALL
Section 9: West 1/2, West 1/2 of East 1/2, East 1/2 of Northeast 1/4
Section 10: Northwest 1/4
Section 16: West 1/2, West 1/2 of East 1/2
14
<PAGE> 15
ORDER NO. 210238 DN
Section 17: ALL
Section 18: ALL
Section 19: ALL
Section 20: ALL
Section 21: Northwest 1/4, West 1/2 of Northeast 1/4, Southwest 1/4 of
Southwest 1/4
EXCEPTING THEREFROM those portions described as Parcel B in the Deed from
Oregon-Washington Plywood Company, an Oregon corporation, to George E. Zeni and
Alice L. Zeni, his wife, dated July 7, 1965 and recorded July 8, 1965 in Book
693, Official Records, Page 208, Mendocino County Records.
ALSO: That portion of the Northwest 1/4 of the Southwest 1/4 of Section 21
described as Parcel Three in the Deed from George E. Zeni and Alice L. Zeni, his
wife, to Oregon-Washington Plywood Company, an Oregon corporation, dated July 6,
1965 and recorded July 8, 1965, Book 693 of Official Records, page 212,
Mendocino County Records
ALSO: The Northeast 1/4 of Southwest 1/4 and the Northwest 1/4 of Southeast
1/4 of Section 21
EXCEPTING THEREFROM those portions described as Parcel A in the Deed from
Oregon-Washington Plywood company, an Oregon corporation, to George E. Zeni and
Alice L. Zeni, his wife, dated July 7, 1965 and recorded July 8, 1965, Book 693,
Official Records, page 208, Mendocino County Records.
ALSO: That portion of the Southwest 1/4 of Southeast 1/4 of Section 21 described
as Parcel One in the Deed from George E. Zeni and Alice L. Zeni, his wife, to
Oregon-Washington Plywood Company an Oregon corporation, dated July 6, 1965 and
recorded July 8, 1965, Book 693 of Official Records, page 212, Mendocino County
Records.
Section 27: Southeast 1/4 of Southwest 1/4
Section 28: West 1/2 of West 1/2
EXCEPTING THEREFROM that portion of the Northwest 1/4 of Northwest 1/4 of
Section 28, described as parcel C in the Deed from Oregon-Washington Plywood
Company, an Oregon corporation, to George E. Zeni and Alice L. Zeni, his wife,
dated July 7, 1965, recorded July 8, 1965, Book 693, Official Records, page 208,
Mendocino County Records.
East 1/2 of Southwest 1/4, Southeast 1/4 of Northwest 1/4, West 1/2 of East 1/2
EXCEPTING THEREFROM the above described land the following portion thereof, to
wit:
15
<PAGE> 16
ORDER NO. 210238 DN
Beginning at the intersection of the East line of the County Road known as
Signal Ridge Road or Anchor Bay County Road with the North line of Southeast 1/4
of the Northwest 1/4 of Section 28, Township 12 North, Range 14 West, Mount
Diablo Meridian; thence along the said North line North 88(degree) 35' East,
500.00 feet; thence leaving said North line South 1(degree) 35' East, 175.00
feet; thence south 88(degree) 35' West, 550.00 feet to the East line of the
County Road; thence North 13(degree) 15' East, 175.00 feet to the point of
beginning. Being a portion of the Southwest 1/4 of the Northeast 1/4 and of the
Southeast of the northwest 1/4 of Section 28, Township 12 North, Range 14 West,
Mount Diablo Base and Meridian.
ALSO: That portion of the Northeast 1/4 of the Northwest 1/4 of
Section 28 as conveyed by Deed and described as parcel Two therein from George
E. Zeni and Alice L. Zeni, his wife, to Oregon-Washington Plywood Company, an
Oregon corporation, dated July 6, 1965 and recorded July 8, 1965 in Book 693,
Official Records, page 212, Mendocino County Records.
Section 29: ALL
Section 30: ALL
Section 31: Lot 1, Northeast 1/4 of Northwest 1/4, North 1/2 of Northeast
1/4, Southeast 1/4 of Northeast 1/4, East 1/2 of Southeast 1/4
Section 32: West 1/2, Southeast 1/4, West 1/2 of Northeast 1/4 of
Northeast 1/4, Southeast 1/4 of Northeast 1/4, West 1/2 of Northeast 1/4
Section 33: East 1/2, Southwest 1/4, Northeast 1/4 of Northwest 1/4, South
1/2 of Northwest 1/4
ALSO: That portion described in the Deed executed by Charles A. Ciapusci, et
ux, to Longview Fibre, recorded December 11, 1987, Book 1660, Official Records,
Page 168
EXCEPTING THEREFROM the above described land all that portion described in the
Deed executed by Longview Fibre Company to Charles A. Ciapusci, et ux, recorded
December 11, 1987, Book 1660, Official Records, page 166.
Section 34: South 1/2 of Northwest 1/4, Southwest 1/4
Township 12 North, Range 15 West
Section 2: Lots 1, 2, 3 and 4, Northeast 1/4 of Southwest 1/4,
Southeast 1/4, Northwest 1/4 of Southwest 1/4 South 1/2 of Southwest 1/4
16
<PAGE> 17
ORDER NO. 210238 DN
EXCEPTING THEREFROM all that portion conveyed to Stornetta Brothers by document
dated May 20, 1959, recorded June 9, 1959, Book 513 of Official Records, Page
207, Mendocino County Records.
ALSO EXCEPTING THEREFROM all that portion conveyed to Stornetta Brothers by
Oregon-Washington Plywood Company, an Oregon corporation, by Deed dated
September 10, 1964, recorded October 16, 1964, Book 672, Official Records, Page
544, Mendocino County Records.
Section 3: ALL
EXCEPTING THEREFROM all that portion conveyed to Stornetta Brothers by document
dated May 20, 1959, recorded June 9, 1959, Book 513, Official Records, Page 207,
Mendocino County Records.
Section 4: ALL
Section 5: ALL
Section 6: ALL
Section 7: Lot 1, Northeast 1/4, East 1/2 of Northwest 1/4, Northwest 1/4
of Southeast 1/4
ALSO: That certain property of William F. Walsh located in Section 7, Township
12 North, Range 15 West, Mount Diablo Base and Meridian, and lying North of that
line delineated on a map titled Record of Agreement Survey for Moores and Smith,
dated December, 1960 and done by Donald E. Bushnell, Licensed Surveyor, No. 2786
and filed in the County of Mendocino in Map Case 2, Drawer 1, Page 83. This line
is more particularly described as follows:
COMMENCING at the common corner of Sections 7, 8, 18 and 17 in said Township 12
North, Range 15 West, and Thence Following a Line North 14(Degree) 20' 35" West,
494.93 Feet; Thence North 43(Degree) 35' 53" West, 918.75 Feet; Thence North
48(Degree) 0L' 08" West, 746.29 Feet; Thence North 81(Degree) 52' 10" West,
1372.95 Feet; Thence North 1(Degree) 01' 04" East, 798.15 Feet; Thence North
44(Degree) 21' West, 475.86 Feet; Thence North 60(Degree) 41' 35" West, 556.46
Feet; Thence North 81(Degree) 32' 12" West, 480.51 Feet; Thence North 00(Degree)
06' 51" West, 270.82 Feet; Thence North 48(Degree) 37' 08" West, 1098.84 Feet;
Thence North 29(Degree) 39' 15" West, 341.16 Feet; Thence 60(Degree) 11' 41"
West, 323.58 Feet to the West Line of the Section Thence North Along the West
line of the Section, 33.00 feet to the 1/16 corner.
EXCEPTING THEREFROM any portion sold the United States for GATR site or
easements in connection therewith by Deed dated October 15, 1960 and recorded on
June 20, 1961, Book 571, Official Records, page 30 et seq., Mendocino County
Records.
Section 8: North 1/2, West 1/2 of Southwest 1/4, Southeast 1/4 of
Southwest 1/4, Southwest 1/4 of Southeast 1/4
17
<PAGE> 18
ORDER NO. 210238 DN
EXCEPTING THEREFROM that portion described as Tract 104E in the Lis Pendens
recorded October 14, 1960, Book 551, Official Records, page 332.
Section 9: West 1/2 and North 1/2 of Northeast 1/4
ALSO: All that portion described in the Deed executed by Louisiana-Pacific to
Longview Fibre recorded March 12, 1986, Book 1549, Official Records, page 58.
EXCEPTING THEREFROM from all of the above described land that portion described
in the deed executed by Longview Fibre Company to Louisiana-Pacific Corporation
recorded March 12, 1986, Book 1549, Official Records, page 60.
Section 10: North 1/2 of Northwest 1/4
ALSO: That portion described in the deed executed by Louisiana-Pacific to
Longview Fibre recorded March 12, 1986, Book 1549, Official Records, Page 58.
EXCEPTING THEREFROM all of the above described land that portion described in
the deed executed by Longview Fibre Company to Louisiana-Pacific corporation
recorded March 12, 1986, Book 1549, Official Records, page 60.
Section 11: Southeast 1/4 of Southeast 1/4, Northeast 1/4 of Southwest 1/4,
Southwest 1/4 of NORTHEAST 1/4, Northwest 1/4, North 1/2 of Southeast 1/4,
Southwest 1/4 of Southeast 1/4
EXCEPTING THEREFROM that portion of the Southwest 1/4 of Northeast 1/4 of
Section 11, Township 12 North, Range 15 West, Mount Diablo Base and Meridian,
which lies North of that certain existing fence running along the Northerly edge
of an existing road transversing said property and lying East of the centerline
of Blue Waterhole Creek.
ALSO: That portion described in the deed executed by Louisiana-Pacific
corporation recorded April 15, 1981, Book 1301, Official Records, Page 34.
EXCEPTING THEREFROM the above described land that portion described in the deed
executed by Longview Fibre Company to Louisiana-Pacific Corporation, recorded
April 6, 1981, Book 1299, Official Records, page 59.
Section 12: Lots 3 and 4 and that portion of Lot 2 described as follows:
Beginning at the Southwest corner of the North 1/2 of said Section 12; thence
along the Southerly boundary of the said North 1/2 of Section 12, a distance of
29.85 chains, more or less, to the range line between Range 14 West and Range 15
West; thence Northerly along said range line 11.55 chains to a point; thence in
a straight line in a southwesterly direction to the point of beginning.
18
<PAGE> 19
ORDER NO. 210238 DN
EXCEPTING THEREFROM that portion of Lot 2, Section 12, Township 12 North, Range
15 West, Mount Diablo Base and Meridian, described as follows:
BEGINNING at the Southwest corner of Lot 2, which is located on the North line
of the existing main private road; thence following the North line of said road
Northeasterly to its intersection with the centerline of the Garcia River being
the Northside of a Bridge; thence Southerly and Westerly down the centerline of
the Garcia River to its intersection with the South line of Lot 2; thence West
along the South line of Lot 2 to the point of beginning.
Said land being further described in Parcel 3, herein.
Section 13: Lots 1, 2, 3, 4
Section 14: Northeast 1/4 of Northeast 1/4, Southwest 1/4 of Northeast
1/4, Southeast 1/4 of Northwest 1/4, Northwest 1/4 of Southwest 1/4, South 1/2
of South 1/2,
Section 15: Southwest 1/4 of Northeast 1/4, Northwest 1/4 of Northwest
1/4, South 1/2 of Northwest 1/4, Southwest 1/4, West 1/2 of Southeast 1/4
Section 16: South 1/2 of North 1/2, North 1/2 of South 1/2, Southeast 1/4
of Southwest 1/4, South 1/2 OF Southeast 1/4
Section 20: Southeast 1/4 of Northeast 1/4, Northeast 1/4 of Southeast
1/4, South 1/2 of Southeast 1/4
Section 21: East 1/2, Southwest 1/4
Section 22: West 1/2, West 1/2 of Southeast 1/4
Section 23: East 1/2, East 1/2 of the Northwest 1/4
Section 24: Lots 1, 2, 3 and 4
Section 25: Lots 1, 2, 3 and 4
Section 26: East 1/2, Southwest 1/4
Section 27: ALL
Section 28: All that portion lying Northerly of the main Garcia River and
Easterly of the ridge extending approximately from the West 1/4 of Section 28 to
the point where the Garcia River crosses the South line of the Section; and all
that portion lying Southerly of the main Garcia River and Northerly of the ridge
extending approximately from the Southeast corner of Section 28 to the point
where the Garcia River crosses the South line of the Section.
19
<PAGE> 20
ORDER NO. 210238 DN
Section 29: All that portion lying Easterly and Northerly of the ridge
extending approximately from the North 1/4 corner of Section 29 to the center of
the Section and thence to the East 1/4 corner of Section 29.
Section 34: Northwest 1/4 of Southeast 1/4, Northeast 1/4, all that
portion of the West 1/2 lying Northeasterly of the ridge extending approximately
from the Northwest corner of Section 34 to a point about 10 chains South of the
center of the Section; and that portion of the East 1/2 of Southeast 1/4 lying
Northerly of Signal Ridge.
Section 35: North 1/2, North 1/2 of Southeast 1/4, Southeast 1/4 of
Southeast 1/4
ALSO: That portion described in the deed executed by Louisiana-Pacific
corporation to Longview Fibre Company recorded July 22, 1985, Book 1515,
Official Records, Page 56.
EXCEPTING THEREFROM that portion described in the deed executed by Longview
Fibre Company to Louisiana-Pacific Corporation, recorded July 22, 1985, Book
1515, Official Records, Page 54.
Section 36: Lots 1, 2, 3, and 4
Township 12 North, Range 16 West
Section 1: ALL
Section 2: Northeast 1/4
Section 12: All that portion which drains Northerly into North Fork Garcia
River, Also that portion of North 1/2 lying South of North Fork Garcia River
ridge. (Intending to include the North 1/2 of Section 12)
Township 13 North, Range 15 West
Section 31: Lots 6, 7, 8, 12, 13, 14, 15, 16, 17, 18, 19, 20, South 1/2 of
Northeast 1/4, NortheasT 1/4 of Southeast 1/4, South 1/2 of Southeast 1/4,
ALSO: That portion described in the deed executed by Florence Miller, et al,
recorded May 12, 1983, Book 1400, Official Records, Page 490.
That portion described in the deed executed by Timber Realization, recorded May
12, 1983, Book 1400, Official Records, Page 492.
20
<PAGE> 21
ORDER NO. 210238 DN
That portion described in the deed executed by Michael H. Pettibone, et ux,
recorded November 7, 1984, Book 1481, Official Records, Page 479.
EXCEPTING THEREFROM those portions described in the following:
(1) Deed executed by Longview Fibre Company, to Florence Miller, et al
recorded May 12, 1983, Book 1400, Official Records, Page 496.
(2) Deed executed by Longview Fibre Company to Timber Realization Company
recorded May 12, 1983, Book 1400, Official Records, Page 498.
(3) Deed executed by Longview Fibre Company to Michael H. Pettibone, et ux,
recorded November 7, 1984, Book 1481, Official Records,-Page 477.
Section 32: Southwest 1/4, Southwest 1/4 of Southeast 1/4,
ALSO: That portion described in the deed executed by Daniel F.
Dooling, et al, recorded November 24, 1982, Book 1375, Official Records, Page
152.
EXCEPTING THEREFROM THE FOLLOWING:
(1) That portion described in the deed executed by Longview Fibre Company
to Daniel F. Dooling, et al, recorded November 24, 1982, Book 1375,
Official Records, Page 145:
(2) That portion described in the deed executed by Longview Fibre Company
to Daniel F. Dooling, et al, recorded May 8, 1987 in Book 1622,
Official Records, Page 556.
Section 33: Northeast 1/4, North 1/2 of Northwest 1/4, Southeast 1/4 of
Northwest 1/4, Northeast 1/4 OF Southwest 1/4, North 1/2 of Southeast 1/4,
Southwest 1/4 of Southeast 1/4, Southeast 1/4 of Southeast 1/4,
EXCEPTING THEREFROM all that portion conveyed to Stornetta Brothers by document
dated May 20, 1959 and recorded June 9, 1959, Book 513, Official Records, Page
207, Mendocino County Records.
Section 34: ALL
EXCEPTING THEREFROM all that portion conveyed to Stornetta Brothers by document
dated May 20, 1959, and recorded June 9, 1959, Book 513, Official Records, Page
207, Mendocino County Records.
Township 13 North, Range 16 West
Section 26: South 1/2 of Southwest 1/4
21
<PAGE> 22
ORDER NO. 210238 DN
ALSO: That portion described in the deed executed by Florence
Miller, et al, recorded January 7, 1983, Book 1381, Official Records, Page 129.
EXCEPTING THEREFROM that portion described in the deed executed by Longview
Fibre Company, recorded January 7, 1983, Book 1381, Official Records, Page 127.
Section 35: East 1/2, Northwest 1/4,
North 1/2 of Southwest 1/4, Southeast 1/4 of Southwest 1/4
Section 36: Northeast 1/4 of Northwest 1/4, South 1/2 of Northwest 1/4,
Southwest 1/4
PARCEL TWO:
Township 12 North, Range 14 West
Section 34: West 1/2 of Southeast 1/4 Southeast 1/4 of Southeast 1/4
Section 35: Southwest 1/4 of Southwest 1/4
PARCEL THREE:
That portion of Lot 2, Section 12, Township 12 North, Range 15 West, Mount
Diablo Base and Meridian, described as follows:
BEGINNING at the Southwest corner of Lot 2, which is located on the North line
of the existing main private road; thence following the North line of said road
Northeasterly to its intersection with the centerline of the Garcia River being
the north side of a Bridge; thence Southerly and Westerly down the centerline of
the Garcia River to its intersection with the South line of Lot 2; thence West
along the South line of Lot 2, to the point of beginning.
EXCEPTING THEREFROM that portion of Lot 2 described as follows: Beginning at the
Southwest corner of the North 1/2 of said Section 12; thence along the southerly
boundary of the said North 1/2 of Section 12, a distance of 29.85 chains, more
or less, to the range line between Range 14 West and Range 15 West; thence
Northerly along said range line 11.55 chains to a point; thence in a straight
line in a Southwesterly direction to the point of beginning.
TRACT SEVEN:
1. An easement for right of way as conveyed by road right of way from Mailliard
Ranch (a partnership) to Oregon-Washington Plywood Co., dated October 1, 1964
and recorded December 4, 1964 in Book 677, Official Records, page 99, Mendocino
County Records.
22
<PAGE> 23
ORDER NO. 210238 DN
2. An easement as reserved in the Grant Deed from Oregon-Washington Plywood Co.,
to Mailliard Ranch (a partnership) dated October 1, 1964 and recorded December
4, 1964, Book 677, Official Records, Page 103, Mendocino County Records.
3. An easement as conveyed by Reciprocal Grants of rights of way between R.J.
Saunders, as trustee and Moores & Smith, a partnership dated June 8, 1960 and
recorded June 10, 1960 in Book 542, Official Records, page 198, Mendocino County
Records.
4. An easement conveyed by Agreement for Partitions of Real Property and
Reciprocal Grants of easements between Moores & Smith, a partnership, and
Stornetta Brothers, a partnership dated May 20, 1959, and recorded June 9, 1959,
Book 513, Official Records, Page 207, Mendocino County Records.
Supplemental Agreement thereunder recorded December 11, 1972, Book 908, Official
Records, Page 598.
5. Easements as conveyed by Reciprocal Grants of rights of way between Holm
Timber Industries, a partnership, and Oregon Washington Plywood Co., dated
August 16, 1962 and recorded March 19, 1963, Book 621, Official Records, Page
284, Mendocino County Records.
6. Easements as reserved in the Grant Deed from Oregon-Washington Plywood Co.,
to Clarence L. and Amy K. Neilson, his wife, dated November 1, 1964 and recorded
November 17, 1964 in Book 676, Official Records, Page 396, Mendocino County
Records.
7. Perpetual non-exclusive easement in gross for road purposes granted to
Longview Fibre Company in the Agreement recorded September 8, 1983, Book 1419,
Official Records, Page 108.
8. Perpetual non-exclusive easement in gross for road purposes granted to
Longview Fibre Company in the Agreement recorded September 8, 1983, Book 1419,
Official Records, Page 118.
9. Perpetual non-exclusive easement in gross for road purposes granted to
Longview Fibre Company in the Agreement recorded September 8, 1983, Book 1419,
Official Records, Page 123.
10. The perpetual non-exclusive in gross easements for road purposes granted to
Longview Fibre Company, recorded March 20, 1984, Book 1448, official Records,
Page 171.
11. Reciprocal Easement Agreement executed by and between Congree River Ltd.,
and Longview Fibre Company, recorded November 20, 1984, Book 1483, Official
Records, Page 129.
23
<PAGE> 24
ORDER NO. 210238 DN
12. Reciprocal Easement for Right-of-Way executed by and between Daniel F.
Dooling, et al, and Longview Fibre Company for a perpetual non-exclusive
easement in gross for road purposes, recorded May 8, 1987, Book 1622, Official
Records, Page 560.
13. Non-exclusive perpetual, in gross easement for ingress, egress, and utility
purposes granted to Longview Fibre Company, recorded May 18, 1987, Book 1624,
Official Records, Page 237.
14. Reciprocal Road Use Agreement for a non-exclusive perpetual in gross
easement for road purposes executed by and between Albert John Gianoli, et ux,
and Longview Fibre Company, recorded May 6, 1976, Book 1039, Official Records,
Page 199.
15. Easements for road purposes as described in the document entitled "Grant of
Easements" recorded July 1, 1974 in Book 967, Official Records, Page 660, and as
reserved in the Quitclaim Deed recorded July 5, 1960 in Book 544, Official
Records, Page 246.
TRACT EIGHT:
The Southeast quarter of the Northeast quarter of Section 11, Township 12 North,
Range 15 West, Mount Diablo Base and Meridian.
EXCEPTING THEREFROM that portion which lies North of that certain existing fence
running along the Northerly edge of an existing road transversing said property
and lying East of the centerline of Blue Waterhole Creek.
TRACT NINE:
The South half of the Northeast quarter and the North half of the Southeast
quarter of Section 12, Township 11 North, Range 14 West, Mount Diablo Base and
Meridian.
APN: 049-400-27
24
<PAGE> 25
ORDER NO. 210238 DN
And the following land situated in the State of California, County of Sonoma,
incorporated area, described as follows:
TRACT ONE:
PARCEL ONE:
In Township 10 North, Range 12 West, M.D.B. & M.:
Section 7 That portion of Lot 7 lying to the right side of the highwater
mark on the right bank facing down stream of the Wheatfield
branch of the Gualala River.
Section 18 That portion of Lots 4, 5, 6 and 7, lying to the right side of
the highwater mark on the right bank facing down stream of the
Wheatfield Branch of the Gualala River.
Section 19 Lots 5, 6, 7, the North half of Lot 8, the South half of Lot 3
and that portion of Lot 4 lying to the right side of the
highwater mark on the right bank facing down stream of the
Wheatfield Branch of the Gualala River.
Section 30 Lots 3, 4, 5, 6, 7 and the North half of Lots 8, 9 and 10.
Section 31 Lot 4 and the North half of Lot 3
In Township 10 North, Range 13 West M.D.B. & M.:
Section 1 All of Section 1
Excepting from the above Section 1, that portion lying to the
left of the highwater mark on the right bank facing down
stream of the Wheatfield branch of the Gualala River.
Section 2 All of Section 2
Section 3 All of Section 3
25
<PAGE> 26
ORDER NO. 210238 DN
Excepting therefrom the above Section 3, that portion conveyed
to the State Of California by Deed recorded August 13, 1974
under Recorder's Serial No. P-14964, Sonoma County Records.
Section 8 The Northeast Quarter
Section 9 The North Half
Section 10 All of Section 10
Section 11 All of Section 11
Section 12 All of Section 12
Excepting from the above Section 12 that portion lying to the
left of the highwater mark on the right bank facing down
stream of the Wheatfield Branch of the Gualala River.
Section 13 All of Section 13
Section 14 All of Section 14
Section 15 All of Section 15
Section 22 All of Section 22
Section 23 All of Section 23
Section 24 All of Section 24
Section 25 The North half and the North half of the South half.
Section 26 The Northeast quarter and the North half of the Northwest
quarter.
In Township 10 North, Range 14 West M.D.B. & M.
Section 1 Lots 1, 2, 3 and 4, the Southeast quarter of the Northwest
quarter and the South half of the Northeast quarter.
In Township 11 North, Range 14 West, M.D.B. & M.
26
<PAGE> 27
ORDER NO. 210238 DN
Section 25 All of Section 25
Section 26 All of Section 26
Section 27 The South half, the Northeast quarter and the East half of the
Northwest quarter.
Section 34 The East half of the Northeast quarter, the North half of the
Northwest quarter.
Section 35 The North half
Section 36 All of Section 36
Excepting from all the above the fee to a strip of land of
uniform width of 100 feet, the center line being coincident
with the physical center line of Kelly Road, as it now exists
including its Southerly extension, commonly known as South
Branch Road.
PARCEL TWO:
A right of way over the presently existing road commonly known as "Kelly Road"
including its Southerly extension (such extension also commonly known as "South
Branch Road") beginning at the intersection of said Kelly Road with the West
line of Highway 101, a public roadway, and extending along said Kelly Road in a
Westerly and Southerly direction to the intersection of said road with the South
line of the Northeast Quarter of the Southwest Quarter of Section 8, Township 10
North, Range 13 West, Mount Diablo Meridian, said point being the termination of
said right of way; which said right of way is more fully set forth in the Deed
from Masonite Corporation, a Delaware Corporation to Longview Fibre Company, a
Delaware Corporation, dated November 11, 1977 and recorded November 18, 1977 in
the office of the County Recorder of Sonoma County under Recorder's Serial No.
S-61739, Sonoma County Records.
PARCEL THREE:
A non-exclusive easement as contained "Reciprocal Easements" executed by Paul J.
Garrett, et ux and Longview Fibre Company recorded September 26, 1978 in Book
3458 of Official Records, page 374.
27
<PAGE> 28
PARCEL FOUR:
A non-exclusive easement in gross over the lands of Putnam (being Taber Road)
all as described in "Grant of Easements" executed by Cliff Putnam and Longview
Fibre Corporation, recorded July 19, 1983, Document No. 83047134 Official
Records of Sonoma County, California.
TRACT TWO:
In Township 10 North, Range 14 West M.D.B. & M.:
Section 3 The West half and the West half of the East half.
Section 4 The East half of Lot 1, the East half of the Southeast quarter
of the Northeast quarter and that portion of East half of the
Northeast quarter of the Southeast quarter which lies North
and East of Buckeye Creek.
Section 10 The North half of the Northwest quarter.
In Township 11 North, Range 13 West, M.D.B. & M.:
Section 20 The South half of the Southeast quarter, the North half of the
Southwest quarter and the Southeast quarter of the Southwest
quarter.
Section 29 The Northeast quarter of the Northwest quarter and the North
half of the Northeast quarter.
In Township 11 North, Range 14 West, M.D.B. & M.:
Section 34 The South half of the Southeast quarter and the Southeast
quarter of the Southwest quarter.
Section 35 That portion of the West half of the Southwest quarter which
is West and South of Buckeye Creek.
In Township 11 North, Range 13 West, M.D.B. & M.:
28
<PAGE> 29
ORDER NO. 210238 DN
Section 21 A strip of land 100 feet in width traversing the South half of
the Southwest quarter and the Northeast quarter of the
Southwest quarter.
Being the same parcel excepted in the conveyance to Lewis M.
Norton and Edward R. Norton, by Deed recorded December 24,
1953 under Recorder's Serial No. E- 10756, Sonoma County
Records.
Section 29 The West half of the Southwest quarter and a strip of land 100
feet in width commencing on the North line and the Southeast
quarter of the Northwest quarter of Section 29; and running
thence Southwesterly through said Southeast quarter of the
Northwest quarter along the route more particularly shown upon
the sketch recorded in Book 1173 of Official Records, page
482, Sonoma County Records.
Section 30 Lots 1, 2, 11, the South half of Lot 3, the South half of Lot
4, the North half of Lot 10 and the Southwest quarter of the
Southeast quarter.
Section 31 Lots 1, 2, 3, 4, 6 and 7 and the East half.
Section 32 The South half, the Northwest quarter and the South half of
the Northeast quarter.
Section 33 The South half and that part of the Southeast quarter of the
Northeast quarter lying Southerly of the Kelly Main Stem
Logging Road.
Section 34 The South half and that part of the South half of the
Northwest quarter lying Southerly of the Kelly Main Stem
Logging Road.
Section 35 The Southwest quarter, the West half of the Southeast quarter
and the Southeast quarter of the Southeast quarter.
Section 36 The South half of the Northwest quarter, the South half of the
Southeast quarter and the Southwest quarter.
Excepting therefrom that portion lying Northerly of the
Southern line of existing Kelly Road.
In Township 10 North, Range 13 West, M.D.B. & M.:
Section 4 All of Section 4
Section 5 The North half and the Southeast quarter.
29
<PAGE> 30
ORDER NO. 210238 DN
Section 6 Lots 1, 2, 3, 4, 7, 8, 9 and that portion of Lot 6, lying West
of Porter Creek and the Southeast quarter of the Northwest
quarter.
Excepting therefrom that portion described in that certain Grant Deed recorded
January 14, 1994 as Document No. 94-006526 of Sonoma County Records. Executed by
Coastal Forestlands, Limited, a California Limited Partnership as Grantor and
the County of Sonoma, a political subdivision of the State of California as
Grantee.
Also excepting therefrom that portion described in quitclaim deed to Robert M.
Eberg et al recorded November 22, 1995 in Document 1995-99973.
TRACT THREE:
The Southwest quarter of Section 5, the North half of the Southeast quarter and
the Southeast quarter of the Southeast quarter of Section 6 in Township 10
North, Range 13 West, M.D.M. in the County of Sonoma, State of California.
TRACT FOUR:
A. Easements as contained in Deed from Lee Evans, et ux to Paul B. Kelly
Lumber Company, recorded October, 24, 1959 in Book 1002, Official
Records, page 8, Sonoma County.
B. Easement as contained in Deed from Masonite Company to Albert Garvin,
recorded February 21, 1975 in Book 2935, Official Records, page 214,
Sonoma County Records.
C. The Easements as granted by Molalla Forest Products Inc., under the
following Recorder's Serial Nos. K-50563, K-51747, K-51890, K-52052,
K-56486, K-75656, K-87520, K-87684, K-92860, K-95064, K-97523, K-98574,
L-35704, L-38703, L-41581, L-85522.
D. Right of way agreement between Wickersham Ranch, First Party, and
Cloverdale Redwood, Inc., a Corporation, Second Party, dated March 16,
1967 and recorded April 3, 1967 in Book 2261 of Official Records, page
103, Recorder's Serial No. K-32283, Sonoma County Records. (Affects
Sections 1 and 12 Township 10 North, Range 13 West and Sections 6 and
18, Township 10 North, Range 12 West)
TRACT FIVE:
Any and all rights, right to claims, and appurtenances pertaining to all the
above described real property including, but not limited to, all rights of way,
easements of any nature including, both in gross and appurtenant easements, and
any other interest of Longview Fibre Company, Inc., a Delaware Corporation.
30
<PAGE> 31
ORDER NO. 210238 DN
TRACT SIX:
Those certain easement rights as set forth in the deed to Coastal Forestlands
Limited, recorded November 27, 1995 in Document 1995-99972.
TRACT SEVEN:
ALL OF THE TIMBER AND TIMBER RIGHTS AS RESERVED IN THE DEED FROM COASTAL
FORESTLANDS, LTD., TO JAMES RATTO ET UX, RECORDED MARCH 3, 1997 SONOMA COUNTY
RECORDER'S SERIAL NUMBER 97-17395 ON THE FOLLOWING DESCRIBED PROPERTY IN
SECTIONS 14 AND 15, TOWNSHIP 11 NORTH, RANGE 13 WEST, M.D.B. & M:
In Township 11 North, Range 13 West, M.D.B. & M.:
Section 14 Lots 2, 3, 4, 5, 6 and 7; and all that portion of Lots 1 and
8, and the North half of the South half of said Section 14,
lying Northerly and Westerly of a dividing and traverse line
as established by Agreement by and between Ornbaun Livestock
Company, as first party, F.J. Brandt, et al, as second party,
and Paper Cabin, Inc., a corporation, as third party, dated
December 11, 1954 and recorded February 15, 1955 in Book 1329
of Official Records, page 432, Sonoma County Records.
Section 15 Lots 1, 2, 3, 4 and 5, all that portion of Lots 6, 7 and 8 of
said section 15 lying Northerly of a dividing and traverse
line as established by Agreement by and between Ornbaun
Livestock Company, as first party, F.J. Brandt et al, as
second party, and Paper Cabin, Inc., a corporation, as third
parry, dated December 11, 1954 and recorded February 15, 1955
in Book 1329 of Official Records, page 432, Sonoma County
Records.
END
30
<PAGE> 1
EXHIBIT 10.19.1
STATE OF NEW HAMPSHIRE :
: ACT OF SALE
COUNTY OF MERRIMACK :
BE IT KNOWN, that on the dates and at the places hereafter set forth,
before the undersigned Notaries Public, duly commissioned and qualified, and in
the presence of the undersigned competent witnesses, personally came and
appeared:
STRATEGIC TIMBER PARTNERS, LP, a Delaware limited partnership, whose
principal office is located at 5 North Pleasant Street, New London, New
Hampshire 03257, whose taxpayer identification number is 02-0499203,
represented herein by Joseph E. Rendini, Vice President of Strategic
Timber Operating Co., its sole general partner duly authorized by a
resolution of its Board of Directors, a certified copy of which is
attached hereto as Exhibit A and incorporated herein by reference
(hereafter referred to as "Seller"),
who declared that for the consideration, and on the terms and conditions,
hereafter set forth, it does hereby sell, convey, assign and deliver unto:
C. EDWARD BROOM, a person of the full age of majority residing in the
County of Merrimack, State of New Hampshire, whose mailing address is
339 Route 103A, New London, New Hampshire 03257, and whose Social
Security Number is ###-##-#### (hereafter referred to as "Purchaser"),
who declared that he has been married but once and then to Joan M.
Broom, from whom he has never been divorced or judicially separated and
with whom he is presently living and residing, and that he is acquiring
the Property herein described for his separate estate with separate and
paraphernal funds under his administration, that the Property shall be
his separate and paraphernal property, and that he has no intention of
changing his residence or domicile to the State of Louisiana,
here present, accepting and purchasing for himself, his heirs, legal
representatives, successors, successors-in-title and assigns and acknowledging
due delivery and possession thereof, the immovable property in Allen,
Beauregard, Calcasieu and Jefferson Davis Parishes, Louisiana, described on
Exhibit B attached hereto and incorporated herein by reference (the "Land"),
together with any and all buildings and improvements thereon, and all rights,
ways, servitudes,
<PAGE> 2
appurtenances, and hereditaments pertaining thereto, and all sand and gravel,
if any, but excepting all oil, gas and mineral rights (the Land, said
buildings, improvements, rights, ways, servitudes, appurtenances,
hereditaments, sand and gravel being hereafter referred to collectively as the
"Property").
TO HAVE AND TO HOLD the Property unto Purchaser, his heirs, successors
and assigns forever, without warranty of title whatsoever, either expressed or
implied, other than as against Seller's own acts, and the acts of those claiming
by, through or under Seller but not otherwise, but with full subrogation to all
rights and actions of warranty Seller has or may have against all former owners
and vendors.
Seller, for the benefit of Seller's Other Lands (as hereinafter
defined) hereby excepts and reserves from this conveyance: (a) title to and all
rights and interests with respect to all timber and trees now standing or
growing on the Land (the "Existing Timber"), and all Timber Agreements (as
hereinafter defined) relating thereto, together with a perpetual, non-exclusive
predial servitude to enter upon the Land for the purpose of cutting and removing
the Existing Timber; and (b) a perpetual, non-exclusive predial servitude for
ingress and egress over and across all roads and logging paths now existing or
hereafter constructed on the Land for the limited purpose of providing vehicular
and pedestrian access to and from any and all other lands now or hereafter owned
by Seller in Allen, Beauregard, Calcasieu and Jefferson Davis Parishes,
Louisiana ("Seller's Other Lands") to and from public roads. The rights afforded
by these predial servitudes are sometimes referred to for convenience as the
"Seller's Servitudes". The Seller's Servitudes may be exercised by the then
current owner or owners of Seller's Other Lands, who shall also be entitled to
permit its or their
-2-
<PAGE> 3
lessees, licensees and invitees, including parties to Timber Agreements, to use
the rights afforded by the Seller's Servitudes.
Seller hereby grants Purchaser, for the benefit of those portions of
the Land that are described on Exhibit C attached hereto and incorporated herein
by reference ("Purchaser's Benefitted Land"), a perpetual, non-exclusive predial
servitude for ingress and egress over and across all roads and logging paths now
existing or hereafter constructed on those portions of Seller's Other Lands that
adjoin Purchaser's Benefitted Land ("Seller's Burdened Land"), for the limited
purpose of providing vehicular and pedestrian access to and from Purchaser's
Benefitted Land to and from public roads. The rights afforded by this predial
servitude are sometimes referred to for convenience as the "Purchaser's
Servitudes". The Purchaser's Servitudes may be exercised by the then current
owner or owners of Purchaser's Benefitted Land, who shall also be entitled to
permit his, its or their lessees, licensees and invitees to use the rights
afforded by the Purchaser's Servitudes.
For purposes of this Act of Sale, the term "Other Lands Owner" shall
mean the then current owner or owners, as the case may be, of Seller's Other
Lands, including Seller's Burdened Land; the term "Burdened Land Owner" shall
mean the then current owner or owners, as the case may be, of Seller's Burdened
Land; the term "Land Owner" shall mean the then current owner or owners, as the
case may be, of the Land, including Purchaser's Benefitted Land; the term
"Benefitted Land Owner" shall mean the then current owner or owners, as the case
may be, of Purchaser's Benefitted Land; and the term "Timber Agreements" shall
mean all agreements, contracts, leases, arrangements or other contractual
obligations, whether now existing or hereafter entered into, whereby the Other
Lands Owner or its predecessors in interest have granted, grant or will grant to
third persons the right to cut, harvest, load, chip, haul or otherwise remove
any Existing Timber from the Land and
-3-
<PAGE> 4
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 the Other Lands Owner, as seller, is or may
become obligated, either directly or through any agreement, contract,
arrangement or other contractual obligation with any third person, including any
affiliate of the Other Lands Owner or any independent contractor, to cut,
harvest, load, chip, haul or otherwise remove any Existing Timber harvested from
the Land or to otherwise obtain any Existing Timber and to sell, exchange or
deliver such Existing Timber to third persons.
The Benefitted Land Owner shall be responsible and liable for, and
shall repair and/or pay or reimburse the Burdened Land Owner for, and indemnify,
defend and hold the Burdened Land Owner harmless against, any and all damages to
the roads on Seller's Burdened Land and/or to any other portion of Seller's
Burdened Land (including, without limitation, any timber or trees now or
hereafter standing or growing on Seller's Burdened Land) and any injury to
persons or other damage to property, in each case to the extent such damages
result from the Benefitted Land Owner's acts or omissions or the acts or
omissions of the Benefitted Land Owner's employees, agents, lessees, tenants or
contractors. The Land Owner shall be responsible and liable for, and shall
repair and/or pay or reimburse the Other Lands Owner for, any and all damages to
the Existing Timber, to the extent such damages result from the Land Owner's
acts or omissions or the acts or omissions of the Land Owner's employees,
agents, lessees, tenants or contractors. The Other Lands Owner shall be
responsible and liable for, and shall repair and/or pay or reimburse the Land
Owner for, and indemnify, defend and hold the Land Owner harmless against, any
and all damages to the roads on the Land used by the Other Lands Owner and/or to
any other portion of the Land, and any injury to persons or other damage to
property, in each case to the extent such damages result from the Other
-4-
<PAGE> 5
Lands Owner's acts or omissions or the acts or omissions of the Other Lands
Owner's employees, agents, lessees, tenants or contractors. Neither the
Benefitted Land Owner nor the Other Lands Owner shall have the right to
construct any new roads on the lands of the other without the prior written
consent of the other, provided that nothing contained herein shall be construed
to prevent or hinder the Other Lands Owner from gaining access to any portion of
the Land on which any Existing Timber is located. The Land Owner and the Other
Lands Owner shall each indemnify and hold the other harmless from and against
any and all injury, loss, liability, damage, cost and expense the other party
may suffer or incur as a result of claims, demands, suits, causes of action or
judgments resulting from the indemnifying party's acts or omissions or the acts
or omissions of the indemnifying party's employees, agents, lessees, tenants or
contractors in connection with the rights and servitudes reserved or granted
herein. Notwithstanding the foregoing or any other provision of this Act of Sale
to the contrary, nothing contained herein shall be construed to prevent, hinder
or limit the Other Lands Owner from gaining access to any part of the Land on
which the Existing Timber is located, from cutting and removing the Existing
Timber or from engaging in customary activities on the Land in connection with
such cutting or removal, and nothing contained herein shall be construed to make
the Other Lands Owner responsible or liable for any repair, payment,
reimbursement or indemnification obligations with respect to such access,
cutting, removal and related activities. The provisions of this paragraph shall
run with the Land and Seller's Other Lands and shall be binding upon and shall
inure to the benefit of the Other Lands Owner and the Land Owner and their
respective heirs, successors, successors-in-title and assigns.
-5-
<PAGE> 6
Purchaser acknowledges and agrees that the conveyance of the Property
hereunder is expressly subject to all matters described on Exhibit D attached
hereto and incorporated herein by reference.
Purchaser acknowledges that he has had an opportunity to fully inspect
and examine the Property. Purchaser also acknowledges that the Property is being
conveyed to Purchaser in an "as is - where is" condition without any warranty of
fitness whatsoever.
PURCHASER AGREES THAT THE PROPERTY IS TRANSFERRED BY SELLER ON AN "AS
IS" AND "WHERE IS" BASIS, IN ITS CURRENT CONDITION, WITHOUT ANY WARRANTY
WHATSOEVER ON THE PART OF SELLER. PURCHASER HEREBY EXPRESSLY WAIVES ALL
WARRANTIES AS TO THE PROPERTY, WHETHER IMPLIED BY THIS OR ANY OTHER WRITING OR
REPRESENTATION OR BY LAW. THIS WAIVER APPLIES TO ALL WARRANTIES OF ANY NATURE,
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF FITNESS FOR A
PARTICULAR PURPOSE. PURCHASER UNDERSTANDS THAT, UNDER ARTICLES 2520 THROUGH 2548
OF THE LOUISIANA CIVIL CODE AND OTHER PROVISIONS OF LAW, THIS SALE ORDINARILY
WOULD INCLUDE A WARRANTY AGAINST CERTAIN DEFECTS IN THE PROPERTY. PURCHASER
EXPRESSLY WAIVES ANY AND ALL WARRANTIES WITH RESPECT TO ALL DEFECTS, INCLUDING
ANY WARRANTY AGAINST REDHIBITORY DEFECTS AND ANY CLAIM FOR DIMINUTION OF THE
PURCHASE PRICE, AND INCLUDING ANY WARRANTY AS TO THE ENVIRONMENTAL CONDITION OF
THE LAND, WHETHER SUCH DEFECTS ARE APPARENT OR LATENT, VISIBLE OR NOT, AND
REGARDLESS OF WHETHER PURCHASER CURRENTLY IS AWARE OF ANY DEFECTS. THIS WAIVER
OF
-6-
<PAGE> 7
WARRANTY EXTENDS TO ALL DEFECTS, EVEN IF THE DEFECT OR DEFECTS RENDER THE
PROPERTY ABSOLUTELY USELESS OR SO INCONVENIENT AND IMPERFECT THAT PURCHASER
WOULD NOT HAVE PURCHASED THE PROPERTY HAD HE KNOWN OF THE DEFECT.
Notwithstanding anything contained herein to the contrary, Seller
hereby waives any and all rights under Louisiana law or otherwise to rescind the
sale contemplated hereby or to assert a claim or vendor's lien against the
Property.
THIS SALE is made and accepted for and in consideration of the sum of
THREE MILLION AND NO/100 DOLLARS ($3,000,000.00) cash, the receipt and
sufficiency of which is hereby acknowledged by Seller.
This Act of Sale may be executed in counterparts, each of which shall
be deemed an original and all of which together shall constitute one agreement
binding all the parties.
Seller and Purchaser acknowledge and agree that they shall execute any
documents and take any steps necessary, advisable or appropriate to give effect
to this Act of Sale or to carry out the purposes of this Act of Sale.
This Act of Sale shall be governed by and construed and interpreted in
accordance with the laws of the State of Louisiana.
Seller and Purchaser intend that this Act of Sale was effective as of
December 29, 1998.
The acts of the Notaries in the preparation and execution of this Act
of Sale do not constitute the expression of any opinion as to the validity of
the title of the Property, and no examination of the title to the Property has
been performed by the Notaries. The Notaries are exonerated from all liability
in the premises. Seller and Purchaser waive the production of mortgage and
conveyance
-7-
<PAGE> 8
certificates and tax researches and relieve and release the undersigned
Notaries of any liability in connection therewith.
AND NOW TO THESE PRESENTS INTERVENES Joan M. Broom, an individual of
the full age of majority, residing in the County of Merrimack, State of New
Hampshire, with a mailing address of 339 Route 103A, New London, New Hampshire
03257, and whose Social Security Number is ###-##-####, who declared that she
has been married but once and then to C. Edward Broom, from whom she has never
been divorced or judicially separated and with whom she is presently living and
residing, that she is appearing herein to concur that Purchaser has acquired the
property herein described for his separate estate with separate and paraphernal
funds under his administration, and to hereby acknowledge that the said property
shall be the separate and paraphernal property of Purchaser. Intervenor does
hereby declare that she is separate in property with Purchaser, that no
community of acquets and gains exists between them, and that she has no
intention of changing her residence or domicile to the State of Louisiana.
THUS DONE AND SIGNED on the ___ day of April, 1999 (but
effective as of December 29, 1998), in New London, New Hampshire, in the
presence of the undersigned Notary Public, and in the presence of the
undersigned competent witnesses, after due reading of the whole.
WITNESSES: SELLER:
[Witness] Strategic Timber Partners, LP, a Delaware
- ------------------------- limited partnership
[Witness]
- ------------------------- By: Strategic Timber Operating Co., a
Delaware corporation, its sole
general partner
By: /s/ Joseph E. Rendini
-----------------------------------
Joseph E. Rendini
Vice President
--------------
-8-
<PAGE> 9
Notary Public
My Commission Expires:
----------------
[NOTARY SEAL]
-9-
<PAGE> 10
THUS DONE AND SIGNED on the day of April, 1999 (but effective
as of December 29, 1998), in New London, New Hampshire, in the presence of the
undersigned Notary Public, and in the presence of the undersigned competent
witnesses after due reading of the whole.
WITNESSES: PURCHASER:
[Witness] /s/ C. Edward Broom
- -------------------------- --------------------------------
C. Edward Broom
[Witness]
- --------------------------
/s/ Linda L. Miller
----------------------
Notary Public
My Commission Expires: 6/22/99
----------------
[NOTARY SEAL]
THUS DONE AND SIGNED on the day of April, 1999 (but effective
as of December 29, 1998), in New London, New Hampshire, in the presence of the
undersigned Notary Public, and in the presence of the undersigned competent
witnesses after due reading of the whole.
WITNESSES: INTERVENOR:
[Witness] /s/ Joan M. Broom
- ---------------------------- -----------------------------------
Joan M. Broom
[Witness]
- ----------------------------
/s/ Linda L. Miller
------------------------
Notary Public
My Commission Expires: 6/22/99
--------------------
[NOTARY SEAL]
-10-
<PAGE> 11
EXHIBIT A
SECRETARY'S CERTIFICATE OF
STRATEGIC TIMBER OPERATING CO.
I HEREBY CERTIFY that I am the duly elected and authorized Secretary of
Strategic Timber Operating Co. (the "Corporation").
I HEREBY FURTHER CERTIFY that the Corporation is the sole general
partner of STRATEGIC TIMBER PARTNERS, LP, a Delaware limited partnership (the
"Partnership")
I HEREBY FURTHER CERTIFY that the following resolutions were duly
adopted by the unanimous consent of all of the Corporation's directors as of
December 29, 1998:
RESOLVED, that the form of, and each of the terms and provisions
contained in that certain Contract for the Purchase and Sale of Property, dated
December 29, 1998, as amended by Agreement Supplementing Contract for the
Purchase and Sale of Property, dated as of December 29, 1998, and by Amendment
to Contract for the Purchase and Sale of Property, dated as of December 29, 1998
(the "Contract"), between C. Edward Broom and Strategic Timber Partners, L.P., a
Delaware limited partnership (the "Partnership"), in which the Corporation is
the sole general partner, are hereby in each and every respect authorized and
approved; and the sale transaction to be effected pursuant to and in substantial
accordance with the terms of the Contract is hereby in each and every respect
authorized and approved; and
FURTHER RESOLVED, that any one officer of the Corporation be hereby
authorized and directed, on behalf of the Corporation as the sole general
partner of the Partnership, to execute and deliver, or cause to be executed and
delivered, such deeds, assignments, affidavits, settlement statements, notices,
requests, releases, demands, directions, consents, approvals, orders, waivers,
acceptances, appointments, applications, certificates, agreements, undertakings,
indemnifications, supplements, amendments, further assurances or other
instruments or communications as may be necessary or advisable in order to
consummate the sale transaction contemplated above and to otherwise carry into
effect the intent of the foregoing resolutions or to comply with the
requirements of the instruments approved or authorized by the foregoing
resolutions; and
FURTHER RESOLVED, that any and all actions which have heretofore been
taken by any one officer of the Corporation, in its capacity as sole general
partner of the Partnership, in connection with the foregoing resolutions or the
matters approved thereby are hereby ratified, approved and confirmed.
* * * * * *
I HEREBY FURTHER CERTIFY that the foregoing resolutions have continued
in full force and effect and have not been rescinded, modified or amended and
that the resolutions are not in conflict with the Articles of Incorporation and
Bylaws of the Corporation.
Dated this 7th day of April, 1999. /s/ Joseph E. Rendini
---------------------------------
Secretary
-11-
<PAGE> 12
EXHIBIT B
DESCRIPTION OF LAND
<TABLE>
<CAPTION>
A. ALLEN PARISH
TOWNSHIP RANGE SECTION DESCRIPTION ACRES
- -------- ----- ------- ----------- -----
<S> <C> <C> <C> <C>
4S 3W 31 W/2 OF NW/4 80
4S 4W 36 N/2 OF NE/4 OF SW/4, W/2 OF NE/4 100
4S 4W 36 N/2 OF NW/4 OF SE/4, SE/4 OF NW/4 60
4S 4W 36 E/2 OF NE/4 OF NW/4 20
4S 4W 33 E/2 OF SE/4 OF SE/4 20
4S 4W 34 S/2, less 2 acres sold to Mayo Benoit in E/2 of SW/4 and less 300
that part lying East of abandoned road to Oakdale in S/2 of
SE/4, 1 acre from Coleman Darbonne in NE/4 of SW/4 Pur 2/90
5S 3W 29 SW/4 160
5S 4W 3 W/2 OF NW/4 less 1 acre sold to C.J. Darbonne, NW/4 OF SW/4 119
5S 4W 4 E/2 320
5S 4W 30 W/2, W/2 OF E/2 OF NE/4 360
5S 4W 30 W/2 OF NE/4, W/2 OF NE/4 OF SE/4 100
5S 4W 30 NW/4 OF SE/4 40
5S 4W 31 SW/4 OF NW/4, SE/4 OF SW/4 80
5S 4W 31 S/2 OF NE/4 OF SW/4 20
5S 4W 31 W/2 OF SW/4 OF SE/4 20
5S 4W 19 S/2 OF SW/4 South of SR #1151 40
6S 3W 28 W/2 OF SW/4 OF NW/4 20
6S 3W 18 S/2 OF S/2 160
6S 3W 19 S/2 OF SE/4 80
6S 3W 22 SE/4, W/2 OF NE/4, S/2 OF SE/4 OF SW/4 260
</TABLE>
-12-
<PAGE> 13
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
6S 4W 13 SE/4 OF SE/4, W/2 OF SE/4, SE/4 OF NW/4 160
6S 4W 13 NE/4 OF SW/4, E/2 OF NW/4 OF SW/4 60
6S 4W 13 E/2 OF SW/4 OF NW/4, SW/4 OF NE/4 OF NW/4 30
6S 4W 24 E/2 OF NE/4 80
6S 4W 2 W/2 OF NW/4 80
6S 4W 3 SE/4 OF NE/4, S/2 OF SW/4, N/2 OF SE/4 200
6S 4W 3 W/2 OF SW/4 OF SE/4, NE/4 OF SW/4 OF SE/4 30
6S 4W 10 N/2 OF NW/4, SE/4 OF NW/4, SW/4 OF NE/4 160
6S 4W 10 W/2 OF NW/4 OF NE/4, W/2 OF SE/4 100
6S 4W 10 SW/4, SE/4 OF NW/4 OF NE/4 170
6S 4W 15 NW/4 OF SE/4, W/2 OF NE/4 120
6S 4W 15 N/2 OF NW/4, N/2 OF SE/4 OF NW/4 100
6S 4W 16 NW/4, N/2 OF NE/4 OF SW/4 180
6S 5W 1 W/2 OF E/2 160
6S 5W 1 E/2 OF W/2 East of Parish Road 100
6S 5W 24 N/2 OF N/2, SE/4 OF NE/4 lying east of Highway 165 199
7S 6W 2 S/2 OF SE/4 South of LA #383 10
7S 6W 11 NE/4, W/2 OF E/2 OF SE/4 200
7S 6W 11 NW/4 OF SE/4 40
7S 6W 14 SW/4, S/2 OF NW/4 240
7S 6W 14 E/2 OF SE/4, SW/4 OF NE/4 120
7S 6W 15 SE/4, E/2 OF SW/4 less 14 acres sold to J.T. Nevils 226
B. BEAUREGARD PARISH
6S 8W 19 W/2 OF NW/4 less Highway R/W (6.935 acres) on west side 73
6S 8W 19 N/2 OF SW/4 OF SW/4 less 2 acres sold in NW corner of SW/4 of 18
SW/4 to Beauregard Electric 5/95
</TABLE>
-13-
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
7S 8W 33 SE/4 OF NE/4, N/2 OF SE/4 120
7S 8W 34 E/2 OF NE/4, N/2 OF SE/4 160
7S 9W 33 W/2 OF NE/4 OF SE/4 20
C. CALCASIEU PARISH
8S 9W 4 NW/4 160
D. JEFFERSON DAVIS PARISH
7S 6W 20 S/2 OF NE/4 OF NE/4, SE/4 OF SE/4 60
7S 6W 20 E/2 OF SW/4 OF NE/4, SE/4 OF NE/4 60
7S 6W 20 E/2 OF NE/4 OF SE/4 20
7S 6W 21 SE/4, N/2 OF SW/4, SW/4 OF NW/4 280
7S 6W 22 E/2 OF NE/4, NW/4 OF NE/4 120
7S 6W 23 N/2 OF NW/4 80
8S 6W 27 S/2 OF SE/4 80
8S 6W 27 SE/4 OF NE/4 40
8S 6W 26 N/2 OF NW/4, NW/4 OF NE/4 120
9S 6W 28 NE/4 OF NW/4 less 13.795 acres to LA Department of Highways, 66
NW/4 OF NE/4
TOTAL ACRES 6,601.00
</TABLE>
-14-
<PAGE> 15
EXHIBIT C
DESCRIPTION OF PURCHASER'S BENEFITTED LAND
<TABLE>
<CAPTION>
ALLEN PARISH
Township Range Section Description Acres
- -------- ------ ------- ----------- -----
<S> <C> <C> <C> <C>
4S 4W 36 N/2 of NE/4 of SW/4, W/2 of NE/4 100
4S 4W 36 N/2 of NW/4 of SE/4, SE/4 of NW/4 60
4S 4W 36 E/2 of NE/4 of NW/4` 20
5S 4W 31 SW/4 of NW/4 40
6S 3W 28 W/2 of SW/4 of NW/4 20
----
TOTAL 240
</TABLE>
-15-
<PAGE> 16
EXHIBIT D
PERMITTED ENCUMBRANCES
1. Ad valorem taxes not yet due and payable.
2. Existing land use, zoning and other governmental restrictions and
requirements.
3. Rights of third persons and/or public authorities and utilities in and
to that portion of the Property located within the boundaries of roads,
highways, easements, servitudes and rights-of-way, whether of record,
on the ground, or acquired through prescription.
4. All matters which would be revealed by an accurate survey of the
Property.
5. Riparian rights of others in and to any creeks, rivers, lakes, streams
or natureways located on the Property.
6. All matters of record.
7. All title matters (recorded or unrecorded) existing as of April 27,
1998, or arising thereafter if based on acts or omissions on or prior
to April 27, 1998, including, but not limited to, various reservations
of mineral and other rights retained by the parties commonly referred
to as the "Bel" owners and the "Quatre Parish" owners in their
respective sales to Griffin Logging, Inc. on or about April 27, 1998.
8. All timber cutting contracts and agricultural, pasture, hunting,
campsite and other leases and licenses affecting the Property.
9. Rights of way granted to Louisiana Department of Transportation and
Development in connection with the Highway 171 expansion.
-16-
<PAGE> 1
EXHIBIT 10.19.2
OPTION AGREEMENT
THIS OPTION AGREEMENT, entered into as of the 29th day of December,
1998, by and between:
STRATEGIC TIMBER PARTNERS, LP, a Delaware limited partnership,
whose principal office is located at 5 North Pleasant Street,
New London, New Hampshire 03257, represented herein by Joseph
E. Rendini, Vice President of Strategic Timber Operating Co.,
a Delaware corporation, its sole general partner (hereafter
referred to as "Purchaser") and
C. EDWARD BROOM, a person of the full age of majority residing
in the County of Merrimack, State of New Hampshire, whose
mailing address is 339 Route 103A, New London, New Hampshire
03257 (hereafter referred to as "Seller"), who declared that
he is married to Joan M. Broom, with whom he is presently
living and residing, and that he acquired the property herein
described for his separate estate with separate and
paraphernal funds under his administration, and that the said
property is his separate and paraphernal property.
W I T N E S S E T H:
WHEREAS, Seller is the owner of certain real property described on
EXHIBIT A attached hereto and made a part hereof (hereinafter referred to as the
"Property"), and
WHEREAS, Seller desires to grant to Purchaser and Purchaser desires to
obtain from Seller an option to purchase the Property.
NOW THEREFORE, for and in consideration of ONE THOUSAND DOLLARS
($1,000.00) paid to Seller by Purchaser contemporaneously herewith, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by Seller, Seller and Purchaser hereby agree as follows:
-1-
<PAGE> 2
1. Seller does hereby grant to Purchaser an exclusive option to
purchase the Property (hereinafter referred to as the "Option") on the following
terms and conditions:
(a) The Option shall be exercisable by Purchaser by written
notice to Seller given at any time on or before December 31, 2000.
(b) If Purchaser exercises the Option, the purchase price for
the Property shall be the sum of THREE MILLION AND NO/100 DOLLARS
($3,000,000.00), plus interest thereon at the rate of eight percent (8%) per
annum, compounded annually (as of the anniversary date hereof), from the date
hereof to the date of Closing, subject to any deductions provided for in
subparagraph 1(d) below. Such sum shall be payable in cash by wire transfer of
immediately available funds or by certified or cashier's check at Closing.
(c) If Purchaser exercises the Option, the closing of the sale
of the Property pursuant hereto (the "Closing") shall be held on the date which
is sixty (60) days after the date of Purchaser's exercise of the Option (or if
such 60th day is a Saturday, Sunday or legal holiday, then on the next day which
is not a Saturday, Sunday or legal holiday), at the offices of Sutherland Asbill
& Brennan LLP, 999 Peachtree Street, NE, Atlanta, Georgia 30309, or such earlier
date and time, and/or such other location, as may be designated by Purchaser
upon not less than three (3) days prior notice to Seller.
(d) If Purchaser exercises the Option, at the Closing Seller
shall convey to Purchaser good and marketable fee simple title to the Property
by act of sale, with warranty of title only against acts of Seller or those
claiming by, through or under Seller, free and clear of all mortgages, liens,
restrictions, agreements, encumbrances and other matters affecting title, except
for (i) those matters not created or suffered by Seller existing as of the time
Seller took title to the Property, (ii) ad valorem real property taxes not yet
due and payable, and (iii) such matters (if any) as shall have been consented to
by Purchaser in writing after the date hereof. Ad valorem real property taxes on
the Property for the year of Closing and income from leases and other contracts
affecting the Property shall be prorated as of Closing. In the event Seller
fails or refuses to convey such title to Purchaser, Purchaser in addition to all
other rights and remedies which it may have at law or in equity, may remove any
title matter created or suffered by Seller without the prior written consent of
Purchaser and deduct all costs and expenses incurred by Purchaser in connection
with such removal (including, but not limited to, attorney's fees) from the
amount of the purchase price otherwise payable as provided in subparagraph 1(b)
hereof. At the Closing Seller shall also execute and deliver to Purchaser an
owner's affidavit reasonably satisfactory to Purchaser, an affidavit as to the
non-foreign status of Seller, a certification of information for 1099-S report
filing purposes, an assignment of any contracts, leases, licenses or permits
affecting the Property, and such other documents and instruments as may be
reasonably necessary or desirable for the consummation of the purchase and sale
pursuant to the Option. Seller and Purchaser agree to do such other acts and to
execute and deliver such other documents and instruments as are reasonably
necessary or desirable for the consummation of the purchase and sale pursuant to
the Option. Purchaser shall pay any transfer tax in connection with the
conveyance of the Property and the cost of recording the act of sale.
-2-
<PAGE> 3
2. All notices permitted or required to be made hereunder shall be in
writing, signed by the party giving notice and shall be delivered personally or
by commercial courier or sent by registered or certified mail, to the other
party hereto, addressed as follows:
TO PURCHASER: TO SELLER:
Strategic Timber Partners, L.P. C. Edward Broom
5 North Pleasant Street 339 Route 103A
New London, New Hampshire New London, New Hampshire
or to such other address and to the attention of such person(s) as either party
shall designate in a notice to the other. The date of personal delivery or
courier delivery or the date of mailing, as the case may be, shall be the date
of such notice.
3. If not sooner exercised, the Option shall automatically terminate
and be of no further force or effect at 11:59 PM, December 31, 2000.
4. This Option Agreement shall be binding upon and shall inure to the
benefit of Seller and Purchaser and their respective heirs, successors,
successors-in-title and assigns, and any reference to Seller or to Purchaser
hereunder shall be deemed to include the heirs, successors, successors-in-title
and assigns of such party.
AND NOW TO THESE PRESENTS intervenes Joan M. Broom, who declared that
she is the spouse of Seller, with whom she is presently living and residing,
appearing herein to acknowledge that the property herein described is the
separate and paraphernal property of Seller, and was acquired with separate and
paraphernal funds under the administration of Seller. Intervenor declares that
she is separate in property with Seller and that no community of acquets and
gains exists between them. Intervenor does hereby quitclaim and assign to Seller
all right, title and interest of Seller in the property herein described, if
any.
IN WITNESS WHEREOF, the parties have executed this Option Agreement on
April, 1999, but effective as of December 29, 1998.
PURCHASER:
STRATEGIC TIMBER PARTNERS, L.P.
By: Strategic Timber Operating Co., its
sole general partner
By: /s/ Joseph E. Rendini
---------------------------
-3-
<PAGE> 4
Name: Joseph E. Rendini
Its: Vice President
SELLER:
/s/ C. Edward Broom
----------------------------------
C. EDWARD BROOM
INTERVENOR:
/s/ Joan M. Broom
----------------------------------
JOAN M. BROOM
-4-
<PAGE> 5
A C K N O W L E D G M E N T S
STATE OF NEW HAMPSHIRE
COUNTY OF MERRIMACK
On this 7th day of April, 1999, before me, the undersigned
Notary Public, duly commissioned and qualified in and for the County of
Merrimack, State of New Hampshire, personally came and appeared Joseph E.
Rendini, who, after being duly sworn, declared that he signed the foregoing
instrument as Vice President of Strategic Timber Operating Co., a Delaware
corporation, as his and such corporation's voluntary act as the sole general
partner of Strategic Timber Partners, LP, a Delaware limited partnership, for
the purposes described therein.
WITNESSES:
[Witness]
- ---------------------------------
/s/ Joseph E. Rendini
----------------------------------
Joseph E. Rendini
[Witness]
- ---------------------------------
/s/ Linda L. Miller
---------------------------
Notary Public
My commission expires:
6/22/99
-----------------
[NOTARY SEAL]
-5-
<PAGE> 6
STATE OF NEW HAMPSHIRE
COUNTY OF MERRIMACK
On this 7th day of April, 1999, before me, the undersigned
Notary Public, duly commissioned and qualified in and for the County of
Merrimack, State of New Hampshire, personally came and appeared C. Edward Broom,
who, after being duly sworn, declared that he signed the foregoing instrument
voluntarily for the purposes described therein.
WITNESSES:
[Witness]
- ---------------------------
/s/ C. Edward Broom
------------------------------
C. Edward Broom
[Witness]
- ---------------------------
/s/ Linda L. Miller
---------------------------
Notary Public
My commission expires:
6/22/99
----------------------
[NOTARY SEAL]
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<PAGE> 7
STATE OF NEW HAMPSHIRE
COUNTY OF MERRIMACK
On this 7th day of April, 1999, before me, the undersigned
Notary Public, duly commissioned and qualified in and for the County of
Merrimack, State of New Hampshire, personally came and appeared Joan M. Broom,
who, after being duly sworn, declared that she signed the foregoing instrument
voluntarily for the purposes described therein.
WITNESSES:
[WITNESS]
- --------------------------------
/S/ JOAN M. BROOM
----------------------------------
Joan M. Broom
[WITNESS]
- --------------------------------
/s/ LINDA L. MILLER
--------------------------
Notary Public
My commission expires:
6/22/99
------------------------
[NOTARY SEAL]
-7-
<PAGE> 8
EXHIBIT A
DESCRIPTION OF LAND
A. ALLEN PARISH
<TABLE>
<CAPTION>
TOWNSHIP RANGE SECTION DESCRIPTION ACRES
- -------- ----- ------- ----------- -----
<S> <C> <C> <C> <C>
4S 3W 31 W/2 OF NW/4 80
4S 4W 36 N/2 OF NE/4 OF SW/4, W/2 OF NE/4 100
4S 4W 36 N/2 OF NW/4 OF SE/4, SE/4 OF NW/4 60
4S 4W 36 E/2 OF NE/4 OF NW/4 20
4S 4W 33 E/2 OF SE/4 OF SE/4 20
4S 4W 34 S/2, less 2 acres sold to Mayo Benoit in E/2 of SW/4 and less 300
that part lying East of abandoned road to Oakdale in S/2 of
SE/4, 1 acre from Coleman Darbonne in NE/4 of SW/4 Pur 2/90
5S 3W 29 SW/4 160
5S 4W 3 W/2 OF NW/4 less 1 acre sold to C.J. Darbonne, NW/4 OF SW/4 119
5S 4W 4 E/2 320
5S 4W 30 W/2, W/2 OF E/2 OF NE/4 360
5S 4W 30 W/2 OF NE/4, W/2 OF NE/4 OF SE/4 100
5S 4W 30 NW/4 OF SE/4 40
5S 4W 31 SW/4 OF NW/4, SE/4 OF SW/4 80
5S 4W 31 S/2 OF NE/4 OF SW/4 20
5S 4W 31 W/2 OF SW/4 OF SE/4 20
5S 4W 19 S/2 OF SW/4 South of SR #1151 40
6S 3W 28 W/2 OF SW/4 OF NW/4 20
6S 3W 18 S/2 OF S/2 160
</TABLE>
-8-
<PAGE> 9
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
6S 3W 19 S/2 OF SE/4 80
6S 3W 22 SE/4, W/2 OF NE/4, S/2 OF SE/4 OF SW/4 260
6S 4W 13 SE/4 OF SE/4, W/2 OF SE/4, SE/4 OF NW/4 160
6S 4W 13 NE/4 OF SW/4, E/2 OF NW/4 OF SW/4 60
6S 4W 13 E/2 OF SW/4 OF NW/4, SW/4 OF NE/4 OF NW/4 30
6S 4W 24 E/2 OF NE/4 80
6S 4W 2 W/2 OF NW/4 80
6S 4W 3 SE/4 OF NE/4, S/2 OF SW/4, N/2 OF SE/4 200
6S 4W 3 W/2 OF SW/4 OF SE/4, NE/4 OF SW/4 OF SE/4 30
6S 4W 10 N/2 OF NW/4, SE/4 OF NW/4, SW/4 OF NE/4 160
6S 4W 10 W/2 OF NW/4 OF NE/4, W/2 OF SE/4 100
6S 4W 10 SW/4, SE/4 OF NW/4 OF NE/4 170
6S 4W 15 NW/4 OF SE/4, W/2 OF NE/4 120
6S 4W 15 N/2 OF NW/4, N/2 OF SE/4 OF NW/4 100
6S 4W 16 NW/4, N/2 OF NE/4 OF SW/4 180
6S 5W 1 W/2 OF E/2 160
6S 5W 1 E/2 OF W/2 East of Parish Road 100
6S 5W 24 N/2 OF N/2, SE/4 OF NE/4 lying east of Highway 165 199
7S 6W 2 S/2 OF SE/4 South of LA #383 10
7S 6W 11 NE/4, W/2 OF E/2 OF SE/4 200
7S 6W 11 NW/4 OF SE/4 40
7S 6W 14 SW/4, S/2 OF NW/4 240
7S 6W 14 E/2 OF SE/4, SW/4 OF NE/4 120
7S 6W 15 SE/4, E/2 OF SW/4 less 14 acres sold to J.T. Nevils 226
B. BEAUREGARD PARISH
</TABLE>
-9-
<PAGE> 10
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
6S 8W 19 W/2 OF NW/4 less Highway R/W (6.935 acres) on west side 73
6S 8W 19 N/2 OF SW/4 OF SW/4 less 2 acres sold in NW corner of SW/4 of 18
SW/4 to Beauregard Electric 5/95
7S 8W 33 SE/4 OF NE/4, N/2 OF SE/4 120
7S 8W 34 E/2 OF NE/4, N/2 OF SE/4 160
7S 9W 33 W/2 OF NE/4 OF SE/4 20
C. CALCASIEU PARISH
8S 9W 4 NW/4 160
D. JEFFERSON DAVIS PARISH
7S 6W 20 S/2 OF NE/4 OF NE/4, SE/4 OF SE/4 60
7S 6W 20 E/2 OF SW/4 OF NE/4, SE/4 OF NE/4 60
7S 6W 20 E/2 OF NE/4 OF SE/4 20
7S 6W 21 SE/4, N/2 OF SW/4, SW/4 OF NW/4 280
7S 6W 22 E/2 OF NE/4, NW/4 OF NE/4 120
7S 6W 23 N/2 OF NW/4 80
8S 6W 27 S/2 OF SE/4 80
8S 6W 27 SE/4 OF NE/4 40
8S 6W 26 N/2 OF NW/4, NW/4 OF NE/4 120
9S 6W 28 NE/4 OF NW/4 less 13.795 acres to LA Department of Highways, 66
NW/4 OF NE/4
TOTAL ACRES 6,601.00
</TABLE>
-10-
<PAGE> 1
EXHIBIT 10.20
TIMBER PURCHASE AGREEMENT
By this Agreement, executed as of the ____ day of June, 1999, FRONTIER
RESOURCES, LLC ("Frontier"), an Oregon Limited Liability Company, and PIONEER
RESOURCES, LLC ("Pioneer"), an Oregon limited liability company, agree as
follows:
1. PURCHASE AND SALE. Frontier hereby purchases from Pioneer and
Pioneer hereby sells to Frontier "the Timber" (as defined in Section 2, below)
on the real property described on Exhibits A-1 (the "First Property") and A-2
(the "Second Property") attached hereto, which is approximately 15,080 acres
situated in Wheeler, Morrow, Umatilla and Grant Counties, Oregon and Columbia
County Washington. The First Property and the Second Property are herein
collectively referred to as "the Premises".
2. THE TIMBER. The term "the Timber" shall mean the merchantable
timber standing or lying on the Premises during the term of this Agreement which
is included in the following description:
2.1 VOLUME. 18,000 MBF (the "Volume"), net short log Scribner
scale, to be designated with blue paint by Pioneer from the timber located on
the Premises. Pioneer agrees to first designate the Timber on the First Property
and shall only designate Timber on the Second Property if the Volume cannot
reasonably be designated on the First Property. Pioneer agrees to designate the
Timber in an orderly and timely fashion so as to not unreasonably interfere or
delay the harvest and removal of the Timber by Frontier.
2.2 SPECIES. Ponderosa pine, Douglas fir, western larch, white
fir, Engelmann spruce, and lodgepole pine.
2.3 SIZE. For standing trees, tree segments which will produce
a 16' log to a minimum 6" top, inside bark diameter. For down trees, tree
segments which will produce an 8' log to a minimum 6" top, inside bark diameter.
3. PRICE. The purchase price for the Timber is Four Million
Thirty Three Thousand Nine Hundred Eighty Dollars ($4,033,980) (the "Purchase
Price"). Frontier shall account for and report to Pioneer, in accordance with
Sections 6 and 7 of this Agreement, all volumes of the Timber harvested from the
Premises and all volumes of timber in excess of the Volume harvested from the
Premises. Frontier shall pay Pioneer, in addition to said purchase price, the
following stumpage price for any excess volumes of timber incidentally cut or
removed by Frontier: $288/MBF, net short log Scribner scale, all species, camp
run. Title to and risk of loss shall remain with Pioneer for any volume in
excess of the Volume until the timber is severed from the
1 - TIMBER PURCHASE AGREEMENT
<PAGE> 2
stump. However, nothing in the three preceding sentences shall be construed to
allow Frontier to cut or remove any volume of timber substantially in excess of
the volume set forth in Section 2.1, above, or unilaterally to make any material
variance in the logging plan approved by Pioneer pursuant to the provisions of
Section 12.2, below.
4. REMOVAL SCHEDULE. Subject to unusual weather conditions or
other events of force majeure, Frontier will use its best efforts to complete
harvest and removal of the Timber not later than March 31, 2002. Frontier will
promptly notify and confer with Pioneer as soon as Frontier knows of
circumstances that may prevent compliance with the schedule set forth above.
Notwithstanding any such unusual weather conditions or other events of force
majeure, the period within which Frontier shall be required to harvest and
remove the Timber shall not extend beyond December 31, 2002.
5. TERMS OF PAYMENT.
5.1 On execution of this Agreement, Frontier will pay to
Pioneer the Purchase Price. Upon receipt of the Purchase Price, Pioneer shall
deliver to Frontier the timber deeds in the form attached hereto as Exhibits B-1
and B-2 (collectively the "Timber Deeds") and all other documents reasonably
requested by Frontier to effect the intent of this Agreement.
5.2 If, for any reason, the volume of merchantable logs
removed from the Premises is less than the Volume, the purchase price shall not
be adjusted and no portion thereof shall be refundable or rebatable, it being
understood and agreed that Frontier shall have all risk with respect to existing
and future volumes of timber on the Premises and all risk of loss except as set
forth in Section 3 above.
5.3 Unless directed otherwise in writing, Frontier shall make
payments to Pioneer at its address set forth in this Agreement for the purpose
of providing notice.
6. UTILIZATION STANDARDS. Frontier shall remove from the Premises
any merchantable log manufactured from severed timber. Merchantable logs shall
be those logs containing 10 board feet or more of sound, usable wood, and having
a minimum log diameter of 6" inside the bark at the small end and having a
minimum of 8 feet in length. Any log containing less than one-third net
merchantable volume that is inadvertently transported to a log yard shall be the
property of Frontier, but Frontier shall have no obligation to pay for such
culls.
7. SCALING.
7.1 All loads shall be weighed at Frontier log yards, or those
of an affiliate of Frontier, with a scale ticket that notes gross, tare, and net
weights. All mixed species loads will be 100 percent rollout scaled. Loads
sorted by species shall be scaled one in five on a random basis to determine the
applicable board foot per pound conversion factor to be used to calculate
2 - TIMBER PURCHASE AGREEMENT
2
<PAGE> 3
the volume of those loads weighed, but not scaled. Scaling will follow the rules
and procedures identified under the U.S. Forest Service Handbook, FSH 2409.11,
and/or the "Official Rules" of the Columbia River Log Scaling and Grading
Bureau, January 1, 1982 Edition, Reprinted January 1, 1995. All scaling will be
done at the expense of Frontier, or an affiliate of Frontier, and through an
independent third party log scaling and grading bureau using one of the
above-identified procedures.
7.2 Frontier shall provide Pioneer monthly with copies of
volume reports showing the amount of Timber removed from the Premises during the
preceding month and the amount of any timber in excess of the Volume so removed.
Each such volume report shall be accompanied by payment from Frontier to Pioneer
for any such excess timber.
8. TERM.
8.1 Frontier shall have from the date hereof until March 31,
2002 (the "Termination Date"), to cut and remove the Timber from the Premises,
provided that in the case of an event of force majeure the Termination Date
shall be extended for the period of delay caused by such event of force majeure,
but in no event shall such Termination Date be extended beyond December 31,
2002. Thereafter, all right, title, and interest to the Timber shall revert to
Pioneer. Upon the expiration of the term of this Agreement or any earlier
termination of this Agreement, Frontier shall execute and deliver to Pioneer a
recordable termination and release of all rights, titles, interests, powers and
privileges of Frontier under this Agreement, in form and substance reasonably
acceptable to Pioneer.
8.2 Pioneer acknowledges that Frontier will finance all or a
portion of the purchase price with a secured loan (the "Loan") from First Union
National Bank, as agent ("First Union"). Should Frontier default in making
payments under the Loan to First Union pursuant to said secured loan, such that
First Union, by the terms of First Union's security agreement with Frontier
commences action to succeed to Frontier's rights under this Agreement, then and
only then the Termination Date shall be extended for the benefit of First Union
to the extent reasonably necessary to cut and remove the balance of the Timber
not yet cut and removed by Frontier from the Premises, but in any event not
later than September 30, 2003; provided, however, if First Union shall at any
time discontinue or abandon such action to succeed, then the extension pursuant
to this Section 8.2 shall be deemed to be rescinded and no longer effective.
"First Union" shall include any successor or assignee of First Union other than
Frontier or Greg Demers or any person or entity affiliated with or related to
Frontier or Greg Demers.
8.3 During the term of this Agreement as defined in Sections
8.1 and 8.2, above, Pioneer will not cut or remove any merchantable timber
standing on the Premises.
9. PIONEER'S TITLE. Pioneer hereby warrants that it has not
granted or created any liens, claims, and encumbrances of any kind against the
Timber or the Premises since October 9,
3 - TIMBER PURCHASE AGREEMENT
3
<PAGE> 4
1998, except those specified on Exhibit C, attached hereto and by this reference
made a part hereof.
10. PASSAGE OF TITLE; RISK OF LOSS. Title to the Timber shall pass
to Frontier upon Pioneer's execution and delivery of the Timber Deed. Frontier
assumes all risk of loss, damage, or injury to the Timber by fire, windstorm,
pestilence, act of God, act of government or other casualty not caused by
Pioneer's negligence or intentional misconduct. Pioneer shall pay for and
maintain their normal aerial and ground fire patrol duties during the fire
seasons for which this contract remains in effect and shall lend their
assistance to the best of their capabilities should a fire occur.
11. TAXES. Pioneer shall pay all taxes levied against the
Premises, including fire patrol tax, during the term hereof, and Frontier shall
pay all taxes levied by reason of Frontier's harvest and removal of the Timber
and any excess timber, including without limitation, the harvest, severance and
privilege tax.
12. HARVEST PRACTICES. Frontier shall conduct its logging
operations on the Premises in an efficient, workmanlike manner, in accordance
with standard good logging practices as the same prevail in eastern Oregon and
pursuant to the provisions of the Oregon Forest Practices Act and in accordance
with the following special provisions:
12.1 Frontier shall at Frontier's expense perform all
requirements of the Oregon Forest Practices Act applicable to Frontier's
activity on the Premises, including filing and delivering all notices to the
State Forester required by the Oregon Forest Practices Act.
12.2 Frontier shall prepare a logging plan for each of the
operations listed in Exhibit A. These plans must be submitted to and approved by
Pioneer prior to commencement of any activity pursuant to this Agreement and
Pioneer shall not delay or withhold approval unreasonably. These plans shall
include, among other things, the names, addresses, and telephone numbers of the
logging contractor and his field representatives, type of logging equipment to
be used, roads to be used, and dates for cutting, yarding, hauling, and current
brush piling and cleanup operations. The plan shall conform to the terms of this
Agreement. A breach of any logging plan approved by Pioneer pursuant to this
Section shall be considered a breach of this Agreement.
12.3 Felling of merchantable trees shall be done so as to
minimize breakage and waste.
12.4 Frontier shall pay all costs of labor and materials and
shall keep the properties of Pioneer free from liens and encumbrances which
result from Frontier's activities on the Premises.
4 - TIMBER PURCHASE AGREEMENT
4
<PAGE> 5
12.5 Upon written notice to Frontier, Pioneer may temporarily
suspend Frontier's operations on certain portions of the Premises during periods
of extreme fire danger or whenever, in Pioneer's reasonable judgment, such
operations would likely cause excessive damage to lands, water quality, roads or
forest soils because of weather conditions during extreme wet periods. Such
notice from Pioneer pursuant to this Section 12.5 shall specify on which portion
of the Premises Frontier's operations are temporarily suspended and the specific
reasons for such suspension. The Termination Date shall be extended one day for
any portion of any day which Frontier's operations are suspended by Pioneer
pursuant to this Section 12.5.
12.6 Upon completion of all logging operations under this
Agreement, Frontier shall promptly remove all equipment, refuse, wire rope,
litter, scrap and trash brought onto the Premises or deposited along access
roads by Frontier, its agents, contractors or employees. All lunch-box garbage,
empty oil and grease containers, empty cans or anything of a non-biodegradable
nature shall be removed from the Premises on a daily basis.
12.7 Frontier shall be responsible for any trespass outside
the Premises boundary marked on the ground by Pioneer.
12.8 In the event any fuel oil, petroleum products, or other
hazardous wastes are deposited on any part of the Premises or along any access
roads as a result of any activities of Frontier or Frontier's contractors,
Frontier shall promptly notify Pioneer of such fact and shall also immediately
remove and clean up the same in full compliance with all provisions of State and
Federal law. Frontier shall defend, indemnify and save harmless Pioneer against
any and all losses, expenses, damages, claims, fines, charges, liens,
liabilities, actions, causes of action or proceedings of any kind relating to
the environmental condition of the Premises and arising directly or indirectly
out of or in connection with the acts or omissions of Frontier or any of its
agents, contractors or employees.
13. ROAD CONSTRUCTION, USE AND MAINTENANCE. Frontier agrees to and
shall comply with the following terms and provisions in constructing, using and
maintaining all logging roads:
13.1 Frontier shall have the right to build such temporary
roads upon the Premises as may be necessary to log the Premises. No road shall
be constructed, and no existing road shall be used, until such planned
construction or use has been disclosed to and approved by Pioneer as part of the
logging plan as provided in Section 12.2 above. In constructing any road,
Frontier shall abide by applicable State and Federal laws.
13.2 Pioneer shall be responsible for deferred maintenance
charges assessed under the Cooperative Maintenance Agreement with the US Forest
Service for any volume hauled over cost share roads. Frontier shall be
responsible for any other current maintenance or for paying for maintenance of
roads used in performing this Agreement except that if there are other users for
commercial hauling, performance of or payment for maintenance will be a
responsibility
5 - TIMBER PURCHASE AGREEMENT
5
<PAGE> 6
shared in proportion to use with such other users. Road maintenance shall
include keeping culverts, culvert catch basins, and ditches free of debris,
grading the road surface, and adding of rock to maintain road surface during
periods of log hauling. Within a reasonable period of time after termination of
log hauling, Frontier shall leave roads in a condition equal to or better than
existed prior to Frontier's logging and hauling operations except as otherwise
provided in this Section 13.2. Frontier shall pay all costs in connection with
maintenance work attributable to Frontier's use of the roads.
14. PRESERVATION OF SURVEY MONUMENTS. Should Frontier destroy or
damage any survey monuments on the Premises during Frontier's operations,
Frontier shall have the monuments replaced by a registered professional land
surveyor licensed in Oregon, and shall effect the appropriate filing of the
resurvey with the County Surveyor.
15. DAMAGE TO RESERVED TREES. Reserved trees are those trees on or
off the Premises, including wildlife trees, not to be cut by Frontier. If
Frontier's activities result in damage to reserved trees as reasonably
determined by Pioneer, Frontier shall take such trees and pay for such trees as
liquidated damages double the fair market value therefor. If the State Forest
Practices Officer determines that Frontier has damaged wildlife trees or logs,
then Frontier will be required to remedy the problem in accordance with the
State's instructions at Frontier's expense.
16. SLASH DISPOSAL. Frontier will be responsible for disposal of
slash as required by the Oregon Forest Practice Rules and Statutes except for
burning. Pioneer will be responsible for burning.
17. REFORESTATION. Pioneer shall be responsible for reforestation
work and costs complying with State requirements except in situations where a
violation of the logging plans (referenced in paragraph 12.2) by Frontier or its
contractor has created a reforestation liability. In that case Frontier is
liable for the costs of reforestation to a level acceptable to Pioneer in its
reasonable discretion.
18. FIRE PRECAUTIONS AND SUPPRESSION. Except as otherwise provided
in Section 10 above, during the time that this Agreement remains in force,
Frontier shall independently make every reasonable effort to prevent and
suppress forest fires on the Premises. Frontier shall be responsible for any
expense, liability, or claim of liability resulting from any default by Frontier
in performance of its obligations under this Section 18. Frontier shall defend,
indemnify and hold harmless Pioneer from all liability to governmental
authorities or to public or private parties arising out of Frontier's violation
of law, or from fire resulting from the gross negligence or willful misconduct
of Frontier.
19. ASSUMPTION OF RISKS AND INDEMNITY.
6 - TIMBER PURCHASE AGREEMENT
6
<PAGE> 7
19.1 Pioneer has made no representations as to the present or
future conditions of or on its property or the character or amount of traffic on
any access roads. Frontier assumes all risks of personal injury or property
damage to itself and its employees, agents and contractors in connection with
operations under this Agreement.
19.2 Frontier shall pay for all damage to Pioneer's property
and to the property of any third parties resulting directly or indirectly from
the gross negligence or willful misconduct of Frontier, its employees, agents,
or contractors in performing this Agreement.
19.3 Frontier shall defend, indemnify and save harmless
Pioneer against any and all losses, expenses, damages, claims, fines, charges,
liens, liabilities, actions, causes of action or proceedings of any kind
whatsoever (whether or not arising on account of damage to or loss of property,
or injury to or death of any person) arising directly or indirectly out of or in
connection with the acts or omissions of Frontier or any of its agents,
contractors or employees, except those caused solely by Pioneer's negligence or
intentional misconduct. The foregoing indemnification in favor of Pioneer
includes, without limitations, any claim for injury to persons or property,
nuisance, mechanics' and materialmen' liens, workers' compensation or
unemployment taxes, fines and penalties, and any environmental damages. Frontier
shall perform all its obligations and carry on all its operations and activities
hereunder as an independent contractor and entirely at its own risk and
responsibility. Frontier shall be responsible for activities of its
subcontractors. Frontier will reimburse Pioneer for all costs reasonably
incurred by Pioneer to defend against such claims through attorneys of Pioneer's
choice.
19.4 Pioneer expressly disclaims, and Frontier expressly
acknowledges such disclaimer, making or giving any warranty regarding the costs
or feasibility of logging such timber; Frontier acknowledges relying solely upon
Frontier's own estimates of said costs and feasibility.
20. INSURANCE. At all times during the period of this Agreement
and any extension thereof or until all work required by this Agreement is
completed, Frontier shall have in effect comprehensive property damage and
personal injury liability insurance, including coverage for motor vehicles, as
required by this section. The insurance shall be in the amounts specified and
shall afford the coverage as described below.
Frontier shall have worker's compensation insurance meeting statutory
requirements for all Frontier's employees, and shall require Frontier's
contractors and subcontractors to have worker's compensation insurance covering
all employees involved in operations hereunder.
Within twenty (20) days of written request by Pioneer, Frontier shall
furnish to Pioneer certificates of insurance evidencing that the required
insurance has been issued to Frontier or to its contractors or subcontractors,
as the case may be, and is in force on the date of the certificates. The
insurance shall be written by a company or companies authorized to do business
in the State
7 - TIMBER PURCHASE AGREEMENT
7
<PAGE> 8
of Oregon. The issuing company or companies shall agree on the certificate or an
attachment thereto that Pioneer shall be given thirty (30) days prior written
notice of intended cancellation of the insurance. Pioneer, its agents, owners
and employees shall be named as additional insured parties under all said
property damage, comprehensive and personal injury liability insurance policies.
Frontier shall at all times during the period of this Agreement and any
extension thereof or until all work required by this Agreement is completed have
in effect loggers broad form property damage and public liability insurance
coverage, with the contractual liability exclusion deleted, in the amounts
specified below:
Bodily Injury or Death:
Each Person $2,000,000
Each Occurrence $2,000,000
Property Damage:
Any One Occurrence $2,000,000
If any said policy shall lapse or shall be canceled at any time during
the life of this Agreement, Pioneer shall have the right immediately to suspend
all of Frontier's logging activities hereunder until insurance requirements are
fully met by Frontier.
21. EXAMINATION OF LOCATIONS AND CONDITIONS. It is understood that
Frontier, before signing this Agreement, has made a careful examination thereof
and an analysis of all requirements and specifications set forth herein; that
Frontier has independently evaluated the character of the work required, and has
not relied upon estimates by Pioneer, and that Frontier has made a careful
examination of the Premises and the location and conditions of work. Pioneer in
no case will be responsible for any loss or cost that may be suffered by
Frontier as a result of the failure of Frontier to be so informed.
22. AUTHORIZED REPRESENTATIVE; INSPECTION. Pioneer and its
designated field representative or representatives shall have the right to
inspect progress of work, and to issue instructions in regard to required
compliance with the terms of this Agreement. Pioneer, through its authorized and
designated representative or representatives, shall at all times be allowed
access to all parts of the logging operations and work locations of Frontier,
and shall be furnished such information and assistance by Frontier, or the
designated representative or representatives of Frontier, as may be reasonably
required to make a complete and detailed inspection.
23. ARBITRATION. Any controversy or claim arising out of or
relating to this Agreement shall be settled by arbitration, except any claim for
injunctive relief pursuant to Section 24.2.1 below or any action in equity to
enforce specific performance pursuant to Section 24.2.3 below. Arbitration shall
take place before a panel of three arbitrators, one chosen by Pioneer, one by
Frontier and the third chosen by the first two. The arbitration shall be held in
such place in the
8 - TIMBER PURCHASE AGREEMENT
8
<PAGE> 9
metropolitan Portland, Oregon area as may be specified by the arbitrators or a
majority of them and shall be conducted in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The decision of the
panel shall be final and binding and may be enforced, if necessary, in any court
of competent jurisdiction. The determination of which party (or combination of
them) bears the costs and expenses incurred in connection with any such
arbitration proceeding shall be determined by the panel. The panel shall have no
power or jurisdiction to consider evidence with respect to or to render any
award of or judgment for punitive damages
24. DEFAULT.
24.1 Time and strict performance hereunder are the essence of
this Agreement, and it is agreed that any one of the following shall constitute
an event of default:
24.1.1 Failure by Frontier to pay any amount owing to
Pioneer under this Agreement on or before the due date thereof.
24.1.2 Failure by either party to keep and perform
any agreement, covenant or condition hereunder (other than a payment default by
Frontier under Section 24.1.1), if such failure shall continue for a period of
thirty (30) days after written notice thereof from the other party; provided,
however, if such failure to perform is not curable within such 30-day period, it
shall not be an event of default if the non-performing party, promptly after
such notice, commences such actions as shall be necessary to cure such failure,
diligently pursues such curative action and completes the cure of such failure
as soon as reasonably possible.
24.2 In the event Frontier defaults in any manner set forth
herein, Pioneer shall have the right to exercise any one or more of the
following rights, powers, and remedies, which shall, to the full extent
permitted by law, be cumulative and not alternative:
24.2.1 to obtain injunctive relief with respect to
any breach of or default under this Agreement; provided, however, Pioneer shall
not have the right to enjoin harvest practices which comply with the provisions
of this Agreement; and provided further, no injunction against Frontier with
respect to a breach or default by Frontier shall be effective against the Bank
or a Successor (as defined in Section 8.2), but nothing in this section shall
prevent Pioneer from obtaining an injunction against the Bank or such Successor
for its own acts or omissions in breach or violation of this Agreement.
24.2.2 to recover damages from Frontier's breach of
contract;
24.2.3 to specifically enforce this Agreement by suit
in equity.
9 - TIMBER PURCHASE AGREEMENT
9
<PAGE> 10
24.3 Nothing contained in this Section 24 shall be deemed or
construed to extend the Termination Date as determined under Section 8 above.
25. ATTORNEY'S FEE. In the event any arbitration, suit or action
is filed by either party hereto to enforce any of the terms, covenants or
provisions of this Agreement, or to rescind the same, the party prevailing in
any such proceeding, or any appeal therefrom, shall be entitled to reasonable
attorney's fees at the trial level and on appeal or review to be established by
the arbitration panel or Court, and expert witness fees, together with all costs
otherwise recoverable under Oregon law, from the non-prevailing party.
26. ACCESS. Pioneer makes no representations or warranties,
express or implied, with respect to rights of access to any portion of the
Premises. Pioneer hereby assigns to Frontier, which assignment shall terminate
upon the expiration or earlier termination of this Agreement, Pioneer's rights
in any easements, permits, or licenses granting Pioneer ingress and egress to
the Premises over or through land owned by third parties, provided that such
assignment shall be non-exclusive and Pioneer shall continue to have and may
also exercise all such rights.
27. ASSIGNMENT. Pioneer shall have the right to assign this
Agreement, in whole or in part, upon notice to but without Frontier's consent.
Frontier shall have the right to assign this Agreement, in whole or in part,
upon notice to but without Pioneer's consent.
28. REPRESENTATIONS. Each party represents and warrants to the
other that: (i) it is a limited liability company duly organized and validly
existing under the laws of the State of Oregon; (ii) it has full right, power
and authority to enter into this Agreement and to consummate the transactions
contemplated by, and otherwise to comply with and perform its respective
obligations under this Agreement; (iii) all action necessary to confirm such
authority has been duly and lawfully taken, except that, with respect to
Pioneer, the consent and/or subordination of Pioneer's lenders may be necessary;
(iv) upon execution hereof, this Agreement shall constitute the valid and
binding agreement of each party in accordance with its terms, except as such
terms may be affected by applicable bankruptcy, insolvency, reorganization,
moratorium or similar debtor relief laws from time to time in effect or general
principles of equity, regardless of whether such enforceability is considered in
equity or at law; and (v) neither execution nor performance of this Agreement
will violate the terms of any provision of its Articles of Organization,
Operating Agreement or any note, loan agreement, commitment agreement, lease or
other material contract or agreement to which it is a party, except that, with
respect to Pioneer, the consent and/or subordination of Pioneer's lenders may be
necessary. Each party shall deliver to the other a certified copy of a
resolution of its Management Committee authorizing the execution of this
Agreement or such other evidence of authority that is reasonably acceptable to
the other.
10 - TIMBER PURCHASE AGREEMENT
10
<PAGE> 11
29. NOTICES. Any notice or demand required or permitted to be
given under the terms of this Agreement shall be deemed to have been duly given
or made if given by any of the following methods:
29.1 Deposited in the United States mail, in a sealed
envelope, postage prepaid, by registered or certified mail, return receipt
requested, or hand delivered, respectively addressed as follows:
If to Pioneer: James A. Mehrwein
Pioneer Resources, LLC
95 S. Bertelsen Road, Suite A
Eugene, OR 97402
If to Frontier: Greg Demers
Frontier Resources, LLC
P.O. Box 876
25310 Jeans Road
Veneta, OR 97487
29.2 Sent to the above address via an established national
overnight delivery service (such as Federal Express) charges prepaid; or
29.3 Sent via any electronic communications method, provided
the sender obtains written confirmation of receipt of the communication by the
electronic communication equipment at the office of the addressee listed above;
provided also that, if this method is used, the party shall immediately follow
such notice with a second notice in one of the methods set forth in subsections
29.1 or 29.2 above. Notices shall be effective three business days after mailing
if sent by United States mail, one business day after dispatch if sent by
overnight delivery service, and upon delivery if hand delivered or sent by an
electronic communications method.
30. MODIFICATION. No modification of this Agreement shall be valid
unless made in writing and duly executed by Pioneer and Frontier.
31. NO WAIVER. The failure of either party to insist upon prompt
and strict performance of any of the terms or conditions in this Agreement shall
not constitute a waiver of such party's right to insist upon strict performance
thereafter or in other instances.
32. GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of the state of Oregon, except for its
rules pertaining to conflicts of laws.
11 - TIMBER PURCHASE AGREEMENT
11
<PAGE> 12
33. COUNTERPARTS, EXECUTION BY FACSIMILE. This Agreement may be
executed in several counterparts, each of which will be deemed to be an original
and all of which will together constitute one in the same instrument. Delivery
of an executed copy of this Agreement by facsimile transmission will be deemed
to be an execution and delivery of this Agreement on the date of such
transmission by the party so delivering such a copy, provided that the party so
delivering such a copy via facsimile transmission shall deliver the executed
original of this Agreement to the other party herein within three (3) days of
the date of delivery of the copy sent via the facsimile transmission.
34. ENTIRE AGREEMENT; SUCCESSORS AND ASSIGNS. This document
constitutes the entire agreement between the parties and merges and replaces all
prior negotiations, discussions, representations, warranties, and agreements of
the parties with respect to the subject matter hereof. Because this Agreement
has been the subject of negotiation between the parties, the rule of
construction that any ambiguity is to be construed against the drafter shall not
apply. This Agreement shall be binding upon and inure to the benefit of the
respective successors and permitted assigns of the parties. In the event of any
conflict between this Agreement and any exhibit attached hereto, the terms of
this Agreement shall be controlling. The covenants, agreements, representations
and warranties made herein shall survive the closing of this transaction and
shall not merge into the Timber Deeds or the recording thereof.
35. CLOSING.
35.1 This transaction shall close in escrow at Oregon Title
Insurance Company, Eugene, Oregon, on or before June ___, 1999, provided that if
(a) the conditions set forth in Section 35.2 have not been satisfied or waived
by Frontier and (b) Pioneer has not unconditionally received the Purchase Price
in cash, both on or before June ___, 1999, then this Agreement shall be deemed
automatically terminated and neither party shall have any further rights or
obligations hereunder.
35.2 Frontier's obligations to close are subject to and
conditioned upon written approval from its Lender, First Union, of (i) this
Agreement, (ii) the Timber Deed attached hereto as Exhibits B-1 and B-2, (iii)
the Subordination Agreement to be provided by Pioneer's Lender, First Union
National Bank, and (iv) a commitment from a title insurance company to insure
the first lien of First Union National Bank's security interest in the Timber,
subject only to exceptions to title which First Union National Bank shall
approve.
35.3 Pioneer shall pay any transfer or excise taxes due as a
result of the purchase and sale under this Agreement or as a result of recording
the Timber Deeds. Frontier and Pioneer shall evenly split the payment of all
title insurance costs, recording fees and other closing costs in connection with
such closing.
Executed as of the date first set forth above.
12 - TIMBER PURCHASE AGREEMENT
12
<PAGE> 13
PIONEER RESOURCES, LLC FRONTIER RESOURCES, LLC
By: By:
----------------------------- ------------------------------
Name: James A. Mehrwein Name:
----------------------------
Title: Vice President Title:
---------------------------
Schedule of Exhibits:
A: Legal Description of Premises
B-1: Statutory Bargain and Sale Deed (Oregon)
B-2: Quitclaim Deed (Washington)
C: Exceptions to Title
13 - TIMBER PURCHASE AGREEMENT
13
<PAGE> 14
EXHIBIT A-1
Legal Description of the First Property
Sale Name: Wilkins Creek (Part of Existing Kinzua Timber Deed) - Appraisal Name:
Wilkins
Legal: Sec 24, T5S, R30E, All
Sec 25, T5S, R30E, All
Sec 36, T5S, R30E, N1/2
Sale Name: Scaffold - Appraisal Name: Buckaroo
Legal: Sec 6, T6S, R30E, Lot 1, Lot 2, Lot 3, S1/2 NE1/4, SE1/4 NW1/4, E1/2
SW1/4, SE1/4
Sec 7, T6S, R30E, All
Sec 18, T6S, R30E, All
Sec 19, T6S, R30E, N1/2 NE1/4, NE1/4 NW1/4
Sec 13, T6S, R29E, SE1/4
Sale Name: Sulphur Gulch - Appraisal Name: Elk Grove
Legal: Sec 1, T7S, R30E, S1/2 NE1/4, N1/2 SE1/4, N1/2 SW1/4, SW1/4 SW1/4
Sec 2, T7S, R30E, E1/2 SE1/4
Sec 12, NW1/4 NW1/4
Sale Name: Seven Mile (Dean Forth Timber Deed) - Appraisal Name: Dean Forth
Timber Deed
Legal: Sec 32, T1S, R33E, SE1/4
Sec 33, T1S, R33E, S1/2 NW1/4, N1/2 SW1/4, E1/2 NE1/4, SW1/4 NE1/4,
N1/2 SE1/4, SW1/4 SE1/4
Sec 34, T1S, R33E, NW1/4
Sale Name: Desolation (Part of Existing Kinzua Timber Deed) - Appraisal Name:
Desolation
Legal: Sec 1, T8S, R32E, Lot 4, S1/2 NW1/4, S1/2
Sec 2, T8S, R32E, E1/2 SE1/4
Sec 12, T8S, R32E, W1/2 NW1/4, NE1/4 NW1/4, NW1/4 NE1/4
Sale Name: Baptist - Appraisal Name: Baptist
Legal: Sec 6, T8N, R40E, SE1/4 NE1/4, SE1/4
Sec 8, T8N, R40E, W1/2 NW1/4
<PAGE> 15
Sale Name: John Z #2 - Appraisal Name: Block 3
Legal: Sec 31, T5S, R26E, SE1/4 SE1/4
Sec 32, T5S, R26E, E1/2 NW1/4, SW1/4 NE1/4, SW1/4 SW1/4, SE1/4 SW1/4,
NE1/4 SW1/4
Sec 4, T6S, R26E, E1/2 NW1/4, NE1/4
Sale Name: Opal South - Appraisal Name: Block 3
Legal: Sec 36, T5S, R25E, NE1/4, E1/2 SW1/4, W1/2 SE1/4
Sec 3, T6S, R26E, SW1/4 SW1/4
Sec 4, T6S, R26E, S1/2 SE1/4
Sec 6, T6S, R26E, SE1/4 SE1/4, W1/2 NE1/4
Sec 7, T6S, R26E, NE1/4
Sec 8, T6S, R26E, NW1/4 NW1/4
Sec 9, T6S, R26E, E1/2
Sec 10, T6S, R26E, SW1/4, W1/2 NW1/4
Sale Name: B&C Board - Appraisal Name: Burns Ranch
Legal: Sec 23, T 5S, R26E, E1/2 SW1/4, W1/2 SE1/4, NE1/4 SE1/4, SE1/4 NE1/4
Sec 24, T 5S, R26E, SW1/4 NW1/4, NW1/4 SW1/4
Sec 26, T 5S, R26E, NE1/4 NW1/4
Sale Name: Blakes OR - Appraisal Name: Blake Ranch
Legal: Sec 7, T4S, R29E, S1/2 N1/2, E1/2 SW1/4, SE1/4
Sec 18, T4S, R 29E, NE1/4 NW1/4, NW1/4 NE1/4
Sale Name: Parkers Mill - Appraisal Name: Part in Burns Ranch, part in Block 3
Legal:
Sec 28, T5S, R26E, NW1/4 NE1/4 (Block 3), SE1/4 NE1/4 (Burns Ranch),
SW1/4 NE1/4 (Block 3), SE 1/4 (NW1/4 SE1/4 is Block 3; S1/2 SE1/4 &
NE1/4 SE1/4 are Burns Ranch)
Sec 33, T 5S, R26E, NE1/4 (N1/2 NE1/4 & SW1/4 NE1/4 are Block 3; SE1/4
NE1/4 is Burns Ranch), N1/2 SE1/4 (Burns Ranch)
Sec 34, T 5S, R26E, W1/2 NW1/4 (NW1/4 NW1/4 is Block 3, SW1/4 NW1/4 is
Burns Ranch)
<PAGE> 16
Sale Name: Browns Helo - Appraisal Name: Block 3
Legal: Sec 22, T6S, R24E, SE1/4, S1/2 NE1/4
Sec 23, T6S, R24E, Lot 2, Lot 3, Lot 4, SE1/4 NW1/4,E1/2 SW1/4, SE1/4
Sec 24, T6S, R24E, Lot 4
Sec 25, T6S, R24E, Lot 1, SE1/4 NW1/4, E1/2 SE1/4
Sec 26, T6S, R24E, Lot 1, NE1/4 NW1/4, W1/2 NE1/4, NE1/4 SE1/4
Sale Name: Camas Pool - Appraisal Name: Block 3
Legal: Sec 16, T6S, R25E, W1/2SW1/4,
Sec 17, T6S, R25E, SW1/4 NW1/4, NE1/4 NW1/4, SE1/4 NW1/4, S1/2 NE1/4,
SW1/4
Sec 20, T6S, R25E, E1/2 NE1/4, NE1/4 SE1/4, SE1/4 SE1/4, SW1/4 SE1/4
Sec 21, T6S, R25E, W1/2
Sec 27, T6S, R25E, W1/2 NW1/4
Sec 28, T6S, R25E, NE1/4, S1/2 NW1/4, SW1/4, N1/2 SE1/4
Sec 29, T6S, R25E, NW1/4, W1/2 NE1/4, SE1/4, E1/2 SW1/4
Sale Name: Jug Creek - Appraisal Name: Part in Burns Ranch, part in Johnson
Creek
Legal: Sec 13, T5S, R26E, NE1/4 (Burns Ranch)
Sec 7, T5S, R27E, NW1/4 SW1/4 (Burns Ranch), SE1/4 SW1/4 (Burns Ranch),
SW1/4 SW1/4 (Burns Ranch)
Sec 17, T5S, R27E, SW1/4 (Johnson Creek), S1/2 SE1/4 (Johnson Creek)
Sec 18, T5S, R27E, NW1/4 NW1/4 (Burns Ranch), SE1/4 SW1/4 (Johnson
Creek), S1/2 SE1/4 (Burns Ranch)
Sec 19, T5S, R27E, N1/2 NE1/4 (Johnson Creek)
Sec 20, T5S, R27E, W1/2 NW1/4 (Johnson Creek)
<PAGE> 17
EXHIBIT A-2
Legal Description of the Second Property
Sale Name: Summerfield Ridge - Appraisal Name: Johnson Creek
Legal: Sec19, T4S, R28E, S1/2, S1/2 N1/2, NE1/4 NW1/4, NW1/4 NE1/4
Sec 30, T4S, R28E, E1/2, E1/2 W1/2
Sale Name: Tupper - Appraisal Name: Block 3
Legal: Sec 5, T6S, R27E, All
Sec 6, T6S, R27E, All
Sec 7, T6S, R27E, N1/2
Sec 8, T6S, R27E, N1/2 N1/2
<PAGE> 18
EXHIBIT B-1
STATUTORY BARGAIN AND SALE TIMBER DEED
PIONEER RESOURCES, LLC, an Oregon limited liability company ("Grantor")
conveys to FRONTIER RESOURCES, LLC, an Oregon limited liability company
("Grantee"), without any covenants or warranties of title except as expressly
set forth below, all of the "Timber" (as defined below) on those certain parcels
of land situated in Wheeler, Morrow, Umatilla and Grant Counties, Oregon,
described below:
SEE EXHIBIT A ATTACHED HERETO
AND INCORPORATED HEREIN (the "Land")
Together with the rights to enter upon the Land, to cut and remove the
Timber and to build, maintain and repair roads, all subject to and in accordance
with the provisions of the Timber Purchase Agreement, which is defined below.
The true consideration for this conveyance is the sum of
$______________.
As used herein, the term "Timber" shall mean the merchantable timber
standing or lying on the Land during the term of this Deed which is included in
the definition of "Timber" set forth in the Timber Purchase Agreement.
Grantee shall have until March 31, 2002 (the "Termination Date") to cut
and remove the Timber. Provided however, at the election of Grantee, the
Termination Date shall be extended for the period of any delay(s) in Grantee's
harvest and removal of the Timber due to acts of God, acts of government, labor
disputes, strikes, weather conditions or other events of force majeure beyond
the reasonable control of Grantee. If any such extension shall apply, Grantee
shall use its best efforts to complete its full performance hereunder as soon as
possible thereafter. Notwithstanding the foregoing, in no event shall the
Termination Date be extended beyond December 31, 2002; provided, however, the
Termination Date may be extended under certain other limited circumstances, to
the extent expressly provided in the Timber Purchase Agreement, to a date not
later than September 30, 2003.
On the Termination Date, all right, title and interest in and to any
remaining Timber shall revert automatically to the Grantor herein, it successors
and assigns, without the requirement of any action by any party hereto.
Grantor hereby warrants to Grantee that Grantor has not granted or
created any liens, claims, and encumbrances of any kind against the Timber or
the Land since October 9, 1998, except those specified on EXHIBIT B attached
hereto and incorporated herein.
This Timber Deed has been executed and delivered, and accepted, subject
to the terms and provisions of that certain Timber Purchase Agreement dated as
of June ___, 1999 between Grantor and Grantee ("Timber Purchase Agreement"),
which by this reference is hereby incorporated herein.
<PAGE> 19
EXECUTED as of the ___ day of June, 1999.
GRANTOR:
PIONEER RESOURCES, LLC, an Oregon limited
liability company
By:
---------------------------------------
Name: James A. Mehrwein
Its: Vice President
STATE OF )
------------------------
) ss.
County of )
--------------------------
This instrument was acknowledged before me on June ____, 1999, by James
A. Mehrwein, Vice President of PIONEER RESOURCES, LLC, an Oregon limited
liability company.
---------------------------------------
NOTARY PUBLIC FOR OREGON
My Commission Expires:
-----------------
[NOTARIAL SEAL]
Upon recording return to:
Frontier Resources, LLC
P.O. Box 876
25310 Jeans Road
Veneta, OR 97487
<PAGE> 20
EXHIBIT B-2
AFTER RECORDING RETURN TO:
James C. Reinhart, Esq.
Schwabe, Williamson & Wyatt
1211 S.W. Fifth Avenue, Suite 1700
Portland, Oregon 97204
QUITCLAIM DEED
(Washington)
REFERENCE NUMBER(S) of related documents: none
Grantor: Pioneer Resources, LLC, an Oregon limited liability company
Grantee: Frontier Resources, LLC, an Oregon limited liability company
Abbreviated Legal Description: Portion of S6 & S8, T8N, R40E, WM
Full Legal Description Located on Page Exhibit A
Assessor's Property Tax Parcel Account Number:
----------------
<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
June 18, 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
captions "Legal Matters" and "Federal Income Tax Consequences" in the prospectus
constituting part of this Registration Statement on Form S-11 and to the filing
as exhibits to the Registration Statement of this consent, the opinion of our
firm regarding the validity of the issuance of the shares and the opinion of our
firm regarding tax matters.
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ William H. Bradley
---------------------------------
William H. Bradley, a Partner
Atlanta, Georgia
June 16, 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
June 16, 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
June 16, 1999
