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Filed pursuant to Rule 424(b)(1)
Registration No. 333-05099
PROSPECTUS
CROWN PACIFIC PARTNERS, L.P.
[LOGO]
10,102,800 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
---------------------
Of the 10,102,800 Common Units representing limited partner interests in
Crown Pacific Partners, L.P., a Delaware limited partnership (the
"Partnership"), offered hereby, 7,455,330 Common Units are being offered by the
Partnership and 2,647,470 Common Units are being offered by the Selling
Unitholders identified herein. The Partnership will not receive any of the
proceeds from the sale of Common Units by the Selling Unitholders. See "Selling
Unitholders and Security Ownership" and "Underwriting."
The Partnership distributes to its partners, on a quarterly basis, all of
its Available Cash. During the Subordination Period, which will generally not
end prior to January 1, 2000, each holder of Common Units will be entitled to
receive distributions of $0.51 per Common Unit per quarter (the "Minimum
Quarterly Distribution"), or $2.04 per Common Unit on an annualized basis,
before any distributions are made on the outstanding Subordinated Units. The
Partnership has paid a quarterly distribution equal to the Minimum Quarterly
Distribution on all outstanding Common Units and Subordinated Units with respect
to each quarter in 1995. For the quarter ended March 31, 1996, the Partnership
distributed $0.524 per Unit (the "First Target Distribution"). On July 10, 1996,
the Partnership declared a distribution for the quarter ended June 30, 1996
equal to the First Target Distribution on all Common Units and Subordinated
Units outstanding on July 19, 1996, which will be paid on August 14, 1996. There
can be no assurance, however, that future distributions by the Partnership will
equal or exceed the Minimum Quarterly Distribution. A portion of such
distributions may constitute a return of an investor's capital. See "Tax
Considerations -- Tax Consequences of Unit Ownership -- Ratio of Taxable Income
to Distributions." The first distribution on the Common Units purchased in this
offering will be paid with respect to the quarter ending September 30, 1996 on
or about November 14, 1996 to holders of record on or about November 1, 1996.
The Common Units are traded on the New York Stock Exchange under the symbol
"CRO." The last reported sale price of the Common Units on the New York Stock
Exchange on July 31, 1996 was $19.00 per Common Unit.
PURCHASERS OF COMMON UNITS SHOULD CONSIDER EACH OF THE FACTORS DESCRIBED
UNDER "RISK FACTORS" BEGINNING ON PAGE 20 IN EVALUATING AN INVESTMENT IN THE
COMMON UNITS. SUCH FACTORS INCLUDE THE FOLLOWING:
- THE PARTNERSHIP'S OPERATIONS ARE SUBJECT TO FLUCTUATIONS IN PRICES AND
DEMAND FOR FOREST PRODUCTS AND SUPPLIES OF TIMBER.
- THE PARTNERSHIP'S ABILITY TO HARVEST ITS TIMBER MAY BE AFFECTED BY VARIOUS
FACTORS, INCLUDING ENVIRONMENTAL AND ENDANGERED SPECIES CONCERNS, DAMAGE
BY FIRE, INSECT INFESTATION, DISEASE, DROUGHT AND OTHER NATURAL DISASTERS.
- THE ACTUAL AMOUNT OF CASH DISTRIBUTIONS DEPENDS ON PARTNERSHIP OPERATING
PERFORMANCE AND IS AFFECTED BY THE FUNDING OF RESERVES, EXPENDITURES AND
OTHER MATTERS WITHIN THE DISCRETION OF THE MANAGING GENERAL PARTNER.
- CONFLICTS OF INTEREST COULD ARISE BETWEEN THE MANAGING GENERAL PARTNER AND
ITS AFFILIATES, ON THE ONE HAND, AND THE PARTNERSHIP OR ANY PARTNER
THEREOF, ON THE OTHER. THE PARTNERSHIP AGREEMENT LIMITS THE LIABILITY AND
MODIFIES THE FIDUCIARY DUTIES OF THE GENERAL PARTNERS. HOLDERS OF COMMON
UNITS ARE DEEMED TO HAVE CONSENTED TO CERTAIN ACTIONS AND CONFLICTS OF
INTEREST THAT MIGHT OTHERWISE BE DEEMED A BREACH OF FIDUCIARY OR OTHER
DUTIES UNDER STATE LAW.
- HOLDERS OF COMMON UNITS HAVE LIMITED VOTING RIGHTS, AND THE MANAGING
GENERAL PARTNER MANAGES AND CONTROLS THE PARTNERSHIP.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions (1) Partnership (2) Unitholders
<S> <C> <C> <C> <C>
Per Common Unit.............. $19.00 $0.95 $18.05 $18.05
Total (3).................... $191,953,200 $9,597,660 $134,568,706.50 $47,786,833.50
</TABLE>
(1) The Partnership, the Operating Partnership and the General Partners have
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Partnership estimated at
$2,000,000.
(3) The Partnership has granted the Underwriters a 30-day option to purchase up
to 1,515,420 additional Common Units on the same terms and conditions as
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Partnership will be $220,746,180, $11,037,309
and $161,922,037.50, respectively. See "Underwriting."
---------------------------
The Common Units offered by this Prospectus are being offered by the
Underwriters, subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the Common
Units will be made at the offices of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001 on or about August 6, 1996.
------------------------
SMITH BARNEY INC. LEHMAN BROTHERS DEAN WITTER REYNOLDS INC.
A.G. EDWARDS & SONS, INC. PAINEWEBBER INCORPORATED
July 31, 1996
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Map of northwest United States indicating location of Crown Pacific's
existing timber holdings, lumber facilities, lumber remanufacturing and woodchip
facilities, corporate offices and Cavenham Acquisition timberlands.
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<PAGE>
The Common Units offered by the Partnership hereby will represent an
aggregate 28.6% limited partner interest in the Partnership (32.4% if the
Underwriters' over-allotment option is exercised in full). The General Partners
own an aggregate 2% general partner interest in the Partnership. In addition,
upon the closing of this offering, the General Partners and their affiliates
will own an aggregate 25.4% limited partner interest in the Partnership (24.0%
if the Underwriters' over-allotment option is exercised in full), of which 22.1%
will be represented by Subordinated Units and 3.3% will be represented by Common
Units. The Common Units and the Subordinated Units are collectively referred to
herein as the "Units." Holders of the Common Units and the Subordinated Units
are collectively referred to herein as "Unitholders."
During the Subordination Period, holders of Common Units will be entitled to
receive the Minimum Quarterly Distribution, plus arrearages thereon, before
holders of Subordinated Units receive the Minimum Quarterly Distribution and,
after the Minimum Quarterly Distribution has been paid on all Units, will be
entitled to receive, before holders of Subordinated Units receive, the
applicable target distribution level. The Subordination Period will generally
extend until the first day of any quarter beginning on or after January 1, 2000
in respect of which (a) distributions of Available Cash on all Units equaled or
exceeded $0.538 per quarter (the "Second Target Distribution") for each of the
three consecutive non-overlapping four-quarter periods immediately preceding
such date and (b) there are no arrearages on the Common Units. Prior to the end
of the Subordination Period, 50% of the outstanding Subordinated Units will
convert into Common Units on the first day of any quarter beginning on or after
January 1, 1999 in respect of which (a) distributions of Available Cash on all
Units equaled or exceeded the applicable target distribution level for each of
the three consecutive non-overlapping four-quarter periods immediately preceding
such date and (b) there are no arrearages on the Common Units. For purposes of
the foregoing sentences, in determining the amount of Available Cash distributed
in any four-quarter period, there will be excluded any positive balance in cash
from operations at the beginning of such four-quarter period and any net
increase in working capital borrowings in such four-quarter period and, with
respect to the third of three consecutive four-quarter periods only, any net
decrease in reserves. Upon the expiration of the Subordination Period, all
remaining Subordinated Units will convert into Common Units, and Available Cash
will generally be distributed 98% to all Unitholders, pro rata, and 2% to the
General Partners, except that if distributions of Available Cash exceed certain
target distribution levels, the General Partners will receive a percentage of
such excess distributions that will range from 15% to 50%. See "Cash
Distribution Policy."
Concurrently with the closing of this offering, the Partnership intends to
enter into a new bank acquisition facility and will redeem the special
allocation limited partner interests (the "SAUs") for an aggregate payment of
$4.1 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Partnership Indebtedness" and "Prospectus Summary
- -- The Partnership -- SAU Redemption."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION........................... 5
INCORPORATION OF CERTAIN DOCUMENTS.............. 5
PROSPECTUS SUMMARY.............................. 7
The Partnership............................... 7
Recent Developments........................... 13
Summary Historical Financial and Operating
Data......................................... 14
The Offering.................................. 16
Cash Distributions............................ 16
Risk Factors.................................. 18
Summary of Tax Considerations................. 19
RISK FACTORS.................................... 20
Risks Inherent in the Partnership's
Business..................................... 20
Risks Inherent in an Investment in the
Partnership.................................. 23
Conflicts of Interest and Fiduciary Duties.... 25
Tax Consequences.............................. 27
USE OF PROCEEDS................................. 30
CAPITALIZATION.................................. 31
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS... 31
CASH DISTRIBUTION POLICY........................ 32
Quarterly Distributions of Available Cash..... 33
Distributions of Cash from Operations During
the Subordination Period..................... 34
Distributions of Cash from Operations After
the Subordination Period..................... 35
Incentive Distributions and Hypothetical
Annualized Yield............................. 35
Distributions of Cash from Interim Capital
Transactions................................. 36
Adjustment of Minimum Quarterly Distribution
and Target Distribution Levels............... 37
Distributions of Cash Upon Liquidation........ 37
Ability to Make the First and Second Target
Distributions................................ 39
SELECTED HISTORICAL FINANCIAL AND OPERATING
DATA........................................... 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................... 43
General....................................... 43
Supply and Demand Factors..................... 43
Results of Operations......................... 46
Effect of Inflation........................... 49
Liquidity and Capital Resources............... 49
Partnership Indebtedness...................... 50
BUSINESS AND PROPERTIES......................... 55
Overview...................................... 55
The Timberlands............................... 56
Cavenham Acquisition.......................... 59
Other Recent Acquisitions and Dispositions.... 61
Sources of Raw Material for Manufacturing
Facilities................................... 61
Competition and Products...................... 62
Manufacturing Facilities...................... 64
Timber Resource Management.................... 66
Federal and State Regulation.................. 67
Litigation.................................... 71
<CAPTION>
PAGE
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<S> <C>
Employees..................................... 71
MANAGEMENT...................................... 73
Partnership Management........................ 73
Directors and Executive Officers of the
Managing General Partner..................... 73
Employment Agreements......................... 74
SELLING UNITHOLDERS AND SECURITY OWNERSHIP...... 75
CONFLICTS OF INTEREST AND FIDUCIARY
RESPONSIBILITY................................. 76
Conflicts of Interest......................... 76
Fiduciary Duties of the General Partners...... 78
DESCRIPTION OF THE COMMON UNITS................. 80
The Units..................................... 80
Transfer Agent and Registrar.................. 80
Transfer of Units............................. 80
THE PARTNERSHIP AGREEMENT....................... 81
Organization and Duration..................... 82
Purpose....................................... 82
Capital Contributions......................... 82
Power of Attorney............................. 82
Restrictions on Authority of the Managing
General Partner.............................. 82
Withdrawal or Removal of the General
Partners..................................... 83
Transfer of General Partner Interests......... 84
Reimbursement for Services.................... 84
Change of Management Provisions............... 85
Transfer Restrictions......................... 85
Non-citizen Assignees; Redemption............. 85
Issuance of Additional Securities............. 86
Limited Call Right............................ 86
Amendment of Partnership Agreement............ 87
Meetings; Voting.............................. 88
Indemnification............................... 89
Limited Liability............................. 89
Books and Reports............................. 90
Right to Inspect Partnership Books and
Records...................................... 91
Termination and Dissolution................... 91
Liquidation and Distribution of Proceeds...... 91
Registration Rights........................... 91
TAX CONSIDERATIONS.............................. 92
Legal Opinions and Advice..................... 92
Tax Consequences of Unit Ownership............ 93
Tax Treatment of Operations................... 98
Disposition of Units.......................... 102
Uniformity of Units........................... 104
Administrative Matters........................ 105
Other Tax Considerations...................... 108
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE
BENEFIT PLANS.................................. 109
UNDERWRITING.................................... 110
VALIDITY OF THE COMMON UNITS.................... 111
EXPERTS......................................... 111
INDEX TO FINANCIAL STATEMENTS................... F-1
FORM OF SECOND AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP............................ A-1
FORM OF APPLICATION FOR TRANSFER OF COMMON
UNITS.......................................... B-1
GLOSSARY........................................ C-1
</TABLE>
4
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AVAILABLE INFORMATION
The Partnership has filed with the Securities and Exchange Commission (the
"SEC") in Washington, D.C., a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered by this Prospectus.
Certain of the information contained in the Registration Statement is omitted
from this Prospectus, and reference is hereby made to the Registration Statement
and exhibits and schedules relating thereto for further information with respect
to the Partnership and the securities offered by this Prospectus. The
Partnership is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the SEC. Such reports and
other information are available for inspection at, and copies of such materials
may be obtained upon payment of the fees prescribed therefor by the rules and
regulations of the SEC from, the SEC at its principal offices located at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the Regional Offices of the SEC located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World Trade Center,
New York, New York 10048 or may be obtained on the Internet at
http://www.sec.gov. In addition, the Common Units of the Partnership are traded
on the New York Stock Exchange, and such reports and other information may be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS
The Partnership's Annual Report on Form 10-K (Commission file No. 0-24976)
for the fiscal year ended December 31, 1995, as amended by the Form 10-K/A dated
July 12, 1996, Quarterly Report on Form 10-Q for the quarter ended March 31,
1996 and Current Report on Form 8-K dated May 30, 1996 are hereby incorporated
herein by reference.
All documents filed by the Partnership pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act, after the date of this Prospectus and prior to the
termination of the offering of the securities offered by this Prospectus, shall
be deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained herein
or in a document incorporated or deemed to be incorporated by reference in this
Prospectus shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained in this Prospectus, or in
any other subsequently filed document that also is or is deemed to be
incorporated by reference, herein modifies or replaces such statement. Any such
statement so modified or replaced shall not be deemed, except as so modified or
replaced, to constitute a part of this Prospectus.
The Partnership undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon written or oral request of any such person, a copy of any or all
of the documents incorporated by reference herein, other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates. Written or oral requests for
such copies should be directed to: Crown Pacific Partners, L.P., 121 S.W.
Morrison Street, Suite 1500, Portland, Oregon 97204, Attention: Mr. Kelly Lang,
Assistant Treasurer and Director of Investor Relations, telephone (503)
274-2300.
5
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[THIS PAGE INTENTIONALLY LEFT BLANK]
6
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL AND OPERATING DATA APPEARING ELSEWHERE IN THIS
PROSPECTUS AND INFORMATION INCORPORATED HEREIN BY REFERENCE. AS USED IN THIS
PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "PARTNERSHIP" OR "CROWN
PACIFIC" REFERS TO CROWN PACIFIC PARTNERS, L.P. AND ITS PREDECESSORS, TOGETHER
WITH ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS BY
THE PARTNERSHIP IS NOT EXERCISED AND, EXCEPT FOR FINANCIAL STATEMENTS AND
RELATED OPERATING DATA, INCLUDES INFORMATION RELATING TO THE ASSETS ACQUIRED
FROM CAVENHAM FOREST INDUSTRIES INC. FOR EASE OF REFERENCE, A GLOSSARY OF
CERTAIN TERMS USED IN THIS PROSPECTUS IS INCLUDED AS APPENDIX C HERETO.
THE PARTNERSHIP
GENERAL
Crown Pacific Partners, L.P. (the "Partnership") is a publicly held Delaware
limited partnership that owns and operates timberland properties and wood
product manufacturing operations in the northwest United States. The
Partnership's business consists of the growing and harvesting of timber for sale
as logs in domestic and export markets and the manufacture and sale of lumber
and other wood products. Lumber and other wood products are used principally in
new residential home construction, home remodeling and repair and for general
industrial uses. The Partnership currently owns and/or controls approximately
724,000 acres of timberland in the Pacific Northwest (the "Timberlands"),
containing a total merchantable timber inventory of approximately 4,875 million
board feet ("MMBF"). In addition to its Timberlands, the Partnership has
significant manufacturing assets consisting of four lumber mills in Oregon and
Idaho and a remanufacturing facility and a chip mill in Oregon (collectively,
the "Manufacturing Facilities").
BUSINESS STRATEGY
The Partnership believes that its extensive private timber inventory, the
maturity and diversity of its timber holdings, the integration of its
Timberlands and mill operations and its demonstrated success in buying and
selling forestry assets give it a competitive advantage in its markets. The
Partnership's business strategy is to pursue growth through strategic
acquisitions of timber and timberlands while continuing to improve the
efficiency of its existing operations. The Partnership intends to focus on
acquisitions that would be expected to increase per Unit distributable cash.
Historically, the Partnership has been successful in acquiring timber and
manufacturing operations from third parties and integrating them into its
operations on a financially attractive basis. The key elements of the
Partnership's strategy include (i) identifying and acquiring undervalued timber
assets on a wholesale basis, (ii) reviewing opportunities for simultaneous or
subsequent resales of smaller, non-strategic portions of acquired assets at a
profit, (iii) enhancing timber management and marketing practices and (iv)
improving operating efficiencies at its Manufacturing Facilities. Since April
1988, the Partnership has completed ten significant acquisitions with an
aggregate purchase price of approximately $920 million (after $145 million of
simultaneous sales of certain assets arranged by Crown Pacific to third
parties). There can be no assurance, however, that general economic conditions
will be conducive to this acquisition strategy, that the Partnership will be
able to identify attractive acquisition candidates in the future, that the
Partnership will be able to acquire any such assets or businesses on
economically acceptable terms, that any acquisitions will not be dilutive to
earnings and distributable cash per Unit or that any additional debt incurred to
finance an acquisition will not adversely affect the ability of the Partnership
to make distributions to Unitholders.
In order to enhance its ability to finance future acquisitions, the
Partnership intends to enter into a new bank credit facility concurrently with
the closing of the offering made hereby, initially providing for borrowings of
up to $125 million (the "Acquisition Facility"). Under certain circumstances
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Partnership Indebtedness," the amount available to be
borrowed under the Acquisition
7
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Facility will be reduced. In addition to using borrowings available under the
Acquisition Facility, the Partnership may fund future acquisitions from internal
cash flow and additional sales of Common Units. Upon completion of this
offering, however, the Partnership will be unable under the terms of the
Partnership Agreement to issue more than 1,544,670 Common Units (29,250 Common
Units if the Underwriters' over-allotment option is exercised in full) during
the Subordination Period without the requisite approval of the holders of
outstanding Common Units. See "The Partnership Agreement -- Issuance of
Additional Securities."
CAVENHAM ACQUISITION
On May 15, 1996, the Partnership completed the purchase of approximately
207,000 acres of timberland in Oregon and Washington, containing approximately
1,485 MMBF of predominantly second growth merchantable timber, from Cavenham
Forest Industries Inc. ("Cavenham") for $205 million (the "Cavenham
Acquisition"). The Cavenham properties are located in close proximity to the
Partnership's existing operations, requiring only minimal additional
administrative cost. The Partnership believes that the Cavenham Acquisition will
benefit the Partnership in several ways. First, the majority of the logs
harvested from the newly-acquired Oregon timberlands (the "Eastside
Timberlands") will be processed by the Partnership's existing Oregon
Manufacturing Facilities and will be used to offset higher cost external log
purchases, which is anticipated to improve the operating margin of the
Partnership's Oregon operations. Second, the Partnership believes the additional
volume available from the newly-acquired Olympic Peninsula timberlands in
Washington (the "Olympic Timberlands") will give the Partnership (i) more log
volume that can be sold in the export market (which has historically commanded a
premium over the domestic market), (ii) more flexibility in harvest planning
with the Partnership's existing northwest Washington timberlands (the "Hamilton
Timberlands"), which are approximately 60 miles away by water and (iii) the
ability to negotiate more favorable terms for sales in both the export and
domestic markets from the Washington region. Third, due to the high growth rates
in the Olympic Timberlands, the Cavenham Acquisition has increased the average
growth rate of the Partnership's Timberlands. See " -- The Timberlands."
The Eastside Timberlands consist of approximately 124,000 acres, containing
approximately 474 MMBF of merchantable timber consisting of appearance-grade
lodgepole pine (61%) and Ponderosa pine (16%), as well as true firs (13%) and
other conifers (10%). The Eastside Timberlands have estimated annual growth
rates of 2.5% to 3.25% and contain significant volumes of mature timber greater
than 80 years old. The Eastside Timberlands are located in two discrete areas,
one of which is a 91,000 acre tract in Klamath County in south central Oregon
called the Mazama Tract. The Mazama Tract's northern point is approximately 20
miles south of the southern boundary of the Partnership's existing Oregon tree
farm and in close proximity to the Partnership's Gilchrist sawmill, which is
already a producer of appearance-grade pine lumber. The remaining approximately
33,000 acres of the Eastside Timberlands are made up of several small tracts
located in Baker, Union and Umatilla counties in northeast Oregon that contain a
high percentage of fir species. The Partnership plans to sell approximately 20%
of the Eastside Timberlands' harvest to third party mills and to use the balance
in its Prineville and Gilchrist sawmills located in central Oregon.
The Olympic Timberlands consist of approximately 83,000 acres, containing
approximately 1,011 MMBF of merchantable timber consisting of hemlock (71%),
Douglas fir (10%), hardwoods (11%) and other conifers (8%) in one of the most
productive timber growth sites in the nation. Growth rates on the Olympic
Timberlands average an estimated 7% per year because of the combination of
rainfall quantity and soil types. The Olympic Timberland operations will be
combined with the Partnership's existing Hamilton Timberland operations for
minimal additional administrative cost. Logs harvested from both Washington
tracts will be sold to domestic and export log buyers or may be processed in a
sawmill the Partnership is considering purchasing or constructing in northwest
Washington. The Olympic Timberlands tract is uneven aged (resulting in stable
annual harvest levels) and well managed. Intensive silvicultural practices
typically applied at the Olympic Timberlands include reforestation, competing
vegetation control, pre-commercial thinning and commercial thinning.
8
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THE TIMBERLANDS
The Partnership's Timberlands include substantial holdings of mature,
premium-quality timber. The Partnership believes it is one of the largest
nongovernmental holders of mature Ponderosa pine in the United States. The
Partnership's Ponderosa pine, as well as substantial quantities of export-
quality Douglas fir and hemlock located on the Hamilton and Olympic Timberlands,
have historically commanded premium prices over other softwood species. The
Partnership also has significant holdings of other species, including white fir,
lodgepole pine, cedar and sugar pine. The Timberlands are comprised principally
of mature stands, with over 50% of the Partnership's merchantable timber in the
Oregon and Inland Regions (defined below) being at least 80 years old. In
northwest Washington, where timber is harvested at a much earlier age because of
high growth rates, over 70% of the Partnership's merchantable timber is at least
40 years old.
The Partnership's Timberlands are geographically divided into three
principal regions: the Oregon region, including the Eastside Timberlands (the
"Oregon Region"), encompassing approximately 333,000 acres and approximately
1,200 MMBF of merchantable timber; the northwest Washington region, including
the Olympic Timberlands (the "Washington Region"), encompassing approximately
185,000 acres and approximately 1,871 MMBF of merchantable timber; and the
inland region in eastern Washington, Idaho and northwest Montana (the "Inland
Region"), encompassing approximately 206,000 acres and approximately 1,804 MMBF
of merchantable timber. Timber harvested from the Oregon and Inland Regions is
used principally as raw material for the operation of the Manufacturing
Facilities, with the remainder sold to third parties. In contrast, between 24%
and 34% of the timber harvested from the Washington Region has historically been
sold as logs in the export market (principally Japan) at premium prices, with
the remainder sold to unaffiliated domestic mills. The Partnership's substantial
timber resources reduce its reliance on third-party log sources to supply its
Manufacturing Facilities, which the Partnership believes gives it a significant
competitive advantage over lumber manufacturers without a supply of fee timber.
See " -- Industry Conditions."
MANUFACTURING FACILITIES
The Partnership manufactures a wide variety of lumber and remanufactured
wood products in its Manufacturing Facilities. The Manufacturing Facilities are
operated to add value to logs harvested from the Partnership's Timberlands or
acquired from third parties. Due to the quality and quantity of the
Partnership's mature pine timber, the Partnership believes it is one of the
largest producers in the Pacific Northwest of industrial-grade pine lumber,
which is sold at premium prices to manufacturers of doors, windows and other
specialty wood products. Lumber produced in the Inland Region Manufacturing
Facilities is sold principally to distributors of dimension or structural lumber
products, which are used primarily for residential construction. The
Partnership's remanufactured wood products customers include window and door
manufacturers and retail home centers.
The Partnership employs modern technology in its Manufacturing Facilities in
order to implement its strategy of maximizing efficiency and utilization of its
timber resources, reducing labor costs and maintaining high-quality standards of
production. Since January 1, 1993, the Partnership and its predecessors have
invested more than $20 million to upgrade the Manufacturing Facilities. In
addition, approximately $9.0 million is anticipated to be spent during 1996 to
upgrade and reconfigure the Manufacturing Facilities to process more efficiently
the species that can be supplied from the Timberlands and from other reliable
sources in proximity to the mills. The most tangible benefits of these upgrades
are expected to be increased recovery rates (the ratio of the volume of lumber
produced at a facility to the volume of logs utilized at such facility), reduced
operating costs, increased flexibility to process the species that are most
readily available and increased product quality. The Partnership recently sold a
sawmill in the Inland Region that has been closed since December 1995 and has
closed another, nonstrategic, Inland Region sawmill. In addition, the
Partnership plans to close its plywood manufacturing facility during the third
quarter of 1996, which will leave the Partnership with a total of six
Manufacturing Facilities. The closure and sale of these facilities are expected
to increase the Partnership's raw material self-sufficiency. The Partnership is
considering purchasing or constructing a sawmill in northwest Washington to
process non-export quality logs from the Washington Region
9
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into dimension lumber. The Partnership believes that the efficiency of its
Manufacturing Facilities, in combination with a highly productive work force and
the ability to meet a substantial portion of its raw material needs from its
Timberlands, make the Partnership competitive in the production of its lumber
and other wood products.
INDUSTRY CONDITIONS
The Partnership's ability to implement its business strategy over the long
term and its results of operations will depend upon a number of factors, many of
which are beyond its control. These factors include general industry conditions,
domestic and international prices and supply and demand for logs, lumber and
other wood products, seasonality and competition from other supplying regions
and substitute products.
SUPPLY. Environmental and other similar concerns and governmental policies
have substantially reduced the volume of timber under contract to be harvested
from federal lands. Federal timber under contract in the Pacific Northwest
decreased 86% from approximately 11,000 MMBF in January 1988 to 1,500 MMBF in
January 1996. The resulting supply decrease caused prices for logs and lumber to
increase significantly, reaching peak levels during late 1993 and early 1994.
Even though prices have declined from these record levels, current prices still
exceed pre-1993 levels. The low supply of timber from federal lands, which is
expected to continue for the foreseeable future, has benefited forest products
companies with private timber holdings such as the Partnership through higher
stumpage and log prices. Additionally, many manufacturing facilities without a
sufficient supply of fee timber were forced to close, including three Crown
Pacific sawmills that were closed promptly after their acquisition and two
others in the Inland Region that have recently been closed or sold. See
"Business and Properties -- Manufacturing Facilities." Increased supplies of
logs harvested from private lands and logs imported from foreign countries have
only partially offset the lost volume from federal lands and have not replaced
the mature, high-quality timber found in greater quantities on federal lands.
The Partnership believes that, because of its sizeable holdings of fee timber
and efficient Manufacturing Facilities, it will continue to benefit from these
price levels and market conditions.
Historically, Canada has been a significant source of lumber for the U.S.
market. For example, during the four-year period ended December 31, 1993,
Canadian softwood lumber imports into the U.S. averaged 13,025 MMBF per year,
representing, on average, approximately 29% of U.S. softwood lumber consumption.
This increased to 16,100 MMBF (33%) in 1994 and to an historic high of 17,000
MMBF (36%) in 1995. The increase in Canadian softwood lumber imports has been
due in part to the reduced production levels of U.S. lumber manufacturers in the
Pacific Northwest (resulting from the reduced availability of timber from U.S.
federal lands), as well as to the large increase during 1995 in the price of
residual wood chips (a by-product of lumber production), which are used in pulp
and paper manufacturing. This price increase caused Canadian lumber producers to
increase lumber production even though Canadian housing starts and Asian lumber
demand were relatively low during 1995. The combination of these factors caused
an increase in Canadian lumber imports into the U.S. in 1995, which contributed
to a decline in U.S. lumber prices. In 1996, unusually high wood chip
inventories have slowed the production of Canadian lumber and reduced its
importation into the U.S.
In 1996, the U.S. and Canadian governments announced a five-year lumber
trade agreement effective April 1, 1996. This agreement is intended to reduce
the volume of Canadian lumber exported into the U.S. through the assessment of
an export tariff on annual lumber exports to the U.S. in excess of 14,700 MMBF
from the four major Canadian producing provinces. This 14,700 MMBF figure is
approximately 10% lower than 1995 import levels from those provinces, but still
exceeds the 1994 Canadian lumber exports to the U.S. from those provinces. The
lumber trade agreement has only recently been enacted and its effect is
therefore uncertain. However, the agreement may limit the amount of lumber
imported from Canada and could result in increased prices for logs and lumber.
DEMAND. Changes in general economic and demographic factors, including the
strength of the economy and interest rates for home mortgages and construction
loans, have historically caused
10
<PAGE>
fluctuations in housing starts and in turn in demand (and therefore prices) for
lumber and other wood products. Domestic demand for lumber and manufactured wood
products is primarily affected by the level of new residential construction
activity. In addition to housing starts, demand for wood products is also
significantly affected by repair and remodeling activities and industrial uses,
demand for which has historically been less cyclical. Domestic demand for logs,
lumber and other wood products is seasonal. In the winter, demand generally
subsides, increasing in the spring as construction activity resumes. Severe
weather conditions, storms and natural disasters can also affect demand. The
Partnership is also affected by international demand factors, which are cyclical
and seasonal as well. The strength of the economy in Japan and other Asian
countries and the relative strength of the United States dollar directly affect
the demand for exported logs from the Partnership's Washington Region. In late
1994 and throughout 1995, demand for lumber and plywood was adversely affected
by declines in housing starts, competition from substitute wood products such as
oriented strand board ("OSB") and changes in purchasing by distributors and
retailers to a just-in-time inventory system. Lumber prices have begun to
increase in 1996 due to an increase in new housing starts and increased demand
from lumber wholesalers who were unable to replenish their inventories because
of the recent severe winter. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PARTNERSHIP STRUCTURE AND MANAGEMENT
Crown Pacific Management Limited Partnership, a Delaware limited
partnership, is the managing general partner of the Partnership (the "Managing
General Partner"), and Crown Pacific, Ltd., an Oregon corporation ("CPL"), is
the special general partner of the Partnership (in such capacity, the "Special
General Partner"). The Managing General Partner and the Special General Partner
are together referred to herein as the "General Partners." Both of the General
Partners are owned by Fremont Investors, Inc. (formerly Fremont Group, Inc.) and
its affiliates ("Fremont") and by Mr. Peter W. Stott and Mr. Roger L. Krage
(collectively, the "Sponsors"). Mr. Stott and Mr. Krage have had preliminary
discussions with Fremont regarding the purchase of all of Fremont's remaining
interest in the Partnership and the General Partners. These discussions are only
preliminary, however, and price and other significant terms have not been
established. There can be no assurance that such a purchase will occur.
The operations of the Partnership are carried out through, and the
Timberlands and operating assets are owned by, Crown Pacific Limited
Partnership, a Delaware limited partnership, and other subsidiary operating
partnerships and corporations (collectively, the "Operating Partnership" unless
the context otherwise requires). The Partnership owns a 98.9899% limited partner
interest in the Operating Partnership. The Managing General Partner is the
general partner of the Operating Partnership with a 1.0101% general partner
interest. The General Partners own an aggregate 2% general partner interest in
the Partnership and the Operating Partnership. References herein to the General
Partners' 2% interest or to distributions to the General Partners of 2% of
"Available Cash," as defined in the Glossary, are references to the amount of
the General Partners' combined percentage interest in the Partnership and the
Operating Partnership. Unless the context otherwise requires, references herein
to the Partnership include the Partnership, the Operating Partnership and any
other subsidiary operating partnerships and corporations.
The activities of the Managing General Partner are limited by the
Partnership Agreement to the management of the activities and operations of the
Partnership. The Managing General Partner receives no management fee in
connection with its management of the Partnership and receives no remuneration
for its services as managing general partner of the Partnership other than
reimbursement for all direct and indirect expenses incurred in connection with
the Partnership's operations and all other necessary or appropriate expenses
allocable to the Partnership or otherwise reasonably incurred by the Managing
General Partner in connection with the operation of the Partnership's business.
See "Management."
11
<PAGE>
The principal executive offices of the Partnership, the Operating
Partnership and the General Partners are located at 121 S.W. Morrison Street,
Suite 1500, Portland, Oregon 97204. The telephone number at such offices is
(503) 274-2300.
The following chart depicts the organization and ownership of the
Partnership and the Operating Partnership immediately after giving effect to the
sale of the Common Units offered hereby (assuming that the Underwriters'
over-allotment option is not exercised). The percentages reflected in the
following chart represent the ownership interest in each of the Partnership and
the Operating Partnership, individually. Except in the following chart, the
ownership percentages referred to in this Prospectus reflect the effective
ownership interest of the Unitholders in the Partnership and the Operating
Partnership on a combined basis.
DESCRIPTION OF ORGANIZATIONAL CHART
1. PUBLIC UNITHOLDERS (17,430,300 Common Units) have a 67.4% limited
partner interest in Crown Pacific Partners, L.P. (the "Partnership").
2. PRIOR INVESTORS (OTHER THAN SPONSORS) (2,162,393 Common Units) have a
8.4% limited partner interest in the Partnership.
3. SPONSORS (3,061,770 Subordinated Units and 223,076 Common Units) have a
12.7% limited partner interest in the Partnership, have 100% ownership of CROWN
PACIFIC, LTD. (the "Special General Partner"), and have 100% ownership of CROWN
PACIFIC MANAGEMENT LIMITED PARTNERSHIP (the "Managing General Partner").
4. The Special General Partner (2,711,318 Subordinated Units) has a 0.01%
general partner interest and a 10.5% limited partner interest in the
Partnership.
5. The Managing General Partner has a 0.99% general partner interest in the
Partnership and a 1.0101% general partner interest in CROWN PACIFIC LIMITED
PARTNERSHIP (the "Operating Partnership").
6. The Partnership has a 98.9899% limited partner interest in the Operating
Partnership.
12
<PAGE>
SAU REDEMPTION
Effective upon the closing of the offering made hereby, all of the
outstanding SAUs will be redeemed from the net proceeds of this offering for an
aggregate of $4.1 million. Under the terms of the Partnership Agreement, the
SAUs were entitled to receive aggregate distributions, through the end of 1997,
of up to $80 million, subject to annual limitations, only after the Partnership
distributed to all Common Units and Subordinated Units $0.51 per Unit with
respect to each quarter during 1995 (and a proportionate amount with respect to
1994), $0.524 per Unit with respect to each quarter during 1996 and $0.538 per
Unit with respect to each quarter during 1997. The Partnership Agreement has
been amended (the "SAU Amendment"), with the approval of the SAU holders, to
redeem the SAUs in exchange for a one-time cash payment equal to $4.1 million in
the aggregate, which represents the present value of the future cash
distributions that the Managing General Partner anticipates the SAU holders
could have received from the Partnership with respect to the periods ending on
or before December 31, 1997. The terms of the SAU Amendment were proposed by the
Managing General Partner and approved by an independent committee of the Board
of Control and by the holders of the SAUs. The SAU holders received an opinion
from a financial advisor that the SAU Amendment was fair to the SAU holders from
a financial point of view. Dillon, Read & Co. Inc., as a financial advisor to
the Partnership, has delivered its opinion that, from a financial point of view,
the SAU Amendment will not adversely affect the limited partners in any material
respect, which under the Partnership Agreement is the requisite standard for
amending the Partnership Agreement without the approval of the holders of Common
Units. Upon redemption, the SAUs will cease to exist and any Partnership cash
that would have been available for distribution to the holders of SAUs will be
available for distribution to the partners as provided in the Partnership
Agreement. See "Cash Distribution Policy."
RECENT DEVELOPMENTS
On July 10, 1996, the Partnership reported its results of operations for the
quarter ended June 30, 1996. Net income for the quarter was approximately $4.4
million on revenues of approximately $96.1 million, compared to approximately
$4.2 million on revenues of approximately $88.7 million for the 1995 second
quarter. The increased revenues in the second quarter of 1996 were primarily
attributable to improving lumber prices and to higher log sales volumes
resulting from the Cavenham Acquisition. In addition, second quarter 1995 sales
were lower due to a labor strike at the Thompson Falls, Montana sawmill and the
Redmond, Oregon plywood facility.
During the quarter ended June 30, 1996, the Partnership completed the sale
of the sawmill at Thompson Falls and permanently closed the sawmill at Albeni
Falls, Idaho. These two Inland Region sawmills could not be supplied with
competitively priced externally purchased logs. The Managing General Partner has
also decided to close the plywood facility during the third quarter of 1996.
This decision was based upon a sharp decline in plywood prices, which resulted
from increased competition from lower cost panel substitutes such as OSB. The
Partnership believes that the combination of the Cavenham Acquisition and the
facility closures will improve the Partnership's raw material self-sufficiency,
which should result in improved margins.
13
<PAGE>
SUMMARY HISTORICAL FINANCIAL
AND OPERATING DATA
The following table sets forth for the periods and at the dates indicated,
summary historical financial and operating data for the Partnership and its
predecessors, on a combined historical basis. The summary historical financial
data for the three years ended December 31, 1993, 1994 and 1995 are derived from
the audited historical consolidated financial statements of the Partnership and
should be read in conjunction with such financial statements included elsewhere
in this Prospectus. The related historical consolidated financial data for the
three-month periods ended March 31, 1995 and 1996 are derived from the unaudited
historical consolidated financial statements of the Partnership included
elsewhere in this Prospectus, which in the opinion of management include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
statement of the results for the unaudited interim periods. The results for the
interim periods are not necessarily indicative of the results that can be
expected for a full year. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The comparability of results of operations among the periods presented is
affected by the acquisitions of DAW Forest Products Company, L.P. and W-I Forest
Products Limited Partnership ("DAW/ W-I") in September and October 1993, which
were accounted for under the purchase method of accounting. The results shown do
not include any information with respect to the assets acquired from Cavenham in
May 1996.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
FOR THE YEAR ENDED DECEMBER 31, ------------------------
---------------------------------------- 1995 1996
1993 (A) 1994 (A) 1995 (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues (b)............................. $ 220,586 $ 397,326 $ 383,383 $ 97,834 $ 84,555
Operating costs:
Cost of products sold (c).............. 151,379 328,882 313,490 80,995 66,882
Selling, general and administrative
expenses.............................. 10,379 21,148 21,653 5,309 5,312
------------ ------------ ------------ ----------- -----------
Operating income......................... 58,828 47,296 48,240 11,530 12,361
Interest expense......................... 14,201 23,894 31,053 7,522 8,245
Amortization of debt issuance costs...... 997 2,184 508 116 126
Other (income) expense, net.............. 3,208 (1,034) (599) (224) (174)
------------ ------------ ------------ ----------- -----------
Income before provision for income
taxes................................... 40,422 22,252 17,278 4,116 4,164
Provision for income taxes............... 1,501 2,514 -- -- --
------------ ------------ ------------ ----------- -----------
Income before extraordinary item......... 38,921 19,738 17,278 4,116 4,164
Extraordinary item -- loss on
extinguishment of debt (d).............. -- (16,178) -- -- --
------------ ------------ ------------ ----------- -----------
Net income............................... 38,921 3,560 17,278 4,116 4,164
Accretion and income relative to
mandatorily redeemable partnership
interests............................... (3,243) (8,624) -- -- --
------------ ------------ ------------ ----------- -----------
Net income (loss) allocated to
partnership and shareholders'
interests............................... $ 35,678 $ (5,064) $ 17,278 $ 4,116 $ 4,164
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Earnings per Unit (e):
Income before extraordinary item....... $ 1.07 $ 0.94 $ 0.22 $ 0.23
Extraordinary item (d)................. (0.88) -- -- --
------------ ------------ ----------- -----------
Net income per Unit.................... $ 0.19 $ 0.94 $ 0.22 $ 0.23
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
FOR THE YEAR ENDED DECEMBER 31, ------------------------
---------------------------------------- 1995 1996
1993 (A) 1994 (A) 1995 (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOW AND OTHER DATA:
EBITDDA (f).............................. $ 85,852 $ 87,016 $ 83,290 $ 17,899 $ 21,414
Depletion, depreciation and amortization
(c)..................................... 31,229 40,870 34,959 6,261 9,005
Additions to timber and timberlands...... 11,230 15,794 31,211 3,988 15,766
Additions to equipment................... 1,885 14,799 10,437 3,425 2,456
BALANCE SHEET DATA (AT PERIOD END):
Working capital.......................... $ 2,291 $ 51,684 $ 66,737 $ 59,500 $ 66,025
Total assets (g)......................... 738,363 461,547 476,505 457,641 490,315
Long-term debt (g)....................... 480,362 300,000 326,000 303,000 340,000
Partners' and shareholders' equity....... 98,632 119,397 107,056 123,259 101,781
OPERATING DATA:
Fee timber harvested (MMBF).............. 152 215 202 46 75
External log sourcing (MMBF)............. 106 269 251 53 46
Lumber production (MMBF)................. 199 421 390 111 97
Plywood production (MMSF) (3/8" basis)... 45 142 113 37 12
</TABLE>
- ------------------------------
(a) Effective December 22, 1994, the Partnership completed an initial public
offering of 9,850,000 Common Units. Since fewer than 80% of the limited
partner interests were sold to the public and because the General Partners
(or their affiliates) were also the general partners of the
companies/partnerships that preceded the Partnership, the assets were not
recorded as a purchase and therefore remain at their historical cost. The
financial information for the periods prior to December 22, 1994 represents
the financial results of the Partnership's predecessors. Results of
operations for the 10-day period ended December 31, 1994 were not
significant compared to the results of the combined predecessors taken as a
whole. The operations of the Partnership for such 10-day period have been
combined with the results of the predecessors for the year ended December
31, 1994. For additional information about the Partnership's predecessors
and the results of the Partnership for the period from December 22, 1994
through December 31, 1994, see Note 1 of Notes to Consolidated Financial
Statements.
(b) Total revenues from Inland Region sawmills acquired in the fourth quarter of
1993 that were closed in the first quarter of 1994 were $9.1 million in the
year ended December 31, 1993 and $13.8 million in the year ended December
31, 1994. Total revenues from Inland Region sawmills that are or will be
closed in 1996 were $9.1 million in the quarter ended March 31, 1996, $15.2
million in the quarter ended March 31, 1995 and $48.8 million in the year
ended December 31, 1995. Total revenues from the Partnership's plywood
manufacturing facility, scheduled to be closed during the third quarter of
1996, were $2.8 million in the quarter ended March 31, 1996, $9.8 million in
the quarter ended March 31, 1995 and $31 million in the year ended December
31, 1995. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations."
(c) In the first quarter of 1995, the Partnership completed a periodic update of
its timber inventory system to reflect the timber it owned. The update
resulted in an increase in timber volumes, which reduced the estimated
depletion rates and decreased the depletion costs for the year ended
December 31, 1995 by $7.4 million or $0.41 per Unit. This change in estimate
had no impact on prior periods or on the Partnership's cash flow. See Note 5
of Notes to Consolidated Financial Statements.
(d) Prior to and in conjunction with the formation of the Partnership in 1994,
borrowings of the Partnership's predecessors were refinanced and certain of
the deferred issuance costs were written off as an extraordinary, non-cash
charge.
(e) The determination of earnings per Unit for 1994 was made as if the initial
public offering had been completed on January 1, 1994.
(f) EBITDDA is defined as net income before interest, amortization of debt
issuance costs, income taxes, depreciation, depletion and amortization and
extraordinary items. EBITDDA is provided because management believes EBITDDA
provides useful information for evaluating the Partnership's ability to make
the First and Second Target Distributions. EBITDDA should not be construed
as an alternative to operating income (as an indicator of the Partnership's
operating performance) or as an alternative to cash flows from operating
activities (as a measure of liquidity).
(g) Included in total assets and long-term debt for the year ended December 31,
1993 was $220 million related to the purchase of certain timberlands in
1989. The Partnership's predecessors issued twenty-two $10 million
installment notes to the seller secured by unconditional letters of credit.
The deposited funds were restricted such that they could be used only to
repay the notes. As a result, both the assets and liabilities remained on
the predecessors' balance sheets.
15
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered................ 10,102,800 Common Units (11,618,220 if the Underwriters'
over-allotment option is exercised in full), of which
7,455,330 are being offered by the Partnership
(8,970,750 if the Underwriters' over-allotment option is
exercised in full) and 2,647,470 are being offered by
the Selling Unitholders. Of the Common Units being sold
by the Selling Unitholders, 2,305,000 were purchased by
the Sponsors in the initial public offering in December
1994 for a purchase price of $20.05 per Common Unit,
representing the initial public offering price less
underwriting discounts and commissions.
Units to be outstanding after this
offering......................... 19,815,769 Common Units representing an aggregate 75.9%
limited partner interest in the Partnership (21,331,189
Common Units, representing an aggregate 77.1% limited
partner interest in the Partnership, if the
Underwriters' over-allotment option is exercised in
full) and 5,773,088 Subordinated Units representing an
aggregate 22.1% limited partner interest in the
Partnership (20.9% if the Underwriters' over-allotment
option is exercised in full).
Use of proceeds................... The net proceeds from the sale of the Common Units
offered by the Partnership hereby (estimated to be
approximately $132.5 million after deducting the
underwriting discounts and commissions and expenses of
the offering), together with $2.8 million contributed by
the General Partners to maintain their 2% interest in
the Partnership and borrowings of $118.8 million under
the Acquisition Facility, will be used by the
Partnership (i) to repay $250.0 million of indebtedness
(the "Cavenham Debt") incurred to finance the Cavenham
Acquisition and other recent timber purchases and (ii)
to pay $4.1 million to redeem the SAUs. See "Use of
Proceeds" and "Cash Distribution Policy." The proceeds
from any exercise of the Underwriters' over-allotment
option will be used to repay indebtedness of the
Partnership. The Partnership will not receive any of the
net proceeds from the sale of Common Units by the
Selling Unitholders.
NYSE symbol....................... CRO
</TABLE>
CASH DISTRIBUTIONS
GENERAL
The Partnership distributes all of its Available Cash within 45 days after
the end of each calendar quarter to the Unitholders of record on the applicable
record date and to the General Partners. Available Cash for any quarter consists
generally of the sum of all of the cash received by the Partnership from all
sources plus reductions to reserves less all cash disbursements of the
Partnership and additions to reserves. The full definition of Available Cash is
set forth in the Glossary. The Managing General Partner has broad discretion in
making cash disbursements and establishing reserves, thereby affecting the
amount of Available Cash. There can be no assurance that the Partnership will
have sufficient Available Cash with respect to any quarter to distribute the
Minimum
16
<PAGE>
Quarterly Distribution or any other amount to Unitholders. A portion of the
Partnership's distributions may constitute a return of an investor's capital.
The tax consequences of an investment in the Partnership are complex. See "--
Summary of Tax Considerations -- Ratio of Taxable Income to Distributions."
Distributions by the Partnership of its Available Cash are generally made
98% to the Unitholders and 2% to the General Partners, subject to the payment of
incentive distributions to the Managing General Partner after certain target
levels of cash distributions to the Unitholders in excess of the Second Target
Distribution are achieved. See "Cash Distribution Policy -- Incentive
Distributions and Hypothetical Annualized Yield."
For each quarter during the Subordination Period, the holders of Common
Units will have the right to receive the Minimum Quarterly Distribution ($0.51
per Unit) with respect to such quarter and any arrearages for prior quarters
before any distributions may be made on the Subordinated Units. Then, the
holders of the Subordinated Units will have the right to receive the Minimum
Quarterly Distribution with respect to such quarter, but no arrearages for prior
quarters. Next, first the holders of Common Units and then the holders of
Subordinated Units will have the right to receive additional cash until they
have received the First Target Distribution of $0.524 per Unit with respect to
each quarter in 1996 and the Second Target Distribution of $0.538 per Unit with
respect to each quarter in each subsequent year during the Subordination Period.
After the holders of Common Units and the holders of Subordinated Units have
each received the First Target Distribution (in 1996) and the Second Target
Distribution (in 1997), cash distributions will be shared among the holders of
Common Units, the holders of Subordinated Units and the General Partners in
proportion to the total amount of Available Cash constituting Cash from
Operations distributed to each such class of partners during such year (up to
and including the quarter with respect to which such distribution is being made)
up to the applicable Target Distribution level.
In 1998 and thereafter, cash distributions in excess of the Second Target
Distribution level ($0.538 per Unit) will be shared between the General Partners
and all Unitholders pro rata, with the General Partners' share increasing as
higher Target Distribution levels on the Units are met. Specifically, the
General Partners will be entitled to 15% of all quarterly distributions after
the Unitholders have received $0.566 per Unit, 25% after the Unitholders have
received $0.679 per Unit and 50% after the Unitholders have received $0.904 per
Unit.
The Minimum Quarterly Distribution and Target Distribution levels are
subject to adjustment under certain circumstances such as unfavorable tax
legislation or upon distributions of Cash from Interim Capital Transactions, as
defined in the Glossary. At the expiration of the Subordination Period, which
will generally occur no sooner than January 1, 2000 and then only upon the
satisfaction of certain tests, all Subordinated Units will convert into an equal
number of Common Units and will participate pro rata with all other Common Units
in distributions of Available Cash. Under certain circumstances, 50% of the
Subordinated Units will convert into an equal number of Common Units after
January 1, 1999 if certain Target Distribution levels have been met for a
specified time period. See "Cash Distribution Policy." Common Units will not
accrue any arrearages for any quarter after the Subordination Period.
ABILITY TO MAKE THE FIRST AND SECOND TARGET DISTRIBUTIONS
The Partnership has paid a quarterly distribution equal to the Minimum
Quarterly Distribution on all outstanding Common Units and Subordinated Units
with respect to each quarter in 1995 (and a proportionate amount thereof with
respect to the period from the inception of the Partnership on December 22, 1994
through December 31, 1994). For the quarter ended March 31, 1996, the
Partnership distributed the First Target Distribution of $0.524 per Unit. For
the quarter ended June 30, 1996, the Partnership has declared a distribution of
$0.524 per Unit. Purchasers of Common Units in this offering will not receive
this distribution.
17
<PAGE>
Based on the amount of working capital that the Partnership is expected to
have at the closing of this offering, the availability of the Working Capital
Facility and the assumptions set forth below, the Partnership believes that it
should have Available Cash constituting Cash from Operations sufficient to allow
the Partnership to distribute the First Target Distribution of $0.524 per Unit
on all Units with respect to each quarter during 1996 and the Second Target
Distribution of $0.538 per Unit on all Units with respect to each quarter during
1997, although no assurance can be given in respect of such distributions. This
belief is based on the Partnership's assumptions regarding the future business
prospects of the Partnership and other assumptions that it believes are within a
range of reasonableness. Some of these assumptions are beyond the control of the
Partnership and cannot be predicted with certainty, including assumptions
concerning market and economic conditions and other factors, such as log and
lumber prices, attainment of projected timber harvest schedules, availability of
non-fee timber, export and environmental restrictions and other factors that
affect the availability of timber and the level of lumber production. If the
Partnership's assumptions, particularly with respect to prices, prove to be
incorrect, Available Cash constituting Cash from Operations could be
insufficient to permit the Partnership to make the distributions estimated as
described above. Accordingly, no assurances can be given that distributions at
those levels will be made. See "Risk Factors -- Risks Inherent in an Investment
in the Partnership --Partnership Assumptions Concerning Future Operations May
Not Be Realized." The Partnership does not intend to update the expression of
belief set forth above.
The Partnership's estimates of Available Cash constituting Cash from
Operations are based in part on the following specific assumptions: (i) the rate
of inflation will be 3.0% for each year; (ii) prices for logs, lumber and
plywood in 1996 will approximate 1995 prices and prices for logs and lumber will
increase by the rate of inflation in 1997; (iii) the Partnership will harvest
timber in accordance with its harvest plan, which is based on projections of
demand, price, availability of timber and other factors beyond the control of
the Partnership and which contemplates the harvest of 270 MMBF in 1996 and 256
MMBF in 1997; (iv) purchases of logs from private sellers will decrease
beginning in 1996 in the Oregon and Inland Regions; (v) purchases of logs from
federal sources will be substantially reduced in the Inland Region and will be
minimal in the Oregon Region in 1996 and 1997; (vi) purchases of logs from state
sources will remain relatively constant through 1997; (vii) manufacturing
productivity will improve in 1996 and 1997 at the Prineville, Oregon
Manufacturing Facility due to, among other factors, certain anticipated capital
expenditures at such facility; and (viii) capital expenditures for maintenance
will average approximately $3.0 million per year in 1996 and 1997. The
Partnership's performance for future years is difficult to predict, and the
realization of the assumptions underlying the projected performance is
uncertain.
When used in this Prospectus the words "expect," "estimate," "project" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
expected, estimated or projected.
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON UNITS SHOULD CONSIDER THE FOLLOWING
RISK FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON UNITS.
- The Partnership's operations are subject to fluctuations in prices and
demand for forest products and supplies of timber.
- The Partnership's ability to harvest its timber may be affected by various
factors, including environmental and endangered species concerns, damage
by fire, insect infestation, disease, drought and other natural disasters.
- The actual amount of cash distributions depends on Partnership operating
performance and is affected by the funding of reserves, expenditures and
other matters within the discretion of the Managing General Partner.
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- Conflicts of interest could arise between the Managing General Partner and
its affiliates, on the one hand, and the Partnership or any partner
thereof, on the other. The Partnership Agreement limits the liability and
modifies the fiduciary duties of the General Partners. Holders of Common
Units are deemed to have consented to certain actions and conflicts of
interest that might otherwise be deemed a breach of fiduciary or other
duties under state law.
- Holders of Common Units have limited voting rights, and the Managing
General Partner manages and controls the Partnership.
See "Risk Factors" for a more detailed discussion of these and other risk
factors.
SUMMARY OF TAX CONSIDERATIONS
THE TAX CONSEQUENCES OF AN INVESTMENT IN COMMON UNITS TO A PARTICULAR
INVESTOR WILL DEPEND IN PART ON THE INVESTOR'S OWN TAX CIRCUMSTANCES. EACH
PROSPECTIVE INVESTOR SHOULD CONSULT HIS OWN TAX ADVISOR ABOUT THE FEDERAL, STATE
AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN COMMON UNITS.
For a discussion of the principal federal income tax consequences associated
with the operations of the Partnership and the ownership and disposition of
Common Units, see "Tax Considerations."
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The General Partners estimate that a purchaser of Common Units in this
offering who holds such Common Units through the record date for the last
quarter of 1997 will be allocated, on a cumulative basis, an amount of federal
taxable income for such period that will be approximately 20% of cash
distributed with respect to that period. Substantially all of such taxable
income will be treated as Section 1231 income, which may be treated as capital
gains, depending upon an investor's particular tax circumstances, as a result of
an election made pursuant to Section 631(a) of the Internal Revenue Code of
1986, as amended (the "Code"), and as a result of transactions qualifying for
treatment under Section 631(b) of the Code. The General Partners further
estimate that after 1997 the taxable income allocable to the Unitholders will
constitute an increasing percentage of cash distributed to Unitholders. These
estimates are based upon the assumption that Available Cash will approximate an
amount required to make the applicable First and Second Target Distributions
with respect to the Common and the Subordinated Units and other assumptions with
respect to capital expenditures, cash flow and anticipated cash distributions.
These estimates and assumptions are subject to, among other things, numerous
business, economic, regulatory, competitive and political uncertainties beyond
the control of the General Partners, especially the assumed prices for logs and
lumber. Further, the estimates are based on current tax law and certain tax
reporting positions that the General Partners have adopted or intend to adopt
and with which the IRS could disagree. Accordingly, no assurance can be given
that the estimates will prove to be correct. The actual percentages could be
higher or lower than as described above and that difference could be material.
See "Tax Considerations -- Tax Consequences of Unit Ownership -- Ratio of
Taxable Income to Distributions."
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
An investment in Units by tax-exempt organizations (including individual
retirement accounts and other retirement plans), regulated investment companies
and foreign persons raises issues unique to such persons. See "Tax
Considerations -- Uniformity of Units -- Tax-Exempt Organizations and Certain
Other Investors."
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RISK FACTORS
A PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS
WELL AS THE OTHER INFORMATION SET FORTH OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, BEFORE MAKING A DECISION TO INVEST IN THE COMMON UNITS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
CYCLICALITY OF FOREST PRODUCTS INDUSTRY WILL AFFECT THE PARTNERSHIP'S
RESULTS OF OPERATIONS. The Partnership's results of operations are, and will
continue to be, affected by the cyclical nature of the forest products industry.
Prices and demand for logs and manufactured wood products have been, and in the
future can be expected to be, subject to cyclical fluctuations. The demand for
logs and wood products is primarily affected by the level of new residential
construction activity, which is subject to fluctuations due to changes in
economic conditions, interest rates, population growth, weather conditions and
other factors. In addition to housing starts, demand for wood products is also
significantly affected by repair and remodeling activities and industrial uses,
demand for which has historically been less cyclical. Decreases in the level of
residential construction activity will be reflected in reduced demand for logs
and wood products, resulting in lower prices for the Partnership's log and wood
products and lower revenues, profits and cash flows.
FEDERAL TIMBER SUPPLY. Various factors, including environmental and
endangered species concerns, have limited, and are likely to continue to limit,
the amount of timber offered for sale by certain United States government
agencies, which historically have been major suppliers of timber to the United
States forest products industry. Federal timber under contract in the Pacific
Northwest decreased 86% from approximately 11,000 MMBF in January 1988 to 1,500
MMBF in January 1996. Although the Partnership intends to supply its
Manufacturing Facilities primarily with logs harvested from its Timberlands,
additional timber and log purchases are contemplated. The Partnership cannot
rely on purchases of federal timber and must therefore rely more heavily on the
acquisition of timber from other sources (including domestic private timber
owners, state agencies and foreign sellers) to supplement its supply of fee
timber. There can be no assurance that sales of timber from such other sources
may not be reduced or that the Partnership will be able to procure sufficient
logs at favorable prices in order to continue operation of the Manufacturing
Facilities at current levels of production or that suspension of operations at,
or closure of, one or more Manufacturing Facilities may not be required in the
future. The decrease in federal timber sales has forced many conversion
facilities to close, including three Crown Pacific sawmills that were closed
promptly after their acquisition and two others in the Inland Region that have
been closed or sold during 1996.
Although the Partnership believes that sales of timber by United States
government agencies are likely to remain at relatively low levels for the
foreseeable future, any reversal of policy that substantially increases such
sales could significantly reduce prices for logs, lumber and other wood
products, which could have a material adverse effect on the Partnership. For
instance, in July 1995, Congress passed the Emergency Salvage Timber Sale
Program (the "Salvage Act"), which authorized an increased harvest of timber by
December 31, 1996 from certain U.S. government lands on which logging had been
restricted because of environmental limitations. Although to date only limited
sales have been consummated under the Salvage Act, substantial sales pursuant to
the Salvage Act or an extension of the time period available under the Salvage
Act could have a material adverse effect on prices of logs, lumber and other
wood products.
THE PARTNERSHIP'S ABILITY TO HARVEST TIMBER WILL BE SUBJECT TO
LIMITATIONS. Revenues, net income and cash flow from the Partnership's future
operations will be dependent to a significant extent on its ability to harvest
timber pursuant to its harvest plan from its approximately 724,000 acres of
timberlands. The ability of the Partnership to harvest significant amounts of
timber in excess of its harvest plan is limited by the terms of the
Partnership's indebtedness. There can be no assurance that the Partnership will
in the future achieve the levels contemplated by its current harvest plan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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Harvesting of the Timberlands may be affected by various factors, including
damage by fire, insect infestation, disease, prolonged drought and natural
disasters. Although damage from such causes usually is localized and affects
only a limited percentage of the timber, there can be no assurance that any
damage affecting the Timberlands will, in fact, be so limited. As is typical in
the forest products industry, the Partnership does not maintain insurance
coverage with respect to damage to the Timberlands. Even if such insurance were
available, the cost would be prohibitive. The Partnership also does not maintain
insurance on its log inventories. The Partnership does, however, maintain
insurance for loss of lumber and other wood products due to fire and other
occurrences. The risk of fire affecting the Timberlands is greatest in the
Oregon and Inland Regions and is less significant in the Washington Region.
Weather conditions, access limitations and regulatory requirements
associated with proximity to streams and other water courses may also restrict
harvesting of the Timberlands. The risks posed by these factors are greatest in
the Washington Region, which is characterized by heavy rainfall, rough terrain
and numerous streams; somewhat reduced in the Inland Region, where the thawing
of frozen ground in the spring generally delays the commencement of harvesting;
and least significant in the Oregon Region, which features relatively even
terrain and few waterways.
THE PARTNERSHIP'S ABILITY TO SELL LOGS FOR EXPORT MAY BE LIMITED. The
Partnership engages in the sale of logs for export, which business is
substantially dependent on market conditions in the major Asian economies,
particularly Japan, and is affected by fluctuations in exchange rates. The
Partnership derived approximately 3% of its revenues during the year ended
December 31, 1995 (prior to the Cavenham Acquisition) from the sale of logs for
export. As a result of the Cavenham Acquisition, the percentage of logs exported
by the Partnership is expected to increase. Historically, export-grade logs have
been sold at a premium over the prices that would have been received for the
logs if sold in the domestic market. The lack of supply of high-quality logs for
export to Japan, however, due primarily to decreased sales from public lands,
has caused a shift in Japanese demand away from logs to lumber.
From time to time, legislation has been unsuccessfully introduced in the
United States House of Representatives to prohibit the export of logs
originating from private lands. There can be no assurance that similar
legislation will not be introduced in subsequent sessions of Congress or that
such legislation will not become law. United States, Oregon and Washington laws
already prohibit the export of logs originating from government lands. If a
prohibition on log exports were enacted, the Managing General Partner
anticipates that the Partnership would respond by selling those logs currently
marketed for export to domestic customers at a lower price, which could have an
adverse effect on the Partnership.
Under the Forest Resources Conservation and Shortage Act of 1990 and the
regulations promulgated thereunder, no person may purchase unprocessed timber
from federal lands west of the 100th meridian in the contiguous 48 states if
such timber is to be used in substitution for unprocessed timber originating
from private lands that has been exported or such person has, during the
preceding 24-month period, exported unprocessed timber from private lands. This
prohibition does not apply to a person who acquires unprocessed timber from
federal lands within an approved sourcing area and who does not export
unprocessed timber from private lands within the sourcing area. Since the
Partnership is engaged in the export of logs from the Washington Region, it is
required to have, and has been granted, a sourcing area for its acquisition of
federal timber. Various parties, including one of Crown Pacific's competitors,
instituted litigation in July 1995 in U.S. District Court in Idaho seeking to
overturn the government's approval of Crown Pacific's sourcing areas. In
addition, a new, more restrictive federal regulation regarding sourcing areas
has been promulgated by the United States Forest Service. See "Business and
Properties -- Federal and State Regulation."
THE PARTNERSHIP EXPERIENCES SIGNIFICANT COMPETITION. The forest products
industry is highly competitive in terms of price and quality. Many of the
Partnership's competitors have substantially
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greater financial and operating resources than the Partnership. Wood products
are subject to increasing competition from a variety of non-wood and "laminated"
or engineered wood products. In addition, the Partnership is subject to
competition from lumber products and logs imported from foreign sources to the
United States as well as to the export markets served by the Partnership. To the
extent there is a significant increase in competitive pressures from substitute
products or other domestic or foreign suppliers, it could have a material
adverse effect on the Partnership. See "Business and Properties -- Competition
and Products."
THE PARTNERSHIP IS DEPENDENT ON KEY PERSONNEL. The Managing General Partner
believes the Partnership's success depends in part upon the efforts and
abilities of its senior management team, in particular Mr. Peter Stott and Mr.
Roger Krage. The failure of the Managing General Partner to retain such
personnel could adversely affect the Partnership's operations. Mr. Stott and Mr.
Krage have entered into employment agreements with the Managing General Partner.
In addition, an event of default will occur under the Partnership's bank credit
agreements if, without lender consent, Mr. Stott at any time is not either the
Chief Executive Officer (as he now serves) or the Chairman of the Board of the
Managing General Partner.
THE PARTNERSHIP IS SUBJECT TO FEDERAL AND STATE ENVIRONMENTAL
REGULATION. The Manufacturing Facilities emit air contaminants, discharge
industrial wastewater and stormwater and generate and dispose of both hazardous
and nonhazardous wastes. The Partnership is subject to regulation under federal
and state statutes, including the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act ("RCRA"), and the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or
"Superfund"), as well as similar state laws and regulations. There can be no
assurance that future legislation or administrative or judicial action with
respect to protection of the environment will not adversely affect the
Partnership or the operation of the Manufacturing Facilities.
The regulations applicable to the Partnership's operations include certain
regulations governing the storage and handling of materials, controlling the
discharge of materials into the environment, requiring removal and/or
remediation and imposing civil and criminal penalties for violations. Each of
the primary statutory and regulatory programs that apply to the Partnership's
operations imposes civil penalties for violation of the requirements of the
programs as well as potential remediation expenses, natural resource damages,
potential injunctions, cease and desist orders and criminal penalties. Such laws
and regulations may expose the Partnership to liability for the conduct of, or
conditions caused by, others or for acts of the Partnership that were in
compliance with all applicable laws at the time such acts were performed. Laws
and regulations protecting the environment have generally become more stringent
in recent years and could become more stringent in the future. Some
environmental statutes impose strict liability, rendering a person liable for
environmental damage without regard to negligence or fault on the part of such
person.
THE PARTNERSHIP'S OPERATIONS ARE SUBJECT TO ENDANGERED SPECIES
REGULATION. The federal Endangered Species Act and counterpart state
legislation protect species threatened with possible extinction. Protection of
endangered and threatened species may include restrictions on timber harvesting,
road building and other silvicultural activities on private, federal and state
land containing the affected species. A number of species indigenous to the
Pacific Northwest have been protected under the Endangered Species Act,
including the northern spotted owl, marbled murrelet, mountain caribou, grizzly
bear, bald eagle and various anadromous fish species.
Based on independent consulting reports and management's knowledge of the
Timberlands, the Managing General Partner does not believe that there are any
species protected under the Endangered Species Act and counterpart state
legislation that would have a material adverse effect on the Partnership's
ability to harvest the Timberlands in accordance with current harvest plans.
There can be no assurance, however, that species on or around the Timberlands
may not subsequently receive
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protected status under the Endangered Species Act or that currently protected
species may not be discovered in significant numbers on or around the
Timberlands. Any such changes could materially and adversely affect the
Partnership's operations.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH PARTNERSHIP
PERFORMANCE. Although the Partnership will distribute 100% of Available Cash,
there can be no assurance regarding the amounts of Available Cash to be
distributed by the Partnership. The actual amounts of Available Cash will depend
upon numerous factors, including the Partnership's profitability, required
principal and interest payments on the Partnership's debt, restrictions
contained in the Partnership's debt agreements, the effect of acquisitions,
fluctuations in working capital, capital expenditures, reserves, prevailing
economic conditions and financial, business and other factors, some of which are
beyond the control of the Partnership and the Managing General Partner. The
Partnership Agreement gives the Managing General Partner broad discretion in
establishing reserves that affect the amount of Available Cash. Because the
business of the Partnership is seasonal, the Managing General Partner
anticipates that it may make additions to reserves during certain of the
Partnership's fiscal quarters in order to fund operating expenses, interest
payments and cash distributions with respect to other fiscal quarters. In
addition, the Partnership is required to establish reserves in respect of future
payments of principal and interest on the Partnership's indebtedness. As a
result of these and other factors, there can be no assurance regarding the
actual levels of cash distributions by the Partnership, and the Partnership's
ability to distribute cash may also be limited during the existence of any
events of default under any of the Partnership's debt agreements.
THE PARTNERSHIP HAS INCURRED SUBSTANTIAL INDEBTEDNESS. Upon the closing of
the offering made hereby, the Partnership will have approximately $418.8 million
in indebtedness (excluding amounts borrowed under the Working Capital Facility)
and the amount of such indebtedness as a percentage of total capitalization
would have been 64.3% on a pro forma basis as of March 31, 1996. As a result,
the Partnership will have indebtedness that is substantial in relation to
partners' equity. The ability of the Partnership to make principal and interest
payments will depend on future performance, which is subject to many factors,
some of which will be outside the Partnership's control. In addition, the
agreements governing the Partnership's indebtedness contain restrictive
covenants that limit the ability of the Partnership to incur additional
indebtedness. Payment of principal and interest on the Partnership's
indebtedness, as well as compliance with the requirements and covenants of the
agreements governing such indebtedness, may limit the Partnership's ability to
make distributions to Unitholders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Partnership Indebtedness."
PARTNERSHIP ASSUMPTIONS CONCERNING FUTURE OPERATIONS MAY NOT BE
REALIZED. In assessing the ability of the Partnership to distribute Available
Cash, the Partnership has relied on certain assumptions concerning its
operations through the quarter ending December 31, 1997, including assumptions
concerning market and economic conditions and other factors, such as log and
lumber prices, attainment of projected timber harvest schedules, availability of
non-fee timber, export and other environmental restrictions and other factors
that affect the availability of timber and the level of lumber production. See
"Cash Distribution Policy -- Ability to Make the First and Second Target
Distributions." Although the Partnership believes its assumptions are within a
range of reasonableness, many of the assumptions are beyond the Partnership's
control and cannot be predicted with any degree of certainty. If the
Partnership's assumptions, particularly with respect to prices or harvest
volumes, prove to be incorrect, Available Cash constituting Cash from Operations
could be insufficient to permit the Partnership to make distributions at the
levels anticipated.
HOLDERS OF COMMON UNITS HAVE LIMITED VOTING RIGHTS; THE MANAGING GENERAL
PARTNER WILL MANAGE AND CONTROL THE PARTNERSHIP. The Managing General Partner
will manage and control the activities of the Partnership. Unlike the holders of
common stock in a corporation, holders of Common Units will have only limited
voting rights on matters affecting the Partnership's business. Holders of
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Common Units will have no right to elect the General Partners on an annual or
other continuing basis. The Managing General Partner may not be removed at any
time unless the approval of the holders of at least 66 2/3% of the outstanding
Units (excluding Units owned by the General Partners and their affiliates) is
received. As a result, holders of Common Units will have limited influence on
matters affecting the operation of the Partnership and third parties may find it
difficult to attempt to gain control from the Managing General Partner or
influence the activities of the Partnership.
ABILITY OF THE PARTNERSHIP TO ISSUE ADDITIONAL UNITS. Subject to certain
exceptions, the Partnership may issue an unlimited number of additional Units or
other equity securities of the Partnership for such consideration and on such
terms and conditions as are established by the Managing General Partner, in its
sole discretion without the approval of any limited partners. After this
offering and prior to the end of the Subordination Period, however, the
Partnership may not issue in excess of 1,544,670 Common Units (29,250 Common
Units if the Underwriters' over-allotment option is exercised in full)
(excluding Common Units issued upon conversion of Subordinated Units) or an
equivalent amount of securities ranking on a parity with the Common Units and
may not issue any equity securities of the Partnership ranking prior or senior
to the Common Units without the approval of the holders of at least 66 2/3% (a
majority in the case of a merger) of the outstanding Common Units at such time
(excluding Common Units held by the General Partners and their affiliates).
After the end of the Subordination Period, the Partnership may issue limited
partner interests of any type without the approval of the Unitholders. The
Partnership Agreement does not impose any restriction on the Partnership's
ability to issue equity securities ranking junior to the Common Units at any
time. Based on the circumstances of each case, the issuance of additional Units
may dilute the value of the interests of the then-existing Unitholders in the
net assets of the Partnership. See "The Partnership Agreement -- Issuance of
Additional Securities."
Due to the Partnership's limited ability to issue additional Common Units
without the requisite approval of the holders of Common Units during the
Subordination Period, it may be difficult to finance subsequent acquisitions
through the issuance of additional equity securities prior to the end of the
Subordination Period.
ISSUANCE OF ADDITIONAL COMMON UNITS WILL REDUCE DISTRIBUTION SUPPORT
PROVIDED BY SUBORDINATED UNITS. During the Subordination Period, holders of
Common Units will have certain preferences as to distributions over holders of
Subordinated Units, thereby enhancing the Partnership's ability to pay the
Minimum Quarterly Distribution and First and Second Target Distributions on the
Common Units. The issuance of Common Units in this offering (including upon the
exercise of the Underwriters' over-allotment option) or future issuances of
Common Units effectively reduce the support provided by the subordination
feature of the Subordinated Units by increasing the aggregate Minimum Quarterly
Distribution and First and Second Target Distributions on the Common Units.
PROVISIONS OF THE PARTNERSHIP AGREEMENT MAY DISCOURAGE REMOVAL OF THE
MANAGING GENERAL PARTNER OR MANAGEMENT. The Partnership Agreement contains
certain provisions that are intended to discourage a person or group from
attempting to remove the current Managing General Partner or otherwise change
the management of the Partnership. If the Managing General Partner is removed
other than for cause, the Subordination Period will end and all outstanding
Subordinated Units will convert into Common Units and any existing arrearages on
the Common Units will be extinguished. If any person or group (other than the
General Partners or their affiliates or successors or persons who acquire 20% or
more of the Common Units from Fremont, Fremont's affiliates or subsequent
transferees of the Units owned by Fremont or its affiliates) acquires beneficial
ownership of 20% or more of the Common Units, such person or group will lose its
voting rights with respect to all of its Common Units. The effect of these
provisions may be to diminish the price at which the Common Units will trade
under certain circumstances.
THE MANAGING GENERAL PARTNER WILL HAVE A LIMITED CALL RIGHT WITH RESPECT TO
THE COMMON UNITS. If at any time less than 10% of the then issued and
outstanding Common Units are held by persons other than the General Partners and
their affiliates, the Managing General Partner will have
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the right, which it may assign to any of its affiliates or the Partnership, to
acquire all, but not less than all, of the remaining Common Units held by such
unaffiliated persons at specified prices. See "The Partnership Agreement --
Limited Call Right." As a consequence of the Managing General Partner's right to
purchase outstanding Common Units, a Unitholder may have his Common Units
purchased from him even though he may not desire to sell them, or the price paid
may be less than the amount the Unitholder would desire to receive upon a sale
of his Common Units.
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN CERTAIN CIRCUMSTANCES. The
limitations on the liability of holders of Common Units for the obligations of a
limited partnership have not been clearly established in some states. If it were
determined that the Partnership had been conducting business in any state
without compliance with the applicable limited partnership statute, or that the
right or the exercise of the right by the holders of Common Units as a group to
remove or replace either of the General Partners, to make certain amendments to
the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted participation in the "control" of the Partnership's
business, then the holders of Common Units could be held liable for the
Partnership's obligations to the same extent as a general partner. In addition,
under certain circumstances a Unitholder may be liable to the Partnership for
the amount of a distribution for a period of three years from the date of
distribution. See "The Partnership Agreement -- Limited Liability" for a
discussion of the limitations on liability and the implications thereof to a
holder of Common Units.
POSSIBLE CHANGE OF GENERAL PARTNER OWNERSHIP. Mr. Stott and Mr. Krage have
had preliminary discussions with Fremont regarding the purchase of all of
Fremont's remaining interest in the Partnership and the General Partners. These
discussions are only preliminary, however, and price and other significant terms
have not been established. There can be no assurance that such a purchase will
occur.
CONFLICTS OF INTEREST AND FIDUCIARY DUTIES
THE GENERAL PARTNERS AND THEIR AFFILIATES MAY HAVE CONFLICTS OF INTEREST
WITH THE PARTNERSHIP AND THE HOLDERS OF COMMON UNITS. Conflicts of interest
could arise as a result of the relationships between the Partnership on the one
hand and the General Partners and their affiliates on the other hand. The
partners, directors and officers of each of the General Partners have fiduciary
duties to manage such General Partners in a manner beneficial to the partners or
stockholders of such General Partners. At the same time, the General Partners
have fiduciary duties to manage the Partnership in a manner beneficial to the
Partnership and the limited partners of the Partnership. The Partnership
Agreement permits the General Partners to consider, in resolving conflicts of
interest, the interests of other parties in addition to the interests of holders
of Common Units, thereby limiting the General Partners' fiduciary duties to such
holders. The duties of the General Partners, as general partners, to the
Partnership and the limited partners of the Partnership, therefore, may come
into conflict with the duties of the directors and officers of the General
Partners to their partners or stockholders.
Such conflicts of interest might arise in the following situations, among
others:
(i) Decisions of the Managing General Partner with respect to the amount
and timing of timber harvests, property sales, cash expenditures,
borrowings, issuance of additional Units and reserves may affect whether, or
the extent to which, there is sufficient Available Cash constituting Cash
from Operations to meet the Minimum Quarterly Distribution and Target
Distributions on all Units in a given quarter. In addition, actions by the
Managing General Partner may have the effect of enabling the Managing
General Partner to receive incentive distributions or hastening the
expiration of the Subordination Period or the conversion of the Subordinated
Units into Common Units. The General Partners and their affiliates own all
of the outstanding Subordinated Units.
(ii) Under the terms of the Partnership Agreement, the Managing General
Partner and its affiliates will be reimbursed by the Partnership for certain
expenses incurred on behalf of the Partnership, including costs incurred in
providing staff and support services to the Partnership.
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(iii) Whenever possible, the Managing General Partner may seek to limit
the Partnership's liability under contractual arrangements to all or
particular assets of the Partnership, with the other party thereto having no
recourse against the Managing General Partner, the Special General Partner
or their respective assets. The Partnership Agreement provides that any
action by the Managing General Partner in so limiting the liability of the
General Partners or that of the Partnership will not be deemed to be a
breach of the Managing General Partner's fiduciary duties, even if the
Partnership could have obtained more favorable terms without such limitation
on liability.
(iv) Under the terms of the Partnership Agreement, the Managing General
Partner is not restricted from paying itself or its affiliates for any
services rendered (provided such services are rendered on terms fair and
reasonable to the Partnership), or entering into additional contractual
arrangements with any of them on behalf of the Partnership. Neither the
Partnership Agreement nor any of the other agreements, contracts and
arrangements between the Partnership, on the one hand, and the Managing
General Partner and its affiliates, on the other, are or will be the result
of arm's-length negotiations.
(v) The Partnership Agreement provides that it will not constitute a
breach of fiduciary duty if the Managing General Partner exercises its right
to call for and purchase Units as provided in the Partnership Agreement or
assigns such right to one of its affiliates or to the Partnership.
(vi) Any agreements between the Partnership and a General Partner and its
affiliates will not grant to the holders of Common Units, separate and apart
from the Partnership, the right to enforce the obligations of such General
Partner and its affiliates in favor of the Partnership. Therefore, the
Managing General Partner, in its capacity as a general partner of the
Partnership, will be primarily responsible for enforcing such obligations.
(vii) The General Partners and their affiliates are restricted from
engaging in any business activities in the timber industry that are in
competition with the Partnership. Notwithstanding the foregoing, Fremont,
its affiliate Sequoia Ventures Inc. and their subsidiaries may compete with
the Partnership under certain circumstances described in "Conflicts of
Interest and Fiduciary Responsibility -- Conflicts of Interest -- Affiliates
of the General Partners May Compete with the Partnership." There can be no
assurance that there will not be competition between the Partnership and
Fremont, Sequoia or their subsidiaries.
THE PARTNERSHIP AGREEMENT MODIFIES THE FIDUCIARY DUTIES OF THE GENERAL
PARTNERS. Certain provisions of the Partnership Agreement contain exculpatory
language purporting to limit the liability of the General Partners to the
Partnership and the holders of Common Units. For example, the Partnership
Agreement provides as follows: (i) borrowings by the Partnership or the approval
thereof by the Managing General Partner shall not constitute a breach of any
duty of the Managing General Partner to the Partnership or the Unitholders
whether or not the purpose or effect thereof is to permit distributions on the
Units or to enable the Managing General Partner to receive incentive
distributions; (ii) any actions taken by the Managing General Partner consistent
with the standards of reasonable discretion set forth in the definition of
Available Cash and Cash from Operations will be deemed not to constitute a
breach of any duty of the Managing General Partner to the Partnership or the
Unitholders; and (iii) in the absence of bad faith by the Managing General
Partner, the resolution of any conflict of interest by the Managing General
Partner will not constitute a breach of the Partnership Agreement or a breach of
any standard of care or duty. See "Conflicts of Interest and Fiduciary
Responsibility -- Conflicts of Interest." The General Partners will not be in
breach of their obligations under the Partnership Agreement or their duties to
the Partnership or the Unitholders if the resolution of such conflict is fair
and reasonable to the Partnership, and any resolution will conclusively be
deemed to be fair and reasonable to the Partnership if such resolution is (i)
approved by the Audit Committee, (ii) on terms no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties or (iii) is fair to the Partnership, taking into account the
totality of the relationship between the parties involved (including other
transactions that
26
<PAGE>
may be particularly favorable or advantageous to the Partnership). In resolving
such conflict, the Managing General Partner may (unless the resolution is
specifically provided for in the Partnership Agreement) consider the relative
interests of the parties involved in such conflict or affected by such action,
any customary or accepted industry practices or historical dealings with a
particular person or entity and, if applicable, generally accepted accounting
practices or principles and such other factors as it deems relevant. Thus,
unlike the strict duty of a fiduciary who must act solely in the best interests
of his beneficiary, the Partnership Agreement permits the Managing General
Partner to consider the interests of all parties to a conflict of interest,
including the interests of the General Partners. In connection with the
resolution of any conflict that arises, unless the Managing General Partner has
acted in bad faith, the action taken by the Managing General Partner will not
constitute a breach of the Partnership Agreement, any other agreement or any
standard of care or duty imposed by the Delaware Act (as defined in the
Glossary) or other applicable law. The Partnership Agreement also provides that
in certain circumstances the Managing General Partner may act in its sole
discretion, in good faith or pursuant to other appropriate standards. See
"Conflicts of Interest and Fiduciary Responsibility."
TAX CONSEQUENCES
For a general discussion of the expected federal income tax consequences of
owning and disposing of Units, see "Tax Considerations."
TAX TREATMENT IS DEPENDENT ON PARTNERSHIP STATUS. The availability to a
holder of Common Units of the federal income tax benefits of an investment in
the Partnership depends, in large part, on the classification of the Partnership
as a partnership for federal income tax purposes. Based on certain
representations made by the General Partners, Andrews & Kurth L.L.P., special
counsel to the Partnership ("Counsel"), is of the opinion that, under current
law, the Partnership is classified as a partnership for federal income tax
purposes. However, except as described in "Tax Considerations," no ruling from
the IRS as to such status has been or will be requested or received, and the
opinion of Counsel is not binding on the IRS. Moreover, in order for the
Partnership to continue to be classified as a partnership for federal income tax
purposes, at least 90% of the Partnership's gross income for each taxable year
must consist of qualifying income. See "Tax Considerations -- Tax Consequences
of Unit Ownership -- Partnership Status."
If the Partnership were classified as an association taxable as a
corporation for federal income tax purposes, the Partnership would pay tax on
its income at corporate rates, distributions would generally be taxed to the
holders of Common Units as corporate distributions, and no income, gains, losses
or deductions would flow through to the holders of Common Units. Because a tax
would be imposed upon the Partnership as an entity, the cash available for
distribution to the holders of Common Units would be substantially reduced.
Treatment of the Partnership as an association taxable as a corporation or
otherwise as a taxable entity would result in a material reduction in the
anticipated cash flow and after-tax return to the holders of Common Units and
thus would likely result in a substantial reduction in the value of the Common
Units. See "Tax Considerations -- Tax Consequences of Unit Ownership --
Partnership Status."
There can be no assurance that the law will not be changed so as to cause
the Partnership to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level taxation.
The Partnership Agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects the Partnership to taxation as
a corporation or otherwise subjects the Partnership to taxation as a corporation
for federal, state or local income tax purposes, certain provisions of the
Partnership Agreement relating to the Minimum Quarterly Distribution and the
Target Distributions will be subject to change, including a decrease in the
amounts thereof to reflect the impact of such law on the Partnership. See "Cash
Distribution Policy -- Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
NO IRS RULING WITH RESPECT TO TAX CONSEQUENCES. No ruling has been
requested or received from the IRS with respect to classification of the
Partnership as a partnership for federal income tax
27
<PAGE>
purposes or any other matter affecting the Partnership except as described in
"Tax Considerations." Accordingly, the IRS may adopt positions that differ from
Counsel's conclusions expressed herein. It may be necessary to resort to
administrative or judicial proceedings in an effort to sustain some or all of
Counsel's conclusions, and some or all of such conclusions ultimately may not be
sustained. The costs of any such proceeding will be borne directly or indirectly
by the holders of Common Units and the General Partners.
PASSIVE LOSS RULES/LIMITATIONS ON PASSIVE INCOME GENERATORS. In the case of
taxpayers subject to the passive loss rules (generally, individuals and closely
held corporations), losses generated by the Partnership, if any, will only be
available to offset future income generated by the Partnership and cannot be
used to offset income from other activities, including passive activities or
investments. Unused passive losses may be deducted when the Unitholder disposes
of all of his Units in a fully taxable transaction with an unrelated party. Net
income from the Partnership (other than certain portfolio income) may be offset
by unused Partnership losses carried over from prior years, but not by losses
from other passive activities, including losses from other publicly traded
partnerships. See "Tax Considerations -- Tax Consequences of Unit Ownership --
Limitations on Deductibility of Partnership Losses."
TAX LIABILITY EXCEEDING CASH DISTRIBUTIONS OR PROCEEDS FROM DISPOSITIONS OF
COMMON UNITS. A holder of Common Units will be required to pay federal income
taxes and, in certain cases, state and local income taxes on his allocable share
of the Partnership's income, whether or not he receives cash distributions from
the Partnership. No assurance can be given that a Unitholder will receive cash
distributions from the Partnership equal to his allocable share of taxable
income of the Partnership or even the tax liability to him relating to that
income. Further, a holder of Common Units may incur a tax liability, in excess
of the amount of cash received, upon the sale of his Common Units. See "Tax
Considerations -- Other Tax Considerations" for a discussion of certain state
and local tax considerations that may be relevant to prospective Unitholders.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS. An investment in Common Units by certain tax-exempt organizations
(including individual retirement accounts and other retirement plans), regulated
investment companies and foreign persons raises issues unique to such persons.
For example, virtually all of the taxable income derived from the ownership of a
Unit by organizations exempt from federal income tax will be unrelated business
taxable income and thus may be taxable to such a Unitholder. See "Tax
Considerations -- Uniformity of Units -- Tax-Exempt Organizations and Certain
Other Investors."
TAX SHELTER REGISTRATION; POTENTIAL IRS AUDIT. The Partnership has been
registered with the IRS as a "tax shelter." No assurance can be given that the
Partnership will not be audited by the IRS or that tax adjustments will not be
made. The rights of a partner owning less than a 1% profits interest in the
Partnership to participate in the federal income tax audit process are very
limited. Further, any adjustments in the Partnership's returns will lead to
adjustments in the partners' returns and may lead to audits of partners' returns
and adjustments of items unrelated to the Partnership. Each partner would bear
the cost of any expenses incurred in connection with an examination of his
personal tax return.
PROPOSED CHANGES IN FEDERAL INCOME TAX LAWS. Legislation passed by Congress
in 1995 (the "1995 Proposed Legislation") as part of the Revenue Reconciliation
Act of 1995 would have altered the tax reporting system and the deficiency
collection system applicable to large partnerships (generally defined as
electing partnerships with more than 100 partners) such as the Partnership and
would have made certain additional changes to the treatment of large
partnerships. The 1995 Proposed Legislation was generally intended to simplify
the administration of the tax rules governing large partnerships. President
Clinton vetoed the 1995 Proposed Legislation on December 6, 1995. See "Tax
Considerations -- Tax Consequences of Unit Ownership."
The proposed Revenue Reconciliation Act of 1996 (the "1996 Proposed
Legislation") currently pending in Congress would affect the taxation of certain
financial products, including partnership
28
<PAGE>
interests. The 1996 Proposed Legislation would treat a taxpayer as having sold
an "appreciated" partnership interest (one in which gain would be recognized if
such interest were sold) if the taxpayer or related persons enters into one or
more positions with respect to the same or substantially identical property
which, for some period, substantially eliminates both the risk of loss and
opportunity for gain on the appreciated financial position (including selling
"short against the box" transactions). See "Tax Considerations -- Disposition of
Common Units."
As of the date of this Prospectus, it is not possible to predict whether any
of the changes set forth in the 1995 Proposed Legislation or the 1996 Proposed
Legislation or any other changes in the federal income tax laws that would
impact the Partnership and the Common Unitholders will ultimately be enacted or,
if enacted, what form they will take, what the effective dates will be, and
what, if any, transition rules will be provided.
UNIFORMITY OF COMMON UNITS AND NONCONFORMING DEPLETION, DEPRECIATION AND
AMORTIZATION CONVENTIONS. Because the Partnership cannot match transferors and
transferees of Units, uniformity of the economic and tax characteristics of the
Common Units to a purchaser of Common Units must be maintained. To maintain
uniformity and for other reasons, the Partnership has adopted and will adopt
certain depletion, depreciation and amortization conventions that may not
conform with all aspects of certain proposed and final Treasury Regulations.
Although these conventions are commonly used by publicly traded partnerships,
the IRS may challenge those conventions and, if such a challenge were sustained,
the uniformity of Common Units could be affected. Non-uniformity could adversely
affect the amount of tax depletion, depreciation and amortization available to a
purchaser of Common Units and could have a negative impact on the value of the
Common Units. See "Tax Considerations -- Uniformity of Units."
STATE, LOCAL AND OTHER TAX CONSIDERATIONS. In addition to federal income
taxes, Unitholders will generally be subject to other taxes, such as state and
local taxes, unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed by the various jurisdictions in which the
Partnership does business or owns property. A Unitholder may be required to file
state income tax returns and to pay state income taxes in some or all of such
jurisdictions and may be subject to penalties for failure to comply with those
requirements. It is the responsibility of each Unitholder to file all state and
local, as well as federal, tax returns that may be required of such Unitholder.
Counsel has not rendered an opinion on the state or local tax consequences of an
investment in the Partnership. See "Tax Considerations -- State, Local and Other
Tax Considerations."
PARTNERSHIP TAX INFORMATION AND AUDITS. The Partnership furnishes each
holder of Common Units with a Schedule K-1 that sets forth his allocable share
of income, gains, losses and deductions. In preparing these schedules, the
Partnership will use various accounting and reporting conventions and adopt
various depletion, depreciation and amortization methods. There is no assurance
that these schedules will yield a result that conforms to statutory or
regulatory requirements or to administrative pronouncements of the IRS. Further,
the Partnership's tax return may be audited, and any such audit could result in
an audit of a partner's individual tax return as well as increased liabilities
for taxes because of adjustments resulting from the audit.
29
<PAGE>
USE OF PROCEEDS
The net proceeds to the Partnership from the sale of Common Units offered
hereby are estimated to be approximately $132.5 million, after deducting
underwriting discounts and commissions and estimated offering expenses. The
following table sets forth the sources and uses of funds from the offering and
related transactions, in thousands:
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Gross proceeds received by the Partnership from this offering.................. $ 141,651
General partner contributions.................................................. 2,757
Borrowings under the Acquisition Facility...................................... 118,775
---------
Total.......................................................................... $ 263,183
---------
---------
USES OF FUNDS:
Repayment of Cavenham Debt (1)................................................. $ 250,000
Payment of fees and expenses related to this offering (including underwriting
discounts and commissions).................................................... 9,083
SAU redemption (2)............................................................. 4,100
---------
Total.......................................................................... $ 263,183
---------
---------
</TABLE>
- ------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Partnership Indebtedness" for a description of the Cavenham
Debt. The Cavenham Debt bears interest at either (i) one, two, three or six
month LIBOR plus 2.5%, or (ii) the higher of (a) Bank of America's reference
rate or (b) the federal funds rate plus 0.5%, plus 1.5%. As of July 1, 1996,
the interest rate on the Cavenham Debt was approximately 8.0% per annum. The
final maturity date of the Cavenham Debt is June 30, 2002. In connection
with the placement and closing of the Cavenham Debt, the Partnership
incurred fees and expenses totalling approximately $5.0 million.
(2) See "Cash Distribution Policy" for a description of the terms of the SAU
redemption.
The net proceeds from any exercise of the Underwriters' over-allotment
option ($27.4 million if exercised in full) will be used to repay indebtedness
of the Partnership. The Partnership will not receive any portion of the net
proceeds from the sale of Common Units by the Selling Unitholders.
30
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Partnership at
March 31, 1996 and the adjusted capitalization of the Partnership after giving
effect to (i) the Cavenham Acquisition and (ii) the sale by the Partnership of
the Common Units offered hereby, the redemption of the SAUs and the borrowings
under the Acquisition Facility. The table should be read in conjunction with the
historical consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
(UNAUDITED, IN THOUSANDS)
----------------------------------------------------------
OFFERING AND
CAVENHAM RELATED PARTNERSHIP
HISTORICAL ACQUISITION TRANSACTIONS AS ADJUSTED
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Long-term debt:
Senior Notes.......................... $ 300,000 -- -- $300,000
Cavenham Debt......................... 40,000 $ 210,000 $ (250,000)(a) --
Acquisition Facility.................. -- -- 118,775 118,775
---------- ----------- ------------ -----------
Total long-term debt.................... 340,000 210,000 (131,225) 418,775
Partners' capital:
General partners...................... (204) 2,757 2,553
Limited partners...................... 101,985 128,468(b) 230,453
---------- ------------ -----------
Total partners' capital................. 101,781 131,225 233,006
---------- ----------- ------------ -----------
Total capitalization.................... $ 441,781 $ 210,000 $ -- $651,781
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
</TABLE>
- ------------------------------
(a) Reflects the payment of $205.0 million to Cavenham, $5.0 million in related
fees and expenses and $40.0 million of previously existing debt incurred to
acquire other Timberlands.
(b) Reflects the gross proceeds received by the Partnership from the sale of
Common Units in this offering ($141.7 million), reduced by fees and
expenses related to the offering ($9.1 million) and the SAU redemption
($4.1 million).
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
The Partnership's Common Units are traded principally on the New York Stock
Exchange. As of December 31, 1995, there were approximately 10,000 beneficial
owners of 12,360,439 outstanding Common Units. The Subordinated Units are not
publicly traded. As of December 31, 1995, there were five beneficial owners of
5,773,088 outstanding Subordinated Units.
Trading price data for the Common Units, as reported by the New York Stock
Exchange, and declared distribution information for 1994, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
CASH
DISTRIBUTION
HIGH LOW PER UNIT
--------- --------- -----------
<S> <C> <C> <C>
December 22, 1994 through December 31, 1994..................................... $ 21.63 $ 21.50 $ 0.055
Year ended December 31, 1995
First quarter................................................................. $ 21.50 $ 18.00 $ 0.51
Second quarter................................................................ 20.00 17.00 0.51
Third quarter................................................................. 21.13 19.38 0.51
Fourth quarter................................................................ 20.25 17.38 0.51
Year ending December 31, 1996
First quarter................................................................. $ 20.88 $ 18.13 $ 0.524
Second quarter................................................................ 21.19 19.63 0.524 (a)
Third quarter (through July 31, 1996)......................................... 20.25 19.00 --
</TABLE>
- ------------------------------
(a) The Partnership has declared the distribution for the quarter ended June
30, 1996, which is payable to holders of Common Units and Subordinated
Units of record on July 19, 1996.
Cash distributions, if any, are expected to be paid quarterly from Available
Cash as defined by the Partnership Agreement. In addition, the Partnership's
debt agreements have certain restrictive covenants limiting cash distribution
amounts. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Partnership Indebtedness."
31
<PAGE>
CASH DISTRIBUTION POLICY
The Partnership will distribute to its partners, on a quarterly basis, all
of its Available Cash in the manner described herein. Available Cash is defined
in the Glossary and generally means, with respect to any fiscal quarter of the
Partnership, the sum of all of the cash received by the Partnership from all
sources plus reductions to reserves less all cash disbursements of the
Partnership and additions to reserves. There can be no assurance that the
Partnership will have sufficient Available Cash with respect to any quarter to
distribute the Minimum Quarterly Distribution or any other amount to
Unitholders. A portion of the Partnership's distributions may constitute a
return of an investor's capital. The tax consequences of an investment in the
Partnership are complex. See "Tax Considerations -- Tax Consequences of Unit
Ownership -- Ratio of Taxable Income to Distributions."
The Managing General Partner's decisions regarding amounts to be placed in
or released from reserves will have a direct impact on the amount of Available
Cash because increases and decreases in reserves are taken into account in
computing Available Cash. The Managing General Partner may establish cash
reserves in such amounts as it determines in its reasonable discretion to be
necessary or appropriate (i) to provide for the proper conduct of the
Partnership's business, (ii) to provide funds for distributions to the
Unitholders and the General Partners in respect of any one or more of the next
four quarters and (iii) to comply with applicable law or any Partnership loan
agreement or other agreement.
Cash distributions will be characterized as either distributions of Cash
from Operations or distributions of Cash from Interim Capital Transactions. This
distinction affects the amounts distributed to Common Unitholders and
Subordinated Unitholders relative to the General Partners. See "-- Distributions
of Cash From Interim Capital Transactions."
Cash from Operations is defined in the Glossary and generally refers to the
cash balance of the Partnership on the date the Partnership commenced
operations, plus all cash generated by the operations of the Partnership's
business, after deducting related cash expenditures, reserves, debt service and
certain other items.
Cash from Interim Capital Transactions is also defined in the Glossary and
will generally be generated only by borrowings (other than for working capital
purposes), sales of debt and equity securities and sales or other dispositions
of assets for cash (other than inventory, accounts receivable and other assets
disposed of in the ordinary course of business). To date the Partnership has not
generated any Cash from Interim Capital Transactions.
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Partnership is Cash from Operations or Cash from Interim
Capital Transactions, all Available Cash distributed by the Partnership from any
source will be treated as Cash from Operations until the sum of all Available
Cash distributed as Cash from Operations equals the cumulative amount of Cash
from Operations actually generated from the date the Partnership commenced
operations through the end of the quarter prior to such distribution. Any excess
Available Cash (irrespective of its source) will be deemed to be Cash from
Interim Capital Transactions and distributed accordingly.
If Cash from Interim Capital Transactions is distributed in respect of each
Common Unit (including the Common Units offered hereby) and Subordinated Unit in
an aggregate amount per Unit equal to the initial public offering price of the
Common Units ($21.50, the "Initial Unit Price"), plus any arrearages with
respect to the Common Units, the distinction between Cash from Operations and
Cash from Interim Capital Transactions will cease, and both types of Available
Cash will be treated as Cash from Operations. The Managing General Partner does
not anticipate that there will be significant amounts of Cash from Interim
Capital Transactions generated.
The Subordinated Units constitute a separate class of interests in the
Partnership, and the rights of holders of such interests to participate in
distributions to limited partners differ from the rights of the holders of
Common Units. For any given quarter, any Available Cash will be distributed to
the
32
<PAGE>
General Partners and to the holders of Common Units, and it may also be
distributed to the holders of Subordinated Units depending upon the amount of
Available Cash for the quarter, whether or not the Subordination Period has
ended, and other factors discussed below.
Effective upon the closing of the offering made hereby, all of the
outstanding SAUs will be redeemed from the net proceeds of this offering for an
aggregate of $4.1 million. Under the terms of the Partnership Agreement, the
SAUs were entitled to receive aggregate distributions, through the end of 1997,
of up to $80 million, subject to annual limitations, only after the Partnership
distributed to all Common Units and Subordinated Units of $0.51 per Unit with
respect to each quarter during 1995 (and the proportionate amount during 1994),
$0.524 per Unit with respect to each quarter during 1996 and $0.538 per Unit
with respect to each quarter during 1997. The SAU Amendment provides for the
redemption of the SAUs in exchange for a one-time cash payment equal to $4.1
million in the aggregate, which represents the present value of the future cash
distributions that the Managing General Partner anticipates the SAU holders
could have received from the Partnership with respect to the periods ending on
or before December 31, 1997. The terms of the SAU Amendment were proposed by the
Managing General Partner and approved by an independent committee of the Board
of Control and by the holders of the SAUs. The SAU holders received a fairness
opinion from a financial advisor that the SAU Amendment was fair to the SAU
holders from a financial point of view. Dillon, Read & Co. Inc., as a financial
advisor to the Partnership, has delivered its opinion that, from a financial
point of view, the SAU Amendment will not adversely affect the limited partners
in any material respect, which under the Partnership Agreement is the requisite
standard for amending the Partnership Agreement without the approval of the
holders of Common Units. Upon redemption, the SAUs will cease to exist and any
Partnership cash that would have been available for distribution to the holders
of SAUs will be available for distribution to the Partners as provided in the
Partnership Agreement.
The discussion below indicates the percentages of cash distributions
required to be made to the General Partners and the Common Unitholders and the
circumstances under which holders of Subordinated Units are entitled to cash
distributions and the amounts thereof. In the following general discussion of
how Available Cash is distributed, references to Available Cash, unless
otherwise stated, mean Available Cash that constitutes Cash from Operations.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
fiscal quarter of the Partnership prior to dissolution of the Partnership in an
amount equal to 100% of its Available Cash for such quarter. The Managing
General Partner has, and expects to, make distributions of all Available Cash
within 45 days after the end of each fiscal quarter ending March 31, June 30,
September 30 and December 31, to holders of record on the applicable record
date, which will generally be between 30 and 35 days after the end of such
quarter. The first distribution on the Common Units purchased in this offering
will be paid with respect to the quarter ending September 30, 1996 on or about
November 14, 1996 to holders of record on or about November 1, 1996. The Minimum
Quarterly Distribution and each of the Target Distribution levels are subject to
certain adjustments as described below under "-- Distributions of Cash from
Interim Capital Transactions" and "-- Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels."
The references below to the 2% of Available Cash constituting Cash from
Operations distributed to the General Partners are references to the amount of
the General Partners' percentage interest in distributions from the Partnership
and the Operating Partnership on a combined basis. The Managing General Partner
owns a .99% general partner interest in the Partnership and a 1.0101% general
partner interest in the Operating Partnership, and the Special General Partner
owns a .01% general partner interest in the Partnership. Other references in
this Prospectus to the General Partners' 2% interest or to distributions of 2%
of Available Cash to the General Partners are also references to the General
Partners' combined percentage interest in the Partnership and the Operating
Partnership.
33
<PAGE>
DISTRIBUTIONS OF CASH FROM OPERATIONS DURING THE SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash constituting Cash from
Operations with respect to any quarter during 1996 and 1997 will be made in the
following manner:
FIRST, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, pro rata, until there has been distributed in respect of each
Common Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
SECOND, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, pro rata, until there has been distributed in respect of each
Common Unit an amount equal to any cumulative Common Unit Arrearages with
respect to any prior quarter;
THIRD, 98% to the Subordinated Unitholders, pro rata, and 2% to the General
Partners, pro rata, until there has been distributed in respect of each
Subordinated Unit an amount equal to the Minimum Quarterly Distribution for
such quarter;
FOURTH, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, pro rata, until there has been distributed in respect of each
Common Unit (in addition to any distribution to Common Unitholders with
respect to Common Unit Arrearages) (i) with respect to any quarter in 1996,
an amount equal to the First Target Distribution and (ii) with respect to
any quarter in 1997, an amount equal to the Second Target Distribution;
FIFTH, 98% to the Subordinated Unitholders, pro rata, and 2% to the General
Partners, pro rata, until there has been distributed in respect of each
Subordinated Unit (i) with respect to any quarter in 1996, an amount equal
to the First Target Distribution and (ii) with respect to any quarter in
1997, an amount equal to the Second Target Distribution; and
SIXTH, 100% to the Common Unitholders, the Subordinated Unitholders and the
General Partners in proportion to the total amount of Available Cash
constituting Cash from Operations previously distributed to such class of
partner, as specified in clauses FIRST through FIFTH above with respect to
the current and all preceding quarters during the calendar year ending
December 31, 1996 or December 31, 1997, as the case may be.
Distributions by the Partnership of Available Cash constituting Cash from
Operations with respect to any of the four quarters in the calendar year ending
December 31, 1998 and any other subsequent quarter during the Subordination
Period, will be made in the following manner:
FIRST, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, pro rata, until there has been distributed in respect of each
Common Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
SECOND, 98% to the Common Unitholders, pro rata, and 2% to the General
Partners, pro rata, until there has been distributed in respect of each
Common Unit an amount equal to any cumulative Common Unit Arrearages with
respect to any prior quarter;
THIRD, 98% to the Subordinated Unitholders, pro rata, and 2% to the General
Partners, pro rata, until there has been distributed in respect of each
Subordinated Unit an amount equal to the Minimum Quarterly Distribution for
such quarter;
FOURTH, 98% to all Common Unitholders, pro rata, and 2% to the General
Partners, pro rata, until there has been distributed in respect of each
Common Unit (in addition to any distributions to Common Unitholders with
respect to Common Unit Arrearages) an aggregate amount equal to the Second
Target Distribution for such quarter;
FIFTH, 98% to all Subordinated Unitholders, pro rata, and 2% to the General
Partners, pro rata, until there has been distributed in respect of each
Subordinated Unit an aggregate amount equal to the Second Target
Distribution for such quarter; and
34
<PAGE>
THEREAFTER, in the manner described under "-- Incentive Distributions and
Hypothetical Annualized Yield" below.
DISTRIBUTIONS OF CASH FROM OPERATIONS AFTER THE SUBORDINATION PERIOD
The Subordination Period will continue until the Conversion Date, which will
be the first day of any quarter beginning on or after January 1, 2000 in respect
of which (a) distributions of Available Cash on all Units equaled or exceeded
the Second Target Distribution for each of the three consecutive non-overlapping
four-quarter periods immediately preceding such date and (b) there are no
arrearages on the Common Units. Notwithstanding the foregoing, 50% of the
outstanding Subordinated Units will convert into an equal number of Common Units
on the first day of any quarter beginning on or after January 1, 1999 in respect
of which (a) distributions of Available Cash on all Units equaled or exceeded
the applicable Target Distribution (the First Target Distribution with respect
to any quarter during 1996 and the Second Target Distribution with respect to
any quarter during each subsequent year) for each of the three consecutive
non-overlapping four-quarter periods immediately preceding such date and (b)
there are no arrearages on the Common Units. For purposes of the foregoing
sentences, in determining the amount of Available Cash constituting Cash from
Operations distributed in any four-quarter period, there will be excluded any
positive balance in Cash from Operations at the beginning of such four-quarter
period and any net increase in working capital borrowings in such four-quarter
period and, with respect to the third of three consecutive four-quarter periods
only, any net decrease in reserves. Upon the expiration of the Subordination
Period, the outstanding Subordinated Units will automatically convert into an
equal number of Common Units, and the Common Units will no longer accrue
distribution arrearages. In addition, if the Managing General Partner is removed
other than for cause, the Subordination Period will end and all outstanding
Subordinated Units will convert into Common Units and any existing Common Unit
Arrearages will be extinguished.
Distributions by the Partnership of Available Cash constituting Cash from
Operations with respect to any quarter after the Subordination Period will be
made in the following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General Partners, pro
rata, until there has been distributed in respect of each Unit an amount
equal to the Minimum Quarterly Distribution for such quarter; and
THEREAFTER, in the manner described under "-- Incentive Distributions and
Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTIONS AND HYPOTHETICAL ANNUALIZED YIELD
For any quarter in 1998 and thereafter for which Available Cash constituting
Cash from Operations is distributed in respect of both the Common Units and the
Subordinated Units in an amount equal to the Minimum Quarterly Distribution and,
with respect to any such quarter during the Subordination Period, Available Cash
constituting Cash from Operations has been distributed on outstanding Common
Units in such amount as may be necessary to eliminate any Common Unit
Arrearages, then any additional Available Cash constituting Cash from Operations
will be distributed among the Unitholders and the General Partners in the
following manner:
FIRST, 98% to all Unitholders, pro rata, and 2% to the General Partners, pro
rata, until the Unitholders have received (in addition to any distributions
to Common Unitholders with respect to Common Unit Arrearages for any quarter
during the Subordination Period) a total of $0.566 for such quarter in
respect of each Unit (the "Third Target Distribution");
SECOND, 85% to all Unitholders, pro rata, 2% to the General Partners, pro
rata, and 13% to the Managing General Partner, until the Unitholders have
received (in addition to any distributions to Common Unitholders with
respect to Common Unit Arrearages for any quarter during the Subordination
Period) a total of $0.679 for such quarter in respect of each Unit (the
"Fourth Target Distribution");
35
<PAGE>
THIRD, 75% to all Unitholders, pro rata, 2% to the General Partners, pro
rata, and 23% to the Managing General Partner, until the Unitholders have
received (in addition to any distributions to Common Unitholders with
respect to Common Unit Arrearages for any quarter during the Subordination
Period) a total of $0.904 for such quarter in respect of each Unit (the
"Fifth Target Distribution"); and
THEREAFTER, 50% to all Unitholders, pro rata, 2% to the General Partners,
pro rata, and 48% to the Managing General Partner.
As noted, as the amount of Available Cash constituting Cash from Operations
distributed exceeds certain Target Distribution levels, the percentage interests
of the General Partners and the Unitholders in distributions in excess of such
levels will change. The following table illustrates how the allocations of
distributions between the General Partners and the Unitholders will change based
on hypothetical distribution amounts, showing per Unit distribution amounts
equal to the Third, Fourth and Fifth Target Distributions. For purposes of the
table, the annualized percentage yield is calculated on a hypothetical basis as
the annual pretax yield on an investment in a Common Unit assuming that (i) the
Common Unit was purchased at an amount equal to $19.00 per Unit in this
offering, (ii) the Partnership issued no partnership interests other than the
General Partner interests and the Units outstanding after the closing of this
offering and (iii) the Partnership distributed each quarter during the first
year following this offering the amount set forth under the column "Quarterly
Distribution Amount." The calculations are also based on the assumption that the
quarterly distribution amounts shown do not include any Common Unit Arrearages.
The amounts set forth under "Percentage Interest in Distributions" are the
percentage interests of the General Partners and the Unitholders in any
Available Cash constituting Cash from Operations distributed up to and including
the corresponding amount in the column "Quarterly Distribution Amount," until
Available Cash distributed reaches the next Target Distribution level, if any.
<TABLE>
<CAPTION>
PERCENTAGE INTEREST IN
DISTRIBUTIONS
--------------------------
QUARTERLY DISTRIBUTION HYPOTHETICAL ANNUALIZED GENERAL
AMOUNT YIELD UNITHOLDERS PARTNERS
----------------------- --------------------------- ------------- -----------
<S> <C> <C> <C> <C>
Third Target Distribution (1)......... up to $0.566 up to 11.92% 98% 2%
Fourth Target Distribution............ $0.566 up to $0.679 11.92% up to 14.29% 85% 15%
Fifth Target Distribution............. $0.679 up to $0.904 14.29% up to 19.03% 75% 25%
Above Fifth Target Distribution....... $0.904 and above 19.03% and above 50% 50%
</TABLE>
- ------------------------
(1) The Minimum Quarterly Distribution amount is $0.51 per Unit per quarter. The
First and Second Target Distributions are $0.524 and $0.538 per Unit per
quarter, respectively. The incentive distributions to the Managing General
Partner do not commence until 1998 and then only to the extent the Third
Target Distribution is exceeded.
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions by the Partnership of Available Cash that constitutes Cash
from Interim Capital Transactions will be made in the following manner:
FIRST, 98% to the holders of Common Units and Subordinated Units, pro rata,
and 2% to the General Partners, pro rata, until the Partnership has
distributed, in respect of each Unit, during the period from December 22,
1994 through the date of distribution, Available Cash constituting Cash from
Interim Capital Transactions in an aggregate amount equal to the Initial
Unit Price ($21.50 per Unit);
SECOND, 98% to the holders of Common Units, pro rata, and 2% to the General
Partners, pro rata, until the Partnership has distributed, in respect of
each Common Unit, Available Cash constituting Cash from Interim Capital
Transactions in an aggregate amount equal to any Common Unit Arrearages; and
36
<PAGE>
THEREAFTER, all distributions of Available Cash that constitute Cash from
Interim Capital Transactions will be distributed as Available Cash
constituting Cash from Operations.
As Cash from Interim Capital Transactions is distributed, it is treated as
if it were a repayment of the Initial Unit Price. To reflect such a repayment of
the Initial Unit Price, the Minimum Quarterly Distribution and each of the
Target Distribution levels will be adjusted downward by multiplying each such
amount by a fraction, the numerator of which is the Unrecovered Initial Unit
Price immediately after giving effect to such repayment and the denominator of
which is the Unrecovered Initial Unit Price immediately prior to such repayment.
The Unrecovered Initial Unit Price for all Units, including the Common Units
offered hereby, is $21.50 per Unit (which was the initial public offering price
of the Common Units). Assuming Cash from Interim Capital Transactions of $10.75
per Unit is distributed to Unitholders (assuming no prior adjustments), then the
amount of the Minimum Quarterly Distribution and each of the Target Distribution
levels would be reduced to 50% of its initial level.
When "payback" of the Initial Unit Price has occurred, I.E., when the
Unrecovered Initial Unit Price is zero (and accrued arrearages have been paid),
then in effect the Minimum Quarterly Distribution and each of the Target
Distribution levels will have been reduced to zero. Thereafter, all
distributions of Available Cash from all sources will be treated as if they were
Cash from Operations.
Distributions of Cash from Interim Capital Transactions will not reduce the
Minimum Quarterly Distribution or Target Distribution for the quarter with
respect to which they are distributed.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
The Minimum Quarterly Distribution and each of the Target Distribution
levels will be proportionately adjusted upward or downward, as appropriate, in
the event of any combination or subdivision of Common Units (whether effected by
a distribution payable in Common Units or otherwise), but not by reason of the
issuance of additional Common Units for cash or property. For example, in the
event of a two-for-one split of the Common Units (assuming no prior
adjustments), the Minimum Quarterly Distribution and each of the Target
Distribution levels would each be reduced to 50% of its initial level.
In addition, as noted above under " -- Distributions of Cash from Interim
Capital Transactions" if a distribution is made of Available Cash constituting
Cash from Interim Capital Transactions, the Minimum Quarterly Distribution and
each of the Target Distribution levels will be adjusted in the manner described
therein.
The Minimum Quarterly Distribution and each of the Target Distribution
levels may also be adjusted if legislation is enacted or if existing law is
modified or interpreted in a manner that causes the Partnership to become
taxable as a corporation or otherwise subjects the Partnership to taxation as an
entity for federal, state or local income tax purposes. In such event, the
Minimum Quarterly Distribution and each of the Target Distribution levels would
be reduced to an amount equal to the product of (i) the Minimum Quarterly
Distribution and each of the Target Distribution levels, multiplied by (ii) one
minus the sum of (x) the maximum effective federal income tax rate to which the
Partnership is subject as an entity plus (y) any increase that results from such
legislation in the effective overall state and local income tax rate to which
the Partnership is subject as an entity for the taxable year in which such event
occurs (after taking into account the benefit of any deduction allowable for
federal income tax purposes with respect to the payment of state and local
income taxes). For example, assuming the Partnership was not previously subject
to state and local income tax, if the Partnership were to become taxable as an
entity for federal income tax purposes and the Partnership became subject to a
maximum marginal federal, and effective state and local, income tax rate of 38%,
then the Minimum Quarterly Distribution and the Target Distribution levels would
each be reduced to 62% of the amount thereof immediately prior to such
adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Partnership, assets will be sold or otherwise disposed of and the partners'
capital account balances will be adjusted to reflect any
37
<PAGE>
resulting gain or loss. The proceeds of such liquidation will, first, be applied
to the payment of creditors of the Partnership in the order of priority provided
in the Partnership Agreement and by law and, thereafter, be distributed to the
Common Unitholders, the Subordinated Unitholders (if the Subordinated Units are
outstanding at the time of liquidation) and the General Partners in accordance
with their respective capital account balances, as so adjusted.
Although operating losses are allocated to all holders of Units pro rata,
the allocations of gains and losses attributable to liquidation are intended to
entitle the holders of outstanding Common Units to a preference over the holders
of outstanding Subordinated Units upon the liquidation of the Partnership, to
the extent of the Unrecovered Initial Unit Price plus any Common Unit
Arrearages. However, no assurance can be given that the gain or loss upon
liquidation of the Partnership will be sufficient to achieve this result. The
manner of such adjustment is as provided in the Partnership Agreement.
With respect to a liquidation of the Partnership, any net gain (or
unrealized gain attributable to assets distributed in kind) will generally be
allocated to the partners as follows:
FIRST, to the General Partners and the holders of Units that have negative
balances in their capital accounts to the extent of and in proportion to
such negative balances;
SECOND, 98% to the holders of Common Units, pro rata, and 2% to the General
Partners, pro rata, until the capital account for each Common Unit is equal
to the Unrecovered Initial Unit Price in respect of such Common Unit plus
any Common Unit Arrearages (including the amount of the Minimum Quarterly
Distribution for the fiscal quarter during which dissolution of the
Partnership occurs) in respect of such Common Unit;
THIRD, 98% to the holders of Subordinated Units, pro rata, and 2% to the
General Partners, pro rata, until the capital account for each Subordinated
Unit is equal to the Unrecovered Initial Unit Price in respect of such
Subordinated Unit plus the amount of the Minimum Quarterly Distribution for
the fiscal quarter during which dissolution of the Partnership occurs;
FOURTH, 98% to all Unitholders, pro rata, and 2% to the General Partners,
pro rata, until there has been allocated an amount per Unit equal to (a) the
sum of the excess of the Third Target Distribution per Unit over the Minimum
Quarterly Distribution per Unit for each quarter during the existence of the
Partnership, less (b) the amount per Unit of any distributions of Available
Cash constituting Cash from Operations in excess of the Minimum Quarterly
Distribution per Unit that was distributed to the Unitholders for any such
quarter (the amount in this subclause (b) not to exceed the amount described
in subclause (a) of this clause FOURTH);
FIFTH, 85% to the Unitholders, pro rata, 2% to the General Partners, pro
rata, and 13% to the Managing General Partner, until there has been
allocated an amount per Unit equal to (a) the sum of the excess of the
Fourth Target Distribution per Unit over the Third Target Distribution per
Unit for each quarter during the existence of the Partnership, less (b) (i)
the amount per Unit of any distributions of Available Cash constituting Cash
from Operations in excess of the Minimum Quarterly Distribution per Unit
that was distributed to the Unitholders for any such quarter less (ii) the
amount described in subclause (b) of clause FOURTH above (the amount in this
subclause (b) not to exceed the amount described in subclause (a) of this
clause FIFTH);
SIXTH, 75% to all Unitholders, pro rata, 2% to the General Partners, pro
rata, and 23% to the Managing General Partner, until there has been
allocated an amount per Unit equal to (a) the sum of the excess of the Fifth
Target Distribution per Unit over the Fourth Target Distribution per Unit
for each quarter during the existence of the Partnership, less (b) (i) the
amount per Unit of any distributions of Available Cash constituting Cash
from Operations in excess of the Minimum Quarterly Distribution per Unit
that was distributed to the Unitholders for any such quarter less (ii) the
amounts described in subclause (b) of clause FIFTH above and subclause (b)
of clause FOURTH above (the amount in this subclause (b) not to exceed the
amount described in subclause (a) of this clause SIXTH); and
38
<PAGE>
THEREAFTER, 50% to all Unitholders, pro rata, 2% to the General Partners,
pro rata, and 48% to the Managing General Partner.
Any net loss or unrealized loss will generally be allocated to the General
Partners and the Unitholders as follows: FIRST, 98% to the Unitholders in
proportion to the positive balances in their respective capital accounts, and 2%
to the General Partners, in proportion to the positive balances in their
respective capital accounts, until the positive balances in the Common
Unitholders' respective capital accounts have been reduced to the amount of the
Unrecovered Initial Unit Price plus any arrearages; SECOND, 98% to the
Subordinated Unitholders in proportion to the positive balances in such
Subordinated Unitholders' respective capital accounts and 2% to the General
Partners, in proportion to the positive balances in their respective capital
accounts, until the positive balances in such Subordinated Unitholders'
respective capital accounts have been reduced to zero; THIRD, 98% to the Common
Unitholders in proportion to the positive balances in such Common Unitholders'
respective capital accounts and 2% to the General Partners, in proportion to the
positive balances in their respective capital accounts, until the positive
balances in such Common Unitholders' respective capital accounts have been
reduced to zero; and THEREAFTER, to the General Partners, in proportion to their
respective percentage interests.
Notwithstanding the discussion above regarding the allocation of net gains
and net losses upon dissolution of the Partnership, in certain circumstances,
items of gross income or gain will be first allocated to the Managing General
Partner in order to provide it, to the extent possible, the full amount
allocable to the Managing General Partner upon liquidation; PROVIDED, HOWEVER,
that no such allocations will be made to the Managing General Partner to the
extent that such allocations would cause the Common Unitholders to receive in
liquidation less than the Unrecovered Initial Unit Price plus the amount of any
Common Unit Arrearages.
ABILITY TO MAKE THE FIRST AND SECOND TARGET DISTRIBUTIONS
The Partnership has paid a quarterly distribution equal to the Minimum
Quarterly Distribution on all outstanding Common Units and Subordinated Units
with respect to each quarter in 1995 (and a proportionate amount thereof with
respect to the period from the inception of the Partnership on December 22, 1994
through December 31, 1994). For the quarter ended March 31, 1996, the
Partnership distributed the First Target Distribution of $0.524 per Unit. For
the quarter ended June 30, 1996, the Partnership has declared a distribution of
$0.524 per Unit. Purchasers of Common Units in this offering will not receive
this distribution.
Based on the amount of working capital that the Partnership is expected to
have at the closing of this offering, the availability of the Working Capital
Facility and the assumptions discussed below, the Partnership believes it should
have Available Cash constituting Cash from Operations sufficient to allow the
Partnership to distribute the First Target Distribution on all Units with
respect to each quarter during 1996 and the Second Target Distribution on all
Units with respect to each quarter during 1997, although no assurance can be
given in respect of such distributions. This belief is based on the
Partnership's assumptions regarding the future business prospects of the
Partnership and other assumptions that it believes are within a range of
reasonableness. Some of these assumptions are beyond the control of the
Partnership and cannot be predicted with certainty, including assumptions
concerning market and economic conditions and other factors, such as log and
lumber prices, attainment of projected timber harvest schedules, availability of
non-fee timber, export and environmental restrictions and other factors that
affect the availability of timber and the level of lumber production. If the
Partnership's assumptions, particularly with respect to prices, prove to be
incorrect, Available Cash constituting Cash from Operations could be
insufficient to permit the Partnership to make the distributions estimated as
described above. Accordingly, no assurances can be given that distributions at
those levels will be made. See "Risk Factors -- Risks Inherent in an Investment
in the Partnership -- Partnership Assumptions Concerning Future Operations May
Not Be Realized." The Partnership does not intend to update the expression of
belief set forth above.
39
<PAGE>
The Partnership's estimates of Available Cash constituting Cash from
Operations are based in part on the following specific assumptions: (i) the rate
of inflation will be 3.0% for each year; (ii) prices for logs, lumber and
plywood in 1996 will approximate 1995 prices and prices for logs and lumber will
increase by the assumed rate of inflation in 1997; (iii) the Partnership will
harvest timber in accordance with its harvest plan, which is based on
projections of demand, price, availability of timber and other factors beyond
the control of the Partnership and which contemplates the harvest of 270 MMBF in
1996 and 256 MMBF in 1997; (iv) purchases of logs from private sellers will
decrease beginning in 1996 in the Oregon and Inland Regions; (v) purchases of
logs from federal sources will be substantially reduced in the Inland Region and
will be minimal in the Oregon Region in 1996 and 1997; (vi) purchases of logs
from state sources will remain relatively constant through 1997; (vii)
manufacturing productivity will improve in 1996 and 1997 at the Prineville
Manufacturing Facility due to, among other factors, certain anticipated capital
expenditures at such facility; and (viii) capital expenditures for maintenance
will average approximately $3.0 million per year in 1996 and 1997. The
Partnership's performance for future years is difficult to predict, and the
realization of the assumptions underlying the projected performance is
uncertain.
When used in this Prospectus the words "expect," "estimate," "project" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
expected, estimated or projected.
40
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth for the periods and at the dates indicated,
selected historical financial and operating data for the Partnership and its
predecessors, on a combined historical basis. The selected historical financial
data for the three years ended December 31, 1993, 1994 and 1995 are derived from
the audited historical consolidated financial statements of the Partnership and
should be read in conjunction with such financial statements included elsewhere
in this Prospectus. The related historical consolidated financial data for the
three-month periods ended March 31, 1995 and 1996 are derived from the unaudited
historical consolidated financial statements of the Partnership included
elsewhere in the Prospectus, which in the opinion of management include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
statement of the results for the unaudited interim periods. The results for the
interim periods are not necessarily indicative of the results that can be
expected for a full year. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The comparability of results of operations among the periods presented is
affected by the acquisitions of DAW/W-I in September and October 1993, which
were accounted for under the purchase method of accounting. The results shown do
not include any information with respect to the assets acquired from Cavenham in
May 1996.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
FOR THE YEAR ENDED DECEMBER 31, ------------------------
---------------------------------------- 1995 1996
1993 (A) 1994 (A) 1995 (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues (b)............................. $ 220,586 $ 397,326 $ 383,383 $ 97,834 $ 84,555
Operating costs:
Cost of products sold (c).............. 151,379 328,882 313,490 80,995 66,882
Selling, general and administrative
expenses.............................. 10,379 21,148 21,653 5,309 5,312
------------ ------------ ------------ ----------- -----------
Operating income......................... 58,828 47,296 48,240 11,530 12,361
Interest expense......................... 14,201 23,894 31,053 7,522 8,245
Amortization of debt issuance costs...... 997 2,184 508 116 126
Other (income) expense, net.............. 3,208 (1,034) (599) (224) (174)
------------ ------------ ------------ ----------- -----------
Income before provision for income
taxes................................... 40,422 22,252 17,278 4,116 4,164
Provision for income taxes............... 1,501 2,514 -- -- --
------------ ------------ ------------ ----------- -----------
Income before extraordinary item......... 38,921 19,738 17,278 4,116 4,164
Extraordinary item -- loss on
extinguishment of debt (d).............. -- (16,178) -- -- --
------------ ------------ ------------ ----------- -----------
Net income............................... 38,921 3,560 17,278 4,116 4,164
Accretion and income relative to
mandatorily redeemable partnership
interests............................... (3,243) (8,624) -- -- --
------------ ------------ ------------ ----------- -----------
Net income (loss) allocated to
partnership and shareholders'
interests............................... $ 35,678 $ (5,064) $ 17,278 $ 4,116 $ 4,164
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Earnings per Unit (e):
Income before extraordinary item....... $ 1.07 $ 0.94 $ 0.22 $ 0.23
Extraordinary item (d)................. (0.88) -- -- --
------------ ------------ ----------- -----------
Net income per Unit.................... $ 0.19 $ 0.94 $ 0.22 $ 0.23
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
CASH FLOW AND OTHER DATA:
EBITDDA (f).............................. $ 85,852 $ 87,016 $ 83,290 $ 17,899 $ 21,414
Depletion, depreciation and amortization
(c)..................................... 31,229 40,870 34,959 6,261 9,005
Additions to timber and timberlands...... 11,230 15,794 31,211 3,988 15,766
Additions to equipment................... 1,885 14,799 10,437 3,425 2,456
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
FOR THE YEAR ENDED DECEMBER 31, ------------------------
---------------------------------------- 1995 1996
1993 (A) 1994 (A) 1995 (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA (AT PERIOD END):
<S> <C> <C> <C> <C> <C>
Working capital.......................... $ 2,291 $ 51,684 $ 66,737 $ 59,500 $ 66,025
Total assets (g)......................... 738,363 461,547 476,505 457,641 490,315
Long-term debt (g)....................... 480,362 300,000 326,000 303,000 340,000
Partners' and shareholders' equity....... 98,632 119,397 107,056 123,259 101,781
OPERATING DATA:
Fee timber harvested (MMBF).............. 152 215 202 46 75
External log sourcing (MMBF)............. 106 269 251 53 46
Lumber production (MMBF)................. 199 421 390 111 97
Plywood production (MMSF) (3/8" basis)... 45 142 113 37 12
</TABLE>
- ------------------------------
(a) Effective December 22, 1994, the Partnership completed an initial public
offering of 9,850,000 Common Units. Since fewer than 80% of the limited
partner interests were sold to the public and because the General Partners
(or their affiliates) were also the general partners of the
companies/partnerships that preceded the Partnership, the assets were not
recorded as a purchase and therefore remain at their historical cost. The
financial information for the periods prior to December 22, 1994 represents
the financial results of the Partnership's predecessors. Results of
operations for the 10-day period ended December 31, 1994 were not
significant compared to the results of the combined predecessors taken as a
whole. The operations of the Partnership per Unit for such 10-day period
have been combined with the results of the predecessors for the year ended
December 31, 1994. For additional information about the Partnership's
predecessors and the results of the Partnership for the period from
December 22, 1994 through December 31, 1994, see Note 1 of Notes to
Consolidated Financial Statements.
(b) Total revenues from Inland Region sawmills acquired in the fourth quarter
of 1993 that were closed in the first quarter of 1994 were $9.1 million in
the year ended December 31, 1993 and $13.8 million in the year ended
December 31, 1994. Total revenues from Inland Region sawmills that are or
will be closed in 1996 were $9.1 million in the quarter ended March 31,
1996, $15.2 million in the quarter ended March 31, 1995 and $48.8 million
in the year ended December 31, 1995. Total revenues from the Partnership's
plywood manufacturing facility, scheduled to be closed during the third
quarter of 1996, were $2.8 million in the quarter ended March 31, 1996,
$9.8 million in the quarter ended March 31, 1995 and $31 million in the
year ended December 31, 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."
(c) In the first quarter of 1995, the Partnership completed a periodic update
of its timber inventory system to reflect the timber it owned. The update
resulted in an increase in timber volumes, which reduced the estimated
depletion rates and decreased the depletion costs for the year ended
December 31, 1995 by $7.4 million or $0.41 per Unit. This change in
estimate had no impact on prior periods or on the Partnership's cash flow.
See Note 5 of Notes to Consolidated Financial Statements.
(d) Prior to and in conjunction with the formation of the Partnership in 1994,
borrowings of the Partnership's predecessors were refinanced and certain of
the deferred issuance costs were written off as an extraordinary, non-cash
charge.
(e) The determination of earnings per Unit for 1994 was made as if the initial
public offering had been completed on January 1, 1994.
(f) EBITDDA is defined as net income before interest, amortization of debt
issuance costs, income taxes, depreciation, depletion and amortization and
extraordinary items. EBITDDA is provided because management believes
EBITDDA provides useful information for evaluating the Partnership's
ability to make the First and Second Target Distributions. EBITDDA should
not be construed as an alternative to operating income (as an indicator of
the Partnership's operating performance) or as an alternative to cash flows
from operating activities (as a measure of liquidity).
(g) Included in total assets and long-term debt for the year ended December 31,
1993 was $220 million related to the purchase of certain timberlands in
1989. The Partnership's predecessors issued twenty-two $10 million
installment notes to the seller secured by unconditional letters of credit.
The deposited funds were restricted such that they could be used to only
repay the notes. As a result, both the assets and liabilities remained on
the predecessors' balance sheets.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Partnership was formed in 1994 to acquire, own and operate the business
and assets of its predecessors. The following discussion addresses the
consolidated results of operations of the Partnership. This discussion should be
read in conjunction with the "Selected Historical Financial and Operating Data"
and the consolidated financial statements appearing elsewhere in this
Prospectus. The results of operations for the three-month period ended March 31,
1996 are not necessarily indicative of the results to be expected for the entire
year.
The first of the Partnership's predecessors was formed in 1988 and, either
directly or through its affiliated partnerships, has completed a number of
significant timberland and other asset acquisitions since that time. In
addition, Crown Pacific historically has engaged in the sale or disposal of
timberland and other properties not integral to its forest products operations,
although such sales have been on a significantly lesser scale than its
acquisitions. As a result, and as described in greater detail below, Crown
Pacific has seen substantial growth since inception. See "Business and
Properties -- Cavenham Acquisition" and "Business and Properties -- Other Recent
Acquisitions and Dispositions."
Each acquisition by Crown Pacific has been accounted for using the purchase
method of accounting. Accordingly, the historical financial and operating data
from one period to the next are not necessarily comparable and are not
indicative of future results of operations. The following table identifies Crown
Pacific's significant acquisitions:
<TABLE>
<CAPTION>
ACQUISITION DATE SELLER CONSIDERATION
- ---------------------------------- --------------- ---------------------------------- --------------
<S> <C> <C> <C>
Central Oregon Timberlands April 1988 Diamond Group Inc./Diamond Priest $35.6 million
Lake Corporation
Prineville, Oregon sawmill November 1988 Prineville Sawmill Company, Inc. $6.3 million
Hamilton Timberlands July 1989 Scott Paper Company/Three Rivers $237.8 million
Timber Company
Central Oregon Timberlands and October 1991 Gilchrist Timber Co. $131.5 million
Gilchrist, Oregon sawmill
Central Oregon Timberlands June 1992 Pine Products Corporation $8.8 million
Eastern Washington Timberlands December 1992 Omak Wood Products, Inc. $10.1 million
Redmond, Oregon plywood and September 1993 DAW $29.4 million
remanufacturing facilities
Inland Region Timberlands and October 1993 DAW/W-I $238.0 million
sawmills
Northwest Washington, Tract 17 July 1995 Mutual of New York $18.0 million
Timberlands
Olympic Timberlands and Eastside May 1996 Cavenham Forest Industries $205.0 million
Timberlands
</TABLE>
SUPPLY AND DEMAND FACTORS
Crown Pacific's principal operations consist of the growing and harvesting
of timber, the sale of logs and the processing and sale of lumber and other wood
products. See "Business and Properties -- Overview." Results of operations are
affected by various factors, which include general industry conditions, domestic
and international prices and supply and demand for logs, lumber, and other wood
products, seasonality and competition from other supplying regions and
substitute products. Domestic demand for lumber and manufactured wood products
is primarily affected by the level of new residential construction activity. In
addition to housing starts, demand for wood products is also significantly
affected by repair and remodeling activities and industrial uses, demand for
which has historically been less cyclical. These fluctuations are reflected in
changes in prices for logs, lumber and other manufactured wood products. The
supply of logs available for purchase has been most affected
43
<PAGE>
in recent years by reductions in timber harvesting from United States federal
lands, which imposed upward pressure on prices for logs and lumber and resulted
in a number of sawmill and plywood facility closings in the Pacific Northwest.
SUPPLY. Since 1988, the supply of timber for sale to domestic wood products
manufacturing facilities has been most directly affected by the reduced
availability of federal timber. Environmental and other similar concerns and
governmental policies have substantially reduced the volume of timber under
contract to be harvested from federal lands. Federal timber under contract in
the Pacific Northwest decreased 86% from approximately 11,000 MMBF in January
1988 to 1,500 MMBF in January 1996. The resulting supply decrease caused prices
for logs and lumber to increase significantly, reaching peak levels during late
1993 and early 1994. Even though prices have declined from these record levels,
current prices still exceed pre-1993 levels. The low supply of timber from
federal lands, which is expected to continue for the foreseeable future, has
benefited forest products companies with private timber holdings such as the
Partnership through higher stumpage and log prices. Additionally, many
manufacturing facilities without a sufficient supply of fee timber were forced
to close, including three Crown Pacific sawmills that were closed promptly after
their acquisition and two others in the Inland Region that have been closed or
sold in 1996.
The following chart demonstrates the declining amount of federal timber
under contract to be harvested and the declining number of operating mills since
January 1988 in the states of Oregon and Washington.
FEDERAL TIMBER UNDER CONTRACT COMPARED WITH OPERATING MILLS
WASHINGTON AND OREGON
<TABLE>
<CAPTION>
VOLUME UNDER CONTRACT NUMBER
(MMBF) (USFS & BLM) OPERATING MILLS
----------------------- -----------------
<S> <C> <C>
Jan-88 11000 498
Jan-89 9200 471
Jan-90 6500 451
Jan-91 7500 412
Jan-92 5500 375
Jan-93 3700 349
Jan-94 2300 333
Jan-95 1600 319
Jan-96 1500 296
</TABLE>
Volume Under Contract data from Timber Data Company/USFS/BLM
Operating Mills data from Paul F. Ehinger & Associates
As a result of the declining availability of federal timber, the Partnership
has pursued and is pursuing the acquisition of additional timberlands to
increase its inventory of fee timber. During 1995 and 1994, Crown Pacific's
Timberlands provided the Oregon Manufacturing Facilities with 35% and 44%,
respectively, and the Inland Manufacturing Facilities with 40% and 34%,
respectively, of their log requirements. These percentages are expected to
increase significantly as a result of the acquisition of the Eastside
Timberlands, the closure of two Inland Region manufacturing facilities and the
plywood
44
<PAGE>
manufacturing facility and capital improvements to the Manufacturing Facilities
that are expected, through more efficient processing, to reduce log supply
requirements. The Partnership also purchases timber from numerous private
landowners, from the States of Idaho, Montana and Washington and from the Bureau
of Indian Affairs (the "BIA"). The Partnership believes that it has good
relationships with these third-party suppliers and expects that it will continue
to be able to purchase such supplies at current levels. For example, the
Partnership believes that the supply of timber from the State of Idaho will be
relatively constant as the State of Idaho uses revenues from timber sales for
school funding. In addition, many private landowners depend upon the cash flow
from regular sales of timber. As a result of the foregoing, the Partnership
believes that it will have adequate supplies of timber in the foreseeable future
for all of its remaining Manufacturing Facilities.
Historically, Canada has been a significant source of lumber for the U.S.
market. For example, during the four-year period ended December 31, 1993,
Canadian softwood lumber imports into the U.S. averaged 13,025 MMBF per year,
representing, on average, approximately 29% of U.S. softwood lumber consumption.
This increased to 16,100 MMBF (33%) in 1994 and to an historic high of 17,000
MMBF (36%) in 1995. The increase in Canadian softwood lumber imports has been
due in part to the reduced production levels of U.S. lumber manufacturers in the
Pacific Northwest (resulting from the reduced availability of timber from U.S.
federal lands), as well as to the large increase during 1995 in the price of
residual wood chips. This price increase caused Canadian lumber producers to
increase lumber production even though Canadian housing starts and Asian lumber
demand were relatively low during 1995. The combination of these factors caused
an increase in Canadian lumber imports into the U.S. in 1995, which contributed
to a decline in U.S. lumber prices. In 1996, unusually high wood chip
inventories have slowed the production of Canadian lumber and reduced its
importation in to the U.S.
In 1996, the U.S. and Canadian governments announced a five-year lumber
trade agreement effective April 1, 1996. This agreement is intended to reduce
the volume of Canadian lumber exported into the U.S. through the assessment of
an export tariff on annual lumber exports to the U.S. in excess of 14,700 MMBF
from the four major producing provinces. This 14,700 MMBF figure is
approximately 10% lower than 1995 import levels from those provinces, but still
exceeds the 1994 Canadian lumber exports to the U.S. from those provinces. A
tariff of $50 per MBF will be assessed on the first 650 MMBF of lumber exported
to the U.S. from the provinces above the 14,700 MMBF level. The tariff increases
to $100 per MBF for any exports in excess of 15,350 MMBF. The lumber trade
agreement has only recently been enacted and therefore its effect is uncertain.
However, the agreement may limit the amount of lumber imported from Canada and
could result in increased prices for logs and lumber.
DEMAND. The domestic demand for lumber and manufactured wood products is
directly affected by the level of residential construction activity. Changes in
general demographic and economic factors, including interest rates for home
mortgages and construction loans, have historically caused fluctuations in
housing starts and in turn in demand (and therefore prices) for lumber and
commodity wood products. The market for repair and remodeling activities and
industrial uses (as opposed to new construction) is also affected, although in a
less volatile manner, by changes in economic conditions. As a result of the
record prices in late 1993 and early 1994, distributors have shifted to reduced
inventory levels, maintaining only enough inventory to provide supplies
"just-in-time." The resulting decrease in demand contributed to lower prices in
1995, although the inability to replenish inventory during the recent, severe
winter contributed to increased prices in 1996.
Crown Pacific is also affected by international demand factors.
Specifically, a portion of the Partnership's revenues is derived from the sale
of logs for export, demand for which comes largely from Japan and other Asian
countries. In these markets, residential construction styles have historically
emphasized large, exposed beams and other wood surfaces of premium quality and
species. The Partnership's logs sold for export are sold to export dealers, who
take title to the logs at a United States port for resale to customers in Asian
countries. The strength of the Japanese and other Asian economies and the
relative strength of the United States dollar directly affect the demand for
exported logs from the Partnership's Washington Region Timberlands.
45
<PAGE>
In addition to being susceptible to cyclical demand factors, demand for
lumber and other wood products is seasonal. In the winter, demand for most
lumber products generally subsides, increasing in the spring as construction
activity resumes. Revenues from sales of exported logs are also seasonal,
determined in part by variations in inventory in the countries that import those
logs. Severe weather conditions, storms and natural disasters can also affect
demand.
The following table demonstrates the pricing trends for lumber manufactured
from Ponderosa pine, Douglas fir/larch and hemlock/fir, the three most
significant timber species in the Partnership's Timberlands.
SELECTED SPECIES PRICES (1)
DECEMBER 31, 1988 - JUNE 30, 1996
(AVERAGE PRICE BY MONTH)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PONDEROSA PINE HEMLOCK/FIR DOUGLAS FIR/LARCH
<S> <C> <C> <C>
Jan-89 393.54 226.01 234.76
Feb-89 419.47 235.95 239.89
Mar-89 445.30 244.52 249.49
Apr-89 459.91 257.35 258.73
May-89 458.15 257.42 268.13
Jun-89 434.50 257.35 271.35
Jul-89 419.40 260.17 275.80
Aug-89 405.47 255.51 270.72
Sep-89 401.14 249.59 262.33
Oct-89 394.59 243.77 262.26
Nov-89 389.65 236.49 247.56
Dec-89 394.29 234.00 237.45
Jan-90 399.58 235.70 242.27
Feb-90 412.31 244.24 249.76
Mar-90 424.70 252.73 257.60
Apr-90 431.04 254.35 260.02
May-90 424.56 253.55 258.27
Jun-90 393.28 246.76 244.67
Jul-90 376.91 243.12 247.47
Aug-90 370.72 233.54 240.62
Sep-90 368.95 229.10 239.27
Oct-90 370.65 215.87 226.67
Nov-90 371.05 213.36 223.82
Dec-90 384.92 211.62 222.60
Jan-91 395.74 211.99 225.59
Feb-91 401.10 207.72 220.05
Mar-91 384.31 210.12 222.65
Apr-91 381.61 220.89 230.86
May-91 398.23 244.57 253.06
Jun-91 427.34 279.87 290.28
Jul-91 462.90 285.09 294.94
Aug-91 469.14 243.80 252.53
Sep-91 470.05 239.23 252.15
Oct-91 480.11 237.32 244.60
Nov-91 494.92 234.32 242.53
Dec-91 522.77 248.10 249.47
Jan-92 552.73 256.34 259.39
Feb-92 576.73 288.00 292.60
Mar-92 593.19 312.00 303.92
Apr-92 609.77 322.47 318.39
May-92 610.41 309.93 304.41
Jun-92 575.24 293.41 290.94
Jul-92 533.68 274.89 285.97
Aug-92 502.17 261.44 279.00
Sep-92 498.26 271.57 292.30
Oct-92 506.37 268.43 286.76
Nov-92 508.91 275.18 296.06
Dec-92 546.88 300.68 320.32
Jan-93 504.81 333.05 342.93
Feb-93 676.94 389.58 390.32
Mar-93 772.07 480.40 460.71
Apr-93 813.33 486.89 481.17
May-93 760.56 421.60 441.37
Jun-93 683.57 361.40 403.55
Jul-93 619.92 327.94 383.02
Aug-93 585.53 334.07 374.94
Sep-93 613.15 372.30 403.99
Oct-93 637.65 398.77 418.28
Nov-93 648.34 414.87 424.11
Dec-93 685.32 447.62 457.78
Jan-94 727.51 472.03 483.43
Feb-94 741.51 451.98 470.05
Mar-94 730.84 458.14 466.61
Apr-94 701.71 417.66 416.90
May-94 637.48 382.94 392.87
Jun-94 636.95 416.25 418.74
Jul-94 630.75 404.38 401.52
Aug-94 609.09 411.85 403.07
Sep-94 615.80 412.12 411.50
Oct-94 631.92 373.94 384.40
Nov-94 652.29 382.14 389.39
Dec-94 668.05 373.99 383.80
Jan-95 668.31 372.48 375.30
Feb-95 668.77 381.70 373.32
Mar-95 658.88 375.22 376.01
Apr-95 643.66 354.86 361.91
May-95 626.91 345.72 354.49
Jun-95 607.49 324.16 334.35
Jul-95 572.73 339.15 347.28
Aug-95 568.45 351.66 360.65
Sep-95 563.86 373.85 381.56
Oct-95 554.15 382.73 376.42
Nov-95 532.21 338.79 356.74
Dec-95 533.57 322.98 355.88
Jan-96 535.91 320.64 354.72
Feb-96 534.71 329.48 362.31
Mar-96 535.52 344.85 372.78
Apr-96 544.01 361.48 380.87
May-96 554.80 387.37 404.21
Jun-96 584.51 407.86 425.94
</TABLE>
(1) Source: Western Wood Products Association.
RESULTS OF OPERATIONS
The Partnership's predecessors were formed as a result of a series of
acquisitions, either directly or through affiliated partnerships, beginning in
1988. Accordingly, the historical financial and operating data from one period
to the next are not necessarily comparable and are not indicative of future
results of operations. The largest of these acquisitions since January 1, 1993
occurred in September and October 1993, with the acquisition of the Timberlands
and Manufacturing Facilities in the Inland Region. In addition, the
Partnership's predecessors engaged in the sale or disposal of timberlands and
other properties not integral to their forest products operations, although such
sales were on a significantly lesser scale than their acquisitions. The
acquisitions are listed and discussed under " -- General," "Business and
Properties -- Overview," "-- Cavenham Acquisition," and "-- Other Recent
Acquisitions and Dispositions."
RECENT DEVELOPMENTS. On July 10, 1996, the Partnership reported its results
of operations for the quarter ended June 30, 1996. Net income for the quarter
was approximately $4.4 million on revenues of approximately $96.1 million,
compared to approximately $4.2 million on revenues of approximately $88.7
million for the 1995 second quarter. The increased revenues in the second
quarter of 1996 were primarily attributable to improving lumber prices and to
higher log sales volumes resulting from the Cavenham Acquisition. In addition,
second quarter 1995 sales were lower due to a labor strike at the Thompson
Falls, Montana sawmill and the Redmond, Oregon plywood facility.
46
<PAGE>
During the quarter ended June 30, 1996, the Partnership completed the sale
of the sawmill at Thompson Falls and permanently closed the sawmill at Albeni
Falls, Idaho. These two Inland Region sawmills could not be supplied with
competitively priced externally purchased logs. The Managing General Partner has
also decided to close the plywood facility during the third quarter of 1996.
This decision was based upon a sharp decline in plywood prices, which resulted
from increased competition from lower cost panel substitutes such as OSB. The
Partnership believes that the combination of the Cavenham Acquisition and the
facility closures will improve the Partnership's raw material self-sufficiency,
which should result in improved margins.
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995. The Partnership's
Thompson Falls, Montana sawmill effectively closed in December 1995 and was sold
in June 1996. In order to enhance the comparability of the quarters' results,
the Thompson Falls 1995 operations have been excluded from the comparison of
results of operations for the quarters ended March 31, 1995 and 1996.
Revenues totaled $84.6 million and $92.4 million for the quarters ended
March 31, 1996 and 1995, respectively. The $7.8 million decrease in revenues was
primarily caused by generally lower prices and lower sales volumes of plywood
and lumber. The lower plywood sales volume was a result of a temporary
curtailment of plywood production due to low prices. Lumber sales volumes were
5% lower in the first quarter of 1996 as compared to the prior year quarter due
to unusually severe winter weather slowing construction activity and mill
production levels. Prices were generally lower in 1996 compared to 1995 across
all product lines due primarily to lower demand caused by the severe 1996 winter
weather conditions across much of the U.S. Prices for lumber sold from the
Partnership's Oregon and Inland Manufacturing Facilities were 15% and 10% lower,
respectively, than in the first quarter of 1995. The lower prices and volumes
were offset in part by a $4.0 million timber sale in the Partnership's Inland
Region.
Cost of products sold totaled $66.9 million and $75.0 million for the
quarters ended March 31, 1996 and 1995, respectively. The $8.1 million decrease
in cost of products sold was primarily due to lower sales volumes of lumber and
plywood. Also, in response to the low product prices in the first quarter 1996,
the Partnership increased its harvest volumes of low-cost fee timber and reduced
the volume of higher cost externally purchased logs. As a result, first quarter
1996 gross margins increased to 21% from 19% in the first quarter of 1995.
Interest expense totaled $8.2 million and $7.5 million for the quarters
ended March 31, 1996 and 1995, respectively. First quarter 1996 interest expense
was $0.7 million higher than the 1995 quarter due primarily to additional
borrowings related to recent purchases of timberland and timber cutting rights.
YEARS 1993, 1994 AND 1995. As part of the Inland Region acquisition
strategy, in the first half of 1994 the Partnership's predecessors closed three
of the newly acquired Manufacturing Facilities that were not considered
strategic. The Partnership has recently closed two more of the Inland Region
manufacturing facilities and has decided to close the plywood manufacturing
facility by the end of 1996. See "Business and Properties -- Manufacturing
Facilities." Included in the results for the years ended December 31, 1994 and
1993 were $13.8 million and $9.1 million, respectively, of revenues and $1.0
million of operating losses and $1.1 million of operating income, respectively,
related to the facilities closed in 1994.
The Partnership completed its initial public offering on December 22, 1994.
As a result, the Partnership's 1994 financial results include only ten days of
operations. In order to enhance discussion of the 1994 results, the
Partnership's 1994 operations have been combined with the Partnership's
predecessors' herein. The Partnership's results for the ten days ended December
31, 1994 have been included in Note 1 to the Notes to the Consolidated Financial
Statements.
1995 COMPARED TO 1994. The Partnership's revenues totaled $383.4 million
and $397.3 million for the years ended December 31, 1995 and 1994, respectively.
The $13.9 million decrease in revenues was primarily due to lower lumber prices
and lower sales volumes of external logs and stumpage,
47
<PAGE>
offset in part by higher by-product sales and by the $10.2 million sale of
non-strategic central Washington timberland property. Lumber prices in the
Oregon and Inland Regions were 9% and 13% lower, respectively, than 1994
resulting from lower demand caused by lower residential construction activity
and increased Canadian lumber exports to the United States. External log and
stumpage sales volumes were 29% lower during 1995 as compared to 1994 primarily
due to higher harvest volumes of lower quality commercially thinned logs in
1994. In addition, fee harvest levels were 6% lower in 1995 as compared to 1994
primarily due to reductions in the commercial thinning program.
Cost of products sold totaled $313.5 million and $328.9 million for the
years ended December 31, 1995 and 1994, respectively. The $15.4 million decrease
in cost of products sold was primarily due to lower sales volumes of logs and
stumpage coupled with a lower fee harvest and lower depletion costs. Also
included in the 1995 cost of products sold was the $6.5 million cost basis
related to the sale of the non-strategic central Washington timberland property.
Selling, general and administrative costs remained flat, increasing only
2.3% in 1995 over 1994.
Interest expense totaled $31.1 million and $23.9 million for the years ended
December 31, 1995 and 1994, respectively. The higher 1995 interest expense was
primarily due to generally higher interest rates caused by a larger portion of
fixed rate borrowings in 1995 as compared to the prior year.
The Partnership's policy is to capitalize all direct costs incurred in
connection with new financing and to amortize those costs over the term of the
related loan. Deferred financing costs are written off as an extraordinary
non-cash loss upon early retirement of the debt to which such costs relate.
Amortization of debt issuance costs was $0.5 million and $2.2 million for the
years ended December 31, 1995 and 1994, respectively. The 1995 amortization
relates to financings that have occurred since the Partnership's initial public
offering. The 1994 amortization relates to the various debt financings of the
Partnership's predecessors, for which significantly higher financing costs were
incurred. The Partnership's predecessors' capitalized financing costs were
written off either prior to or simultaneous with the Partnership's initial
public offering. As a result, the Partnership and the Partnership's predecessors
reported, in 1994, a $16.2 million non-cash extraordinary charge to record the
write-off of certain debt issuance costs.
Beneficial owners of Units in the Partnership are generally considered
partners for income tax purposes. Accordingly, the Partnership pays no income
taxes and does not include a provision for income taxes in its financial
statements. Certain of the Partnership's predecessors were taxable entities and
accordingly provided for income taxes in their financial statements.
The capital structure of the Partnership's predecessors included mandatorily
redeemable preferred equity interests. During 1994, $8.6 million of accretion
and income were allocated to these interests. These interests were redeemed
simultaneously with the Partnership's initial public offering of Units.
1994 COMPARED TO 1993. Crown Pacific's revenues totaled $397.3 million and
$220.6 million for the years ended December 31, 1994 and 1993, respectively. The
$176.7 million increase in revenues was due primarily to the acquisition of
DAW/W-I in September and October 1993. This acquisition increased the number of
the Partnership's Manufacturing Facilities from two to eight (excluding the
three mills closed shortly after the acquisition) and increased the amount of
fee owned timberland by over 55%. The volume of lumber sold in 1994 increased by
113% over 1993, from 196 MMBF to 418 MMBF, as a result of the added
Manufacturing Facilities. Lumber prices decreased in 1994 as compared to 1993 by
12% and 6% for the Oregon and Inland Regions, respectively. The decrease in
lumber prices was caused primarily by lower demand that resulted from higher
interest rates that slowed residential construction activity. External log sales
revenues increased by 120% in 1994 over 1993 due primarily to the DAW/W-I
acquisition. External log sales volumes totaled 193.5 MMBF and 70 MMBF for the
years ended December 31, 1994 and 1993. respectively. Partially offsetting the
higher sales volumes of wood products and logs was a $7.6 million decrease in
sales of properties that have a higher and/or better use than for the production
of timber.
48
<PAGE>
Cost of products sold totaled $328.9 million and $151.4 million for the
years ended December 31, 1994 and 1993, respectively. The $177.5 million
increase in cost of products sold is directly attributable to the higher sales
volumes of lumber, plywood and external logs. Cost of sales as a percent of
revenues increased from 69% to 83% primarily due to the increased sales from the
Manufacturing Facilities, which generally have lower margins than sales of logs
and timber and, to a lesser extent, the decline in lumber prices. In addition,
five of the Partnership's manufacturing facilities were temporarily closed for
three to four weeks during April 1994 due to unusually low lumber prices.
A major component of the cost of products sold is a non-cash charge for
depreciation, depletion and amortization ("DD&A"). DD&A increased by 31% during
1994 as compared to 1993 primarily due to a 41% increase in the fee timber
harvest, which is directly attributed to the DAW/W-I acquisition.
Selling, general and administrative expenses increased by 104% or $10.8
million, which was primarily due to the DAW/W-I acquisition in the fall of 1993.
Interest expense during this period increased by 68%, from $14.2 million to
$23.9 million, primarily as a result of the additional indebtedness incurred to
finance the acquisition of the Inland operations and to a lesser extent because
of higher interest rates.
Amortization of debt issuance costs totaled $2.2 million during the year
ended December 31, 1994, as compared to $997,000 for the same period in 1993.
This increase resulted from the new financing incurred in connection with the
DAW/W-I acquisition. The 1994 results included a $16.2 million non-cash charge
to record the write-off of certain debt issuance costs. These costs were
previously capitalized on the Partnership's predecessors' balance sheet.
Other income and expense, net, includes certain non-recurring items which do
not directly affect Crown Pacific's ongoing operations. Other income for 1994
was $1.0 million, which compares to $3.2 million of expense in 1993. In 1993,
other income and expense included certain costs associated with the unfavorable
resolution of two stumpage contracts as well as certain nonrecurring costs
associated with upgrading the newly acquired DAW/W-I mills.
EFFECT OF INFLATION
The Partnership has experienced increased costs in recent years due to the
effect of inflation on the cost of labor, materials, supplies, energy, plant and
equipment. Certain of these increases directly affect income through increased
operating costs. During the period from 1992 through early 1994, raw material
(primarily logs) prices increased significantly and exceeded inflation.
Conversely, raw material prices have generally decreased since early 1994 and
operating costs have increased at approximately the same rate as inflation.
Improved operating efficiencies as a result of the recent capital expenditures,
however, have partially offset these cost increases.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary source of liquidity has been cash from operations.
Net cash provided by operating activities was $23.0 million, $57.5 million and
$59.7 million for 1995, 1994 and 1993, respectively. Cash from operations, which
includes changes in working capital, was $34.5 million lower in 1995 primarily
due to the unusual cash requirements related to the initial public offering on
December 22, 1994. The 1995 working capital balances are more representative of
the Partnership's normal working capital level. In addition, notes receivable
increased by $5.5 million in 1995 primarily due to the sale and exchange of
10,400 acres of timberland ("Tract 17") adjacent to its Hamilton Timberlands. At
March 31, 1996, the Partnership had $13.7 million of cash and cash equivalents.
In April 1996, the Board of Control of the Managing General Partner declared
the first quarter 1996 distribution of $0.524 per Unit. The distribution was
paid on May 14, 1996 to Unitholders of record on May 3, 1996. The Board of
Control of the Managing General Partner has declared a second quarter
distribution of $0.524 per Unit. Purchasers of Common Units in this offering
will not receive this distribution. For the year ended December 31, 1995, the
Partnership paid an aggregate distribution of $2.04 per Unit.
49
<PAGE>
Cash required to meet the Partnership's quarterly cash distributions,
capital expenditures and interest and principal payments on indebtedness will be
significant. The Managing General Partner expects that debt service will be
funded from current operations. The Partnership expects to make cash
distributions from current funds and cash generated from operations. Capital
expenditures are expected to be funded by current funds, cash generated from
operations, sales of non-strategic properties and/or bank borrowings.
Timber and timberland capital expenditures were $31.2 million, $15.8 million
and $11.2 million (which exclude the acquisition of timberlands in connection
with the purchase of the DAW/W-I business) in the years ended December 31, 1995,
1994 and 1993, respectively. The expenditures were primarily for the purchase of
timberlands, cutting contracts, construction of logging roads and reforestation.
In addition, during 1995, the Partnership completed the tax-deferred exchange
and purchase of the Tract 17 timberlands for approximately $18.0 million. The
exchange portion of the transaction was funded from the proceeds obtained from
the disposition of certain other non-strategic timberlands and the balance was
financed with borrowings under the existing credit facilities.
Property, plant and equipment capital expenditures were $10.4 million, $14.8
million, and $1.9 million for the years ended December 31, 1995, 1994, and 1993,
respectively. The expenditures were primarily made to increase the efficiency of
the Manufacturing Facilities by decreasing production costs and increasing
recovery rates and for replacing older machinery and equipment. The Partnership
funded its capital expenditures primarily from internally generated funds and
bank borrowings.
Capital expenditures were $18.2 million and $7.4 million for the quarters
ended March 31, 1996 and 1995, respectively. For the quarter ended March 31,
1996, timber and timberland capital expenditures of $15.8 million were primarily
for the purchase of additional timber cutting rights and timberlands, the
construction and repair of logging roads and the reforestation of the
Timberlands. Plant and equipment capital expenditures of $2.5 million for the
first quarter of 1996 were primarily made to increase the efficiency and
operating capacity of the Manufacturing Facilities, to purchase logging
machinery and to replace and retire older machinery and equipment. The
Partnership funded its capital expenditures from internally generated funds,
property sales, bank borrowings and cash and cash equivalents.
The Managing General Partner anticipates that the Partnership will spend
approximately $8.0 million in 1996 on the construction of logging roads,
purchase of logging equipment and reforestation of its Timberlands. In addition,
1996 capital expenditures of approximately $9.0 million are planned for the
Manufacturing Facilities. These capital expenditures will be for improvement in
product recovery, diversification of the product mix, reduction in production
costs and computer software. It is anticipated that the planned 1996 capital
expenditures will be funded primarily from current funds and cash generated from
operations. The Partnership is considering purchasing or constructing a sawmill
in northwest Washington to process non-export quality logs from the Hamilton and
Olympic Timberlands and, to a lesser extent, logs purchased from other parties
into dimension lumber.
PARTNERSHIP INDEBTEDNESS
Upon the completion of this offering and the related transactions, the
Partnership will have (i) the $125 million revolving credit Acquisition
Facility, (ii) a $40 million revolving credit facility (the "Working Capital
Facility") and (iii) an aggregate of $300 million in Senior Notes (the "Senior
Notes"). In addition, the Partnership contemplates the sale of up to an
additional $125 million in Senior Notes (the "New Senior Notes") after the
closing of this offering, the proceeds of which will be used to repay other
indebtedness. As described below, the amount available to be borrowed under the
Acquisition Facility will be affected by the amount of New Senior Notes issued.
THE ACQUISITION FACILITY. The Operating Partnership intends to enter into
the Acquisition Facility concurrently with the closing of this offering. The
facility will be provided by a syndicate of banks
50
<PAGE>
for which Bank of America National Trust and Savings Association ("Bank of
America") acts as agent. At closing, the Operating Partnership expects to borrow
$118.8 million under the Acquisition Facility in order to repay a portion of the
Cavenham Debt. See "Use of Proceeds." The following is a summary of the
anticipated terms of the agreement governing the Acquisition Facility (the
"Acquisition Facility Credit Agreement"), the form of which will be filed as an
exhibit to the Registration Statement of which this Prospectus is a part. This
summary is qualified in its entirety by reference to the Acquisition Facility
Credit Agreement.
The Acquisition Facility will be a three-year unsecured revolving credit
facility to finance the acquisition of timberlands and related assets and will
provide for maximum borrowings outstanding under this facility at any time of
$125 million. However, to the extent the Partnership elects to issue more than
$75 million in New Senior Notes and other long-term indebtedness, the maximum
amount available under the Acquisition Facility will be reduced by an equivalent
amount.
The Acquisition Facility will be nonrecourse to the Managing General Partner
and will not be subject to any cross-default in respect of indebtedness of the
Managing General Partner or its affiliates, except in the event of the
bankruptcy of the Managing General Partner. However, an event of default under
certain other agreements governing indebtedness for borrowed money of the
Operating Partnership would constitute a default under the Acquisition Facility.
At the option of the Operating Partnership, amounts borrowed under the
Acquisition Facility will bear interest at either (i) one, two, three or six
month LIBOR plus a margin ranging from 0.75% to 2.0% or (ii) the higher of (a)
Bank of America's reference rate or (b) the federal funds rate plus 0.5%, plus a
margin ranging up to 1.0%. The applicable margin will be adjusted quarterly
based on the Operating Partnership's ratio of interest-bearing debt to EBITDA
(as defined in the Acquisition Facility Credit Agreement and which includes cash
proceeds from the sale of properties), computed on a rolling historical
four-quarter basis as of the last day of the immediately preceding quarter.
Interest will be payable quarterly. The Operating Partnership will have the
option upon the expiration of the three-year revolving term to convert the
facility into a four-year term loan, in which case the principal amount then
outstanding will be amortized in 16 equal quarterly installments.
The Acquisition Facility Credit Agreement will require the Operating
Partnership to deposit the net cash proceeds from any timber harvest in excess
of:
150% of a specified base volume (250 MMBF per year) in any one year;
140% of the specified base volume over any two-year period;
130% of the specified base volume over any three-year period; or
120% of the specified base volume over any four-year period
into an escrow account for (i) repayment of senior indebtedness of the Operating
Partnership or (ii) the purchase within 180 days of additional timber or
timberlands at fair market value. The base volume will be adjusted to reflect
future acquisitions and dispositions of timberlands.
The Acquisition Facility Credit Agreement will contain covenants prohibiting
the Operating Partnership from creating, incurring, assuming, suffering to exist
or guaranteeing any indebtedness other than (i) the Senior Notes, (ii)
borrowings under the Working Capital Facility, (iii) borrowings under the
Acquisition Facility, the New Senior Notes and additional indebtedness of up to
$1.0 million if, in each case, (a) the ratio of pro forma operating cash flow of
the Operating Partnership during the four quarters immediately preceding the
date of such incurrence to the pro forma interest expense associated with all
consolidated indebtedness of the Partnership (including only actual interest
payments under the Working Capital Facility) during the period of four
consecutive quarters immediately preceding the incurrence is at least 2.50 to 1
and (b) the ratio of pro forma operating cash flow of the Operating Partnership
during the four quarters immediately preceding the date of such incurrence to
the maximum pro forma interest and principal payments due during any future
period of four consecutive quarters (prior to final maturity of the Acquisition
Facility) associated with all consolidated indebtedness of the Partnership is at
least 1.25 to 1 (including only actual interest payments
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<PAGE>
under the Working Capital Facility) and (iv) additional unsecured indebtedness
of the Partnership up to $10 million owing to a General Partner or an affiliate
of a General Partner, provided that such indebtedness is expressly subordinated
to borrowings under the Acquisition Facility.
Other covenants in the Acquisition Facility Credit Agreement will prohibit
the Operating Partnership from (i) creating, incurring or suffering to exist any
lien for borrowed money, subject to certain exceptions, including liens on
inventory and receivables to secure the Working Capital Facility in a principal
amount of up to $40 million and purchase money mortgages for up to 85% of the
purchase price of property acquired by the Operating Partnership (subject to
certain annual and cumulative limitations); (ii) making cash distributions in
any quarter in excess of Available Cash (substantially as defined under "Cash
Distribution Policy" except that the determination of Available Cash for any
quarter must include (a) a reserve equal to 25% of the principal amount to be
paid on the Senior Notes during the nine-month period following such quarter,
(b) a reserve equal to 50% of the interest to be paid on the Senior Notes on the
next interest payment date following such quarter and (c) a reserve equal to the
total unpaid accrued interest on the Acquisition Facility and the Working
Capital Facility as of the date of determination) for the preceding quarter;
(iii) making cash distributions while an event of default under the Acquisition
Facility Credit Agreement exists or if, after giving effect to such
distribution, an event of default would exist; (iv) entering into certain
transactions with affiliates; (v) purchasing or owning any securities of any
person or making loans or capital contributions to or guaranteeing the
obligations of any person, subject to certain exceptions, including investments
in the ordinary course of business in partnerships, joint ventures and
subsidiaries engaged in a permitted business; (vi) merging or consolidating
with, or liquidating, dissolving, conveying, selling, leasing or otherwise
disposing of all or substantially all of its property, assets or business as an
entirety to any other person, subject to certain exceptions; or (vii) selling or
otherwise disposing of assets (other than certain dispositions of property in
the ordinary course of business) unless the net proceeds from such sales or
dispositions in excess of $10 million per calendar year and $51.5 million over
the life of the Senior Notes are spent or committed to be expended within 180
days for productive assets in a permitted line of business or for the making of
principal payments on senior indebtedness of the Operating Partnership.
In addition to the covenants described above, an event of default will occur
under the Acquisition Facility Credit Agreement if, among other things, (i)
there is a material adverse change in, or an event occurs that would have a
material adverse effect upon, the operations, business, properties, condition
(financial or otherwise) or prospects of the Partnership or the Operating
Partnership or (ii) without the consent of lenders of 66 2/3% in principal
amount of the indebtedness outstanding under the Acquisition Facility, Peter W.
Stott at any time is not either the Chief Executive Officer (as he now serves)
or the Chairman of the Managing General Partner. Also, the Acquisition Facility
Credit Agreement will require the Operating Partnership to maintain a ratio of
cash flow to interest expense of not less than 2.5 to 1.0 and a ratio of cash
flow to debt service of not less than 1.25 to 1.0.
THE WORKING CAPITAL FACILITY. The Operating Partnership will enter into the
Working Capital Facility concurrently with the closing of this Offering. Like
the Acquisition Facility, the Working Capital Facility will be provided by a
syndicate of banks for which Bank of America acts as agent. The following is a
summary of the anticipated terms of the agreement governing the Working Capital
Facility (the "Working Capital Facility Agreement"), the form of which will be
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. This summary is qualified in its entirety by reference to the Working
Capital Facility Agreement.
The Working Capital Facility will be a three-year revolving credit facility,
will be secured by the inventory and accounts receivable of the Operating
Partnership and will provide for maximum borrowings outstanding at any time of
$40 million. The facility will be nonrecourse to the Managing General Partner
and will not be subject to any cross-default in respect of indebtedness of the
Managing General Partner or its affiliates, except in the event of the
bankruptcy of the Managing General Partner. However, an event of default under
certain other agreements governing indebtedness for borrowed money of the
Operating Partnership would constitute a default under the Working Capital
Facility Agreement.
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<PAGE>
At the option of the Operating Partnership, amounts borrowed under the
Working Capital Facility will bear interest at either (i) one, two, three, or
six month LIBOR plus a margin ranging from 0.625% to 1.75% or (ii) the higher of
(a) Bank of America's reference rate or (b) the federal funds rate plus 0.5%,
plus a margin ranging up to 0.75%. The applicable margin will be adjusted
quarterly based on the Operating Partnership's ratio of interest-bearing debt to
EBITDA (as defined in the Working Capital Facility Agreement and which includes
cash proceeds from the sale of properties) computed on a rolling historical
four-quarter basis as of the last day of the immediately preceding quarter.
Interest will be payable quarterly. There must be no amount outstanding under
the Working Capital Facility for at least 30 consecutive days not less often
than once every 12 months.
The material covenants contained in the Working Capital Facility Agreement
are expected to be substantially the same as those in the Acquisition Facility
Credit Agreement, except that the Working Capital Facility Agreement will
require the Operating Partnership to maintain a ratio of cash flow to interest
expense of not less than 1.5 to 1.0 and will not impose a requirement with
respect to the ratio of cash flow to debt service. The Working Capital Facility
Agreement will be cross-defaulted with the Acquisition Facility Credit
Agreement.
THE SENIOR NOTES. In December 1994 and March 1995, the Operating
Partnership consummated the sale of the Senior Notes. The following is a summary
of the terms of the agreements governing the Senior Notes (the "Senior Note
Agreements"), the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. This debt is unsecured and
consists of two issuances of notes, each with a maturity of 15 years (with an
average life of 10.5 years). Principal is payable in eight equal installments in
each of the years 2002 through 2009 and interest is payable semi-annually. An
aggregate $275 million of the Senior Notes have an interest rate of 9.78%; the
remaining $25 million of the Senior Notes have an interest rate of 9.60%.
The Operating Partnership is permitted to make additional prepayments of
principal of the Senior Notes at any time at a price equal to the greater of (i)
100% of the principal amount of the Senior Notes being prepaid plus accrued
interest thereon or (ii) the future debt service on such Senior Notes discounted
to present value at a rate equal to 50 basis points in excess of the rate on
U.S. Treasury securities of a maturity comparable to the remaining weighted
average life of all outstanding Senior Notes plus accrued interest.
The Senior Notes are nonrecourse to the Managing General Partner and its
affiliates and are not subject to any cross-default in respect of indebtedness
of the Managing General Partner or its affiliates, except in the event of the
bankruptcy of the Managing General Partner. However, an event of default under
certain other agreements governing indebtedness for borrowed money of the
Operating Partnership would constitute a default under the Senior Notes.
The material covenants contained in the Senior Note Agreements are
substantially the same as those described above with respect to the Acquisition
Facility Credit Agreement and Working Capital Facility Agreement, except that
(i) the Operating Partnership is permitted to incur any additional indebtedness
so long as after giving effect to any such incurrence it complies with the pro
forma cash flow to pro forma interest expense and pro forma cash flow to maximum
pro forma interest expense tests described above, (ii) the Senior Note
Agreements do not contain a default provision based upon a material adverse
change in, or the occurrence of an event that would have a material adverse
effect upon, the operations, business, properties, condition (financial or
otherwise) or prospects of the Partnership or the Operating Partnership, (iii)
the Senior Note Agreements do not contain a default provision based upon the
failure of Peter W. Stott at any time to serve as either the Chief Executive
Officer or the Chairman of the Managing General Partner and (iv) the base
harvest volume under the Senior Note Agreements (with respect to which excess
harvest proceeds must be deposited in an escrow account for application in the
manner described above) is, as a result of the Cavenham Acquisition, currently
higher than the base harvest volume under the Acquisition Facility Credit
Agreement. This increase in base harvest volume resulting from the Cavenham
Acquisition will expire in December 2002, at which time the base harvest volume
under the Senior Note Agreements will be substantially less than that under the
Acquisition Facility Credit Agreement. Thereafter, unless the Senior Note
Agreements have been amended to incorporate a base harvest volume comparable to
that
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<PAGE>
set forth in the Acquisition Facility Credit Agreement, the Senior Note
Agreements will require that the proceeds from a substantial portion of the
Partnership's planned harvest be applied either to the repayment of senior
indebtedness of the Operating Partnership or to the purchase within 180 days of
additional timber or timberlands. The Partnership intends to seek such an
amendment.
Although the Senior Note Agreements do not contain the covenants described
in the preceding paragraph, a breach of these covenants in the Acquisition
Facility Credit Agreement or Working Capital Facility Agreement that leads to an
event of default thereunder will constitute an event of default under the Senior
Note Agreements.
DEBT TO BE REPAID. In order to finance the Cavenham Acquisition and
refinance certain acquisition-related debt incurred by the Operating Partnership
during 1995 pending the closing of this offering, in May 1996 the Operating
Partnership converted its previous acquisition facility into the $250 million
term loan Cavenham Debt. The Cavenham Debt is expected to be repaid in full from
the proceeds of this offering, borrowings under the Acquisition Facility and
capital contributions from the General Partners. See "Use of Proceeds."
The Cavenham Debt, which is nonrecourse to the Managing General Partner,
consists of an acquisition loan in the principal amount of $150 million and a
bridge loan in the principal amount of $100 million. Both loans bear interest at
either (i) one, two, three or six month LIBOR plus 2.5%, or (ii) the higher of
(a) Bank of America's reference rate or (b) the federal funds rate plus 0.5%,
plus, 1.5%. Interest is payable quarterly. The acquisition loan requires
quarterly principal payments in varying amounts beginning on September 30, 1998
and matures on June 30, 2002. The bridge loan requires principal payments in the
amount of $12,500,000 each on December 31, 1996 and March 31, 1997 and
$37,500,000 each on June 30, 1997 and January 1, 1998. The credit agreement
governing the Cavenham Debt provides that an event of default will occur if the
Partnership fails to raise at least $100 million through the sale of additional
Common Units by June 30, 1997. In addition, if the Partnership has not raised at
least $125 million through the sale of additional Common Units by December 31,
1996, the interest rate margins on these loans will increase by 1.0%. As a
result of the consummation of this offering, these provisions will not be
included in the Acquisition Facility Credit Agreement.
Under the terms of the Cavenham Debt, the Operating Partnership is also
required to comply with several financial covenants that will not be imposed, or
will be modified, under the Acquisition Facility Credit Agreement. These
covenants include a requirement that the Operating Partnership maintain a ratio
of cash flow to interest expense of not less than (i) 1.5 to 1.0 through
December 31, 1996, (ii) 2.0 to 1.0 from January 1, 1997 through December 31,
1997 and (iii) 2.25 to 1.0 thereafter. In addition, the ratio of total debt to
cash flow may not exceed (i) 5.75 to 1.0 through September 30, 1996, (ii) 5.5 to
1.0 from October 1, 1996 through June 30, 1997, (iii) 4.5 to 1.0 from July 1,
1997 through December 31, 1997 and (iv) 4.25 to 1.0 thereafter. Finally, the
ratio of cash flow to the sum of distributions to limited partners plus debt
service may not be less than 1.0 to 1.0.
Concurrently with the closing of the Cavenham Debt, the Operating
Partnership restructured its $40 million working capital facility to incorporate
the financial covenants described above. This facility will be replaced with the
Working Capital Facility.
THE NEW SENIOR NOTES. Within not more than six months after the
consummation of this Offering, the Operating Partnership is expected to complete
the issuance and sale of the New Senior Notes on terms similar to those
contained in the Senior Notes (except that the timber harvest limitations are
expected to be similar to those contained in the Acquisition Facility Credit
Agreement). The net proceeds from the New Senior Notes will be applied in full
to repayment of amounts then outstanding under the Acquisition Facility. The
Managing General Partner anticipates that following this repayment, the full
amount of the Acquisition Facility (I.E., up to $125 million) will be available
to finance future acquisitions. However, there can be no assurance that the sale
of the New Senior Notes will be completed. If it is not, approximately $118.8
million will initially remain outstanding under the Acquisition Facility.
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<PAGE>
BUSINESS AND PROPERTIES
OVERVIEW
The Partnership is engaged in the growing and harvesting of timber for sale
as logs in domestic and export markets and the manufacture and sale of lumber
and other wood products. The Partnership believes that its extensive private
timber inventory, the maturity and diversity of its timber holdings, the
integration of its Timberlands and mill operations and its demonstrated success
in buying and selling forestry assets give it a competitive advantage in its
markets.
Crown Pacific has pursued a strategy of growth through strategic
acquisitions of timber and timberlands while continuing to improve the
efficiency of its existing operations. The Partnership now owns and/or controls
approximately 724,000 acres of timberland, including what the Partnership
believes is one of the largest nongovernmental holdings of mature Ponderosa pine
in the United States. Crown Pacific's timberland holdings are a significant
source of wood fiber supply for its six Manufacturing Facilities. Crown Pacific
has made substantial capital investments in its existing Manufacturing
Facilities and has closed unprofitable mills in order to lower its overall cost
of production, reduce its purchases of logs from third parties (which cost more
than logs harvested from its Timberlands) and improve the efficiency of its
manufacturing operations.
Crown Pacific's Timberlands contain a total merchantable timber inventory of
4,875 MMBF located in Oregon, Washington, Idaho and Montana:
<TABLE>
<CAPTION>
TIMBERLANDS VOLUME (MMBF) ACREAGE
- ------------------------------------------------------------------------------------- --------------- ---------
<S> <C> <C>
Central Oregon....................................................................... 726 209,000
Eastside (former Cavenham, south and northeast Oregon)............................... 474 124,000
Hamilton (northwest Washington)...................................................... 860 102,000
Olympic (former Cavenham, northwest Washington)...................................... 1,011 83,000
Inland (Idaho, east Washington and northwest Montana)................................ 1,804 206,000
------ ---------
4,875 724,000
</TABLE>
The Central Oregon and Eastside Timberlands are collectively referred to as
the "Oregon Timberlands." The Hamilton and Olympic Timberlands are collectively
referred to as the "Washington Timberlands."
One of Crown Pacific's competitive advantages is its favorable species mix
of mature timber. On its Central Oregon Timberlands, 69% of its merchantable
timber inventory consists of Ponderosa pine. The Timberlands are also comprised
principally of mature stands, with over 50% of the Partnership's merchantable
timber in the Oregon and Inland Regions being at least 80 years old. In the
Washington Region, where timber is harvested at a much earlier age because of
high growth rates, over 70% of the Partnership's merchantable timber is at least
40 years old.
TIMBERLAND MANAGEMENT. Crown Pacific actively manages its timber operations
based on biological information and other relevant data to maximize the value of
its timber assets over time. These management practices start with the
development of harvest plans for each of its tree farms that are continuously
reviewed and updated to reflect forestry considerations, market conditions,
contractual and financing obligations and regulatory limitations. Harvest plans
are designed to maximize the long-term volume of timber that can be grown
efficiently on each tract within a tree farm, which generally would call for
trees to be harvested when their growth rate has peaked. Crown Pacific utilizes
"thinning" (a process by which smaller trees are selectively removed from among
larger trees or where the number of trees of equal size on a tract is reduced)
to increase the overall growth rate of a stand of trees. Crown Pacific typically
chooses to thin its timber when the trees that are harvested produce
merchantable timber (referred to as commercial thinning), but pre-commercial
thinning is also practiced. Although the vast majority of Crown Pacific's
Timberlands regenerate naturally due to selective harvesting practices, Crown
Pacific is engaged in an active reforestation program with seedling spacing that
generally exceeds reforestation requirements applicable to the Timberlands in
order to achieve better health and growth rates and to facilitate future harvest
flexibility.
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<PAGE>
MANUFACTURING FACILITIES. Crown Pacific harvests timber from its
Timberlands in accordance with its harvest plans and either sells logs in the
export or domestic market or converts the timber to lumber or other wood
products in its six Manufacturing Facilities located in central Oregon and
northern Idaho. The Manufacturing Facilities are operated to add value to logs
harvested from Crown Pacific's Timberlands or logs acquired from third parties.
The Partnership employs modern technology in its Manufacturing Facilities to
implement its strategy of maximizing efficiency and utilization of its timber
resources, reducing labor costs and maintaining high-quality standards of
production. Since January 1, 1993, the Partnership and its predecessors have
invested more than $20 million to upgrade the Manufacturing Facilities. In
addition, approximately $9 million is anticipated to be spent during 1996 to
upgrade and reconfigure the Manufacturing Facilities to process more efficiently
the species that can be supplied from the Timberlands and from other reliable
sources in proximity to the mills. The most tangible benefits of these upgrades
are expected to be increased recovery rates (the ratio of the volume of lumber
produced at a facility to the volume of logs utilized at that facility), reduced
operating costs, increased flexibility to process the species that are most
readily available and increased product quality. There can be no assurance that
these improvements can be achieved.
In order to focus investment in its profitable Manufacturing Facilities,
Crown Pacific has acted aggressively to close unprofitable facilities. Since the
DAW/W-I acquisition in late 1993, as part of its strategy Crown Pacific has
closed five of the mills that it acquired (including the Thompson Falls, Montana
mill, which was closed in December 1995, and the Albeni Falls, Idaho mill, which
was closed in June 1996). These mills were closed primarily because of concern
over the availability of competitively priced wood fiber supply for these
facilities. In addition, the Partnership plans to close the plywood
manufacturing facility during the third quarter of 1996. This decision was based
upon a sharp decline in plywood prices, which resulted from increased
competition from lower cost panel substitutes such as OSB. These closures are
expected to enable Crown Pacific to utilize its timber resource base more
efficiently and to lower its overall cost of production.
The Partnership is considering purchasing or constructing a sawmill in
northwest Washington to process non-export quality logs from the Washington
Region into dimension lumber.
PRODUCTS. Crown Pacific manufactures a wide variety of lumber and
remanufactured wood products. Lumber produced in Crown Pacific's Oregon
Manufacturing Facilities is sold primarily to wood product remanufacturers who
produce doors, windows and other specialty wood products. Lumber produced in
Crown Pacific's Inland Manufacturing Facilities is sold principally to
distributors of dimensional or structural lumber products, which are used
primarily for residential construction. Customers of Crown Pacific's
remanufactured wood products include window and door manufacturers and retail
home centers. Crown Pacific utilizes an established distribution network for its
products, but is responding to recent industry distribution trends toward
"just-in-time" purchasing and the maintenance of lower inventories by forming
strategic alliances with wholesalers that ship directly to retail dealers. See
"-- Competition and Products."
THE TIMBERLANDS
Crown Pacific's timber holdings include the Central Oregon, Eastside,
Hamilton, Olympic and Inland Timberlands.
TIMBER INVENTORY. Based on timber cruises of the Timberlands performed by
Mason, Bruce & Girard, Inc., an independent regional timber appraisal firm
("MBG"), other timber consultants (regarding the recently acquired Eastside and
Olympic Timberlands), and Crown Pacific's own cruise personnel, the Managing
General Partner estimates that total merchantable timber on the Timberlands is
4,875 MMBF. This represents an increase in Crown Pacific's merchantable timber
inventory of more than 3,300 MMBF over the past three years, primarily as a
result of the DAW/W-I and Cavenham acquisitions. Timber cruises involve
estimates of timber volume, age class and species, and the actual amount of
Crown Pacific's inventories may vary.
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The Partnership believes it is one of the largest nongovernmental holders of
mature Ponderosa pine in the United States. The Partnership believes this is a
significant competitive advantage, as Ponderosa pine produces particularly
high-quality appearance grade lumber that can be sold at premium prices. The
highest concentration of mature timber on the Timberlands is the Ponderosa pine
located on the Central Oregon Timberlands.
Most of the timber on the Timberlands is softwood which, due to its long
fiber, strength, flexibility and other characteristics, is generally preferred
over hardwood for construction lumber and plywood. The timber is primarily
Ponderosa and lodgepole pine on the Oregon Timberlands, Douglas fir and hemlock
on the Washington Timberlands and Douglas fir, larch, white fir/hemlock, and
various pine species on the Inland Timberlands.
The following table demonstrates the estimated merchantable timber by
species within the Timberlands (including the Eastside and Olympic Timberlands)
as of January 1, 1996 (all volumes are as estimated by MBG and are based, in
some cases, on cruise information from other consultants):
MERCHANTABLE TIMBER INVENTORY BY SPECIES
(MMBF)
<TABLE>
<CAPTION>
OREGON TIMBERLANDS WASHINGTON TIMBERLANDS
------------------------------ --------------------------- INLAND
CENTRAL OREGON EASTSIDE HAMILTON OLYMPIC TIMBERLANDS
---------------- ----------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ponderosa Pine.......................... 505(a) (69%) 76 (16%) -- -- -- -- 112 (6%)
Lodgepole Pine.......................... 166 (23%) 290 (61%) -- -- -- -- 95 (5%)
Hemlock................................. -- -- -- -- 386 (45%) 714 (71%) 523(b) (29%)
Douglas Fir............................. 5 (1%) 38 (8%) 211 (24%) 99 (10%) 666(c) (37%)
True Firs............................... 41 (6%) 63 (13%) -- -- -- -- -- --
Hardwoods............................... -- -- -- -- 180 (21%) 109 (11%) 34 (2%)
Other Conifers (d)...................... 9 (1%) 7 (2%) 83 (10%) 89 (8%) 374 (21%)
------- ------ --- ------ --- ------ ----- ------ ----- ------
726 (100%) 474 (100%) 860 (100%) 1,011 (100%) 1,804 (100%)
</TABLE>
- ------------------------
(a) Includes 285 MMBF in excess of 12" DBH.
(b) Refers to true firs/hemlock.
(c) Refers to Douglas fir/larch.
(d) Includes sugar pine, spruce, cedar and Idaho white pine.
TIMBER GROWTH. Timber growth rate is an important variable for a forest
products company as it ultimately determines how much timber can be harvested
over the long term. A higher growth rate permits larger annual harvests as
replacement timber regenerates and unharvested timber grows more quickly. Growth
rates vary depending on species, location, age and forestry practice. For
example, the annual growth rate for Crown Pacific's Oregon Timberlands, which
include both young, vibrant growth lodgepole and mature Ponderosa pine, is
estimated by MBG at between 2.5% and 3.25% per annum of standing inventory. The
comparable rate for Crown Pacific's Washington Timberlands, much of which are
located in one of the most productive timber growing regions in the United
States, is estimated by MBG to be 7.0% per annum of standing inventory. The
growth rate for the Inland Region's timber holdings, which are characterized by
second growth timber dating from 1910 (the date of a major fire in the region),
is estimated by MBG at 3.25% per annum of standing inventory. The addition of
properties with high growth rates in the Olympic Timberlands has increased the
average annual growth rate of the Partnership's Timberlands.
AGE DISTRIBUTION OF MERCHANTABLE TIMBER. Crown Pacific's Timberlands are
well diversified, not only by species mix but also by age distribution. A
significant portion of the Timberlands contains mature timber that is ready to
be harvested in the next several years. Due to rain, site and soil conditions,
softwood timber in the Pacific Northwest maintains a relatively high growth rate
in early years, which permits management on a comparatively short rotation, or
harvest cycle, of 40 to 60
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years (40 to 50 years on the Washington Timberlands). The Managing General
Partner considers a 55-year rotation optimal for most of the Timberlands,
although shorter rotations are expected on the Washington Timberlands due to the
higher growth rates. Timber under 20 years of age is generally considered
pre-merchantable. The following table describes the estimated volume
distribution of merchantable timber on the Timberlands by age class (based on
information provided by MBG) as of January 1, 1996:
TIMBER VOLUME DISTRIBUTION BY AGE CLASS
(MMBF)
<TABLE>
<CAPTION>
OREGON WASHINGTON INLAND TOTAL % OF TOTAL
AGE CLASS IN YEARS TIMBERLANDS TIMBERLANDS TIMBERLANDS VOLUME VOLUME
- ----------------------------- --------------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
20 - 39...................... 51 529 90 670 14%
40 - 59...................... 249 1,142 271 1,662 34%
60 - 79...................... 270 126 541 937 19%
80 - 99...................... 205 13 631 849 17%
100+......................... 425 61 271 757 16%
</TABLE>
ACCESS. The majority of the Timberlands are accessible by a system of
low-maintenance roads. Crown Pacific uses third-party road crews to conduct
construction and maintenance on its Timberlands. Crown Pacific regularly
exchanges access easements with the United States Forest Service (the "USFS")
and cooperates with the USFS in numerous cost-sharing arrangements regarding
jointly-used roads.
REFORESTATION. Although the vast majority of the Timberlands regenerate
naturally due to Crown Pacific's selective harvesting practices, Crown Pacific
engages in an active reforestation program. Reforestation activity is greatest
on the Washington Timberlands because of the use of even age forestry, a
management approach that is necessary there (given the difficult logging
conditions, the uniform ages and species of the trees being harvested and the
more rapid growth cycles). This harvest practice is rarely utilized elsewhere in
the Timberlands. During 1995 and 1994, the Partnership and its predecessors
planted 2.5 million and 2.4 million seedlings, respectively.
Crown Pacific generally exceeds the reforestation requirements applicable to
the Timberlands. In Washington, for example, the Washington Forest Practices Act
requires approximately 110 new plantings per acre following harvesting, while
Crown Pacific typically plants 435 seedlings per acre within its Hamilton
Timberlands (one approximately every 10 feet). In other parts of the Timberlands
where the ages and species of the trees are more diverse, harvest decisions are
typically made on a tree-by-tree basis. Regeneration for the most part occurs
naturally on such tracts, but Crown Pacific will selectively replant, especially
where it is possible to improve the species mix on a tract.
Crown Pacific maintains a 40-acre seed orchard on Whidbey Island, Washington
to support its reforestation program. The seed orchard enables Crown Pacific to
produce high quality seeds for its Washington Timberlands. Seedlings from these
seeds are typically grown at cooperative nurseries, including those run by
competitors such as Weyerhaeuser Company. Seedlings are often purchased from
sources such as Weyerhaeuser Company and other forestry companies to provide for
the remainder of Crown Pacific's reproduction needs.
During 1995, Crown Pacific began the process of reclaiming forest lands
within the Central Oregon Timberlands by removing unnecessary roads that had
been constructed decades earlier. As the old roads are removed, the area is
replanted to increase the productivity of the Timberlands.
HARVEST PLANS. The Managing General Partner views the Timberlands as assets
with substantial inherent value apart from the Manufacturing Facilities and
intends to manage the Timberlands on a basis that permits regeneration of the
Timberlands over time. Crown Pacific is pursuing an active management approach,
including pre-commercial and commercial thinning, in order to enhance
productivity on a long-term basis. In comparison, certain of the previous owners
of the Timberlands did not actively manage the tree farms.
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<PAGE>
During 1995 and 1994, 85% and 69%, respectively, of the timber harvested
from the Central Oregon Timberlands was supplied to Crown Pacific's Oregon
Manufacturing Facilities. The comparable percentages for the Inland Timberlands
and the Inland Manufacturing Facilities were 71% and 66%, respectively.
Crown Pacific has harvested the Central Oregon and Inland Timberlands at
accelerated levels during the past several years in response to contractual
obligations, timber management considerations and depressed lumber prices. Crown
Pacific plans to gradually reduce the harvest on these Timberlands to more
sustainable levels beginning in 1997 in response to the expiration of the
contractual obligations, the completion of commercial thinning on certain of
these Timberlands, the availability of logs from the Eastside Timberlands to
supply the Oregon Manufacturing Facilities and the reduced consumption of logs
due to mill closures at the Inland Manufacturing Facilities. Harvest levels on
the Hamilton Timberlands are also expected to be gradually reduced. Crown
Pacific expects harvest levels to remain relatively constant on its Eastside and
Olympic Timberlands.
Harvest levels on the Mazama Tract included in the recently acquired
Eastside Timberlands are subject to limits contained in an agreement negotiated
by the prior owner with the USFS. The Partnership believes that this agreement
will not adversely affect its ability to harvest timber from the Mazama Tract in
accordance with its harvest plan.
Since harvest plans are based on projections of demand, price, availability
of timber from other sources and other factors that may be outside of Crown
Pacific's control, actual harvesting levels may vary. The Managing General
Partner believes that Crown Pacific's harvest plans are sufficiently flexible to
permit modification in response to short-term fluctuations in the markets for
logs and lumber.
CAVENHAM ACQUISITION
On May 15, 1996, the Partnership completed the purchase of approximately
207,000 acres of timberland in Washington and Oregon from Cavenham for $205
million. The Cavenham properties are located in close proximity to the
Partnership's existing operations, requiring only minimal additional
administrative costs. The Partnership believes that the Cavenham Acquisition
will benefit the Partnership in several ways. First, the majority of the logs
from the Eastside Timberlands will be processed by the Partnership's existing
Oregon Manufacturing Facilities and will be used to replace higher cost external
log purchases, which is anticipated to improve the operating margin of the
Partnership's Oregon operations. Second, the Partnership believes that the
additional volume available from the Olympic Timberlands will give the
Partnership (i) more log volume that can be sold in the export market (which has
historically commanded a premium over the domestic market), (ii) more
flexibility in harvest planning with the Partnership's Hamilton Timberlands,
which are approximately 60 miles away by water, and (iii) the ability to
negotiate more favorable terms for sales in both the export and domestic markets
from the Washington Region. Third, due to the high growth rates in the Olympic
Timberlands, the Cavenham Acquisition has increased the average growth rate of
the Partnership's Timberlands.
The acquired Timberlands contain approximately 1,485 MMBF of merchantable
timber. Approximately 1,011 MMBF of the acquired merchantable timber is located
on approximately 83,000 acres in the Olympic Timberlands, in northwest
Washington. The remaining approximately 474 MMBF is located on several tracts in
the Eastside Timberlands, in south central and northeast Oregon. In both cases,
the new properties are adjacent to or near the Partnership's existing
properties. Although the benefits expected to be derived from the Olympic
Timberlands and the Eastside Timberlands differ in certain respects, the
Managing General Partner anticipates that by applying the Partnership's active
resource management practices, including pre-commercial and commercial thinning,
to all of the acquired properties, the Partnership will enhance both near term
cash flow and the long term value of its Timberlands. In addition, the proximity
of the acquired properties to the Partnership's existing operations is expected
to provide opportunities for operating and administrative savings. The
Partnership's employee base has increased by only ten people as a result of the
Cavenham Acquisition.
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The Partnership estimates the average annual harvest from the Cavenham
Acquisition will approximate 60 MMBF (50 MMBF in 1996) from the Olympic
Timberlands and 25 MMBF from the Eastside Timberlands. The actual amount of the
harvest may vary depending on prevailing market conditions and other factors
beyond the control of the Partnership.
The primary direct cash costs incurred in the harvesting of timber are
logging (cutting of the timber), hauling (transporting the timber to a
manufacturing facility), harvest taxes and road building.
THE OLYMPIC TIMBERLANDS. The Olympic Timberlands consist of approximately
83,000 acres containing approximately 1,011 MMBF of merchantable timber
consisting of hemlock (71%), Douglas fir (10%), hardwoods (11%) and other
conifers (8%) in one of the most productive timber growth sites in the nation.
Growth rates on the Olympic Timberlands average an estimated 7% per year,
because of the combination of rainfall quantity and soil types. Timber on the
Olympic Timberlands is uneven aged (resulting in stable annual harvest levels)
and the timberlands have been well-managed by the prior owner. Elevation ranges
from 100 to 2,000 feet, but is generally below 1,300 feet, permitting the use of
economical harvest methods. Intensive silvicultural practices typically applied
on the Olympic Timberlands include reforestation, competing vegetation control
and pre-commercial and commercial thinning. Access is provided by a
well-developed road system.
The Olympic Timberlands will be managed from the Partnership's existing
offices in Hamilton, Washington, in conjunction with the Partnership's Hamilton
Timberlands. The Partnership has added only seven employees to its Washington
work force in connection with the acquisition of the Olympic Timberlands.
Initially, logs harvested from the Olympic Timberlands, like those from the
Hamilton Timberlands, will be sold to domestic and export log buyers. During the
second quarter of 1996, the Partnership's Hamilton Timberlands, which are in
close proximity to the Olympic Timberlands, received an average of $507/MBF and
$768/MBF for the sale of logs in the domestic and export markets, respectively.
The Partnership expects that the prices to be realized from the Olympic
Timberlands will be lower, on average, than prices received from the Hamilton
Timberlands primarily due to the lower value species mix on the Olympic
Timberlands. Log prices depend upon various factors including species, grade,
age, demand for finished wood products, and exchange rates. Depending on market
conditions, the Partnership estimates that between 35% and 50% of the logs
harvested from the Olympic Timberlands will be sold into export markets.
Although the level of the Partnership's export activities is dependent in part
on relative pricing in the export and domestic markets, the Partnership
anticipates that as a result of the acquisition of the Olympic Timberlands, the
Partnership will increase export volumes over those exported during 1995. This
increased presence in the export market is expected to enhance the Partnership's
bargaining position in product sales negotiations. In addition to selling logs
from the Olympic Timberlands, the Partnership is considering purchasing or
constructing a sawmill in northwest Washington to process non-export quality
logs from the Washington Region into dimension lumber.
THE EASTSIDE TIMBERLANDS. The Eastside Timberlands consist of approximately
124,000 acres containing approximately 474 MMBF of merchantable timber,
consisting of appearance-grade lodgepole pine (61%) and Ponderosa pine (16%), as
well as true firs (13%) and other conifers (10%). The Eastside Timberlands have
estimated annual growth rates of 2.5% to 3.25% and contain significant volumes
of timber greater than 80 years old. Selective harvesting with natural
reforestation is the general timber management practice on these properties.
The Eastside Timberlands are located in two discrete areas. The Mazama
Tract, an approximately 91,000 acre tract in Klamath County, Oregon, contains
approximately 289 MMBF of primarily appearance-grade pine. The northern point of
the Mazama Tract is approximately 20 miles south of the southern boundary of the
Partnership's existing Oregon tree farm and is in close proximity to the
Gilchrist sawmill which is already a producer of appearance grade pine lumber.
The remaining 33,000 acres of the Eastside Timberlands are comprised of several
smaller tracts located in Baker, Umatilla and Union Counties in northeast Oregon
which contain approximately 185 MMBF of merchantable
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timber, a high percentage of which is fir species. The Eastside Timberlands will
be managed from the Partnership's central Oregon office in Bend. The Partnership
added only three employees to its Oregon workforce in connection with the
acquisition of the Eastside Timberlands.
The primary benefit expected to be realized from the acquisition of the
Eastside Timberlands is a significant enhancement of the Partnership's ability
to supply its sawmills at Gilchrist and Prineville, Oregon from its own
Timberlands. Approximately 80% of the logs harvested from the Eastside
Timberlands will be processed by the Partnership's existing Oregon Manufacturing
Facilities and will be used to partially offset higher cost external log
purchases, which is anticipated to reduce the Partnership's overall production
cost. Pine harvested from the Mazama Tract will be processed primarily at the
Gilchrist mill, which is already a producer of industrial-grade pine lumber. The
Prineville mill, which historically has also been a processor of pine lumber,
will be reconfigured in 1996 to enable it to process both pine and fir from the
Eastside Timberlands.
OTHER RECENT ACQUISITIONS AND DISPOSITIONS
During 1995, the Partnership acquired (through purchase or exchange)
approximately 20,800 acres of timberlands containing approximately 126 MMBF of
merchantable timber for a total price of approximately $22.3 million. Of these
totals, the acquisition of the Tract 17 timberlands in northwest Washington in
July 1995 contributed about 10,400 acres containing about 73 MMBF of
merchantable timber for a price of $18 million. This property is adjacent to the
Partnership's Hamilton Timberlands. Other miscellaneous acquisitions contributed
10,400 acres with approximately 53 MMBF of merchantable timber for an aggregate
price of approximately $4.3 million. Dispositions of non-strategic timberlands
(either by sale or exchange) during 1995 totaled 44,300 acres with approximately
106 MMBF of merchantable timber for a total sales price of approximately $10.6
million. In addition to these timberland transactions, in June 1995 the
Partnership acquired a whole-log chipping facility located in La Pine, Oregon
for approximately $1.3 million. The log chipping facility enables the
Partnership to produce wood chips from dead or diseased timber and smaller logs
produced by thinning activities in the Oregon Region for sale to regional pulp
and paper mills. Also, during the first quarter of 1996, the Partnership
acquired approximately 42 MMBF of standing timber in eastern Oregon intended for
short-term harvest (over approximately the next three years).
SOURCES OF RAW MATERIAL FOR MANUFACTURING FACILITIES
Primarily as a result of environmental regulations and endangered species
concerns (see "-- Federal and State Regulation"), the Pacific Northwest timber
supply from federal lands has dramatically decreased from levels achieved during
the late 1980s. This major supply reduction has resulted in a number of regional
mill closures (including closures by the Partnership and its predecessors) in
the past several years. As a result of the reduced availability of federal
timber for harvesting, Crown Pacific believes that its supply of fee timber is a
significant competitive advantage. During 1995 and 1994, Crown Pacific's
Timberlands provided the Oregon Manufacturing Facilities with 35% and 44%,
respectively, and the Inland Manufacturing Facilities with 40% and 34%,
respectively, of their log requirements. These percentages are expected to
increase significantly as a result of the acquisition of the Eastside
Timberlands, the closure of two Inland Region manufacturing facilities and the
plywood manufacturing facility and capital improvements to the Manufacturing
Facilities that are expected, through more efficient processing, to reduce log
requirements. See "-- Manufacturing Facilities." The balance of the logs used by
the Manufacturing Facilities (approximately 157 MMBF in 1995) has come from
Crown Pacific's external log sourcing program, which draws primarily on domestic
log sources.
Crown Pacific supplements logs from its Timberlands with logs purchased from
third parties, including private landowners, the States of Idaho, Montana and
Washington, certain United States government agencies and foreign sources for
use in its Manufacturing Facilities. Crown Pacific selects logs for processing
in its Manufacturing Facilities based on species and prevailing market prices.
Crown Pacific also exchanges logs with other forest products companies in order
to obtain logs of size and species more suitable for processing by its
Manufacturing Facilities and to reduce transportation costs.
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DOMESTIC LOG SOURCES. Crown Pacific plans to continue to purchase rights to
cut timber from the States of Idaho, Montana and Washington and from the BIA.
Crown Pacific expects that the harvest volumes from these states and the BIA
will continue to be stable, as these timber programs have been operating
profitably on a sustained yield basis for a number of years. Crown Pacific has
not purchased a significant quantity of timber from the State of Oregon.
In developing plans to supply its Manufacturing Facilities, Crown Pacific
has not assumed the availability of any federal timber (other than from the
BIA). Crown Pacific did, however, purchase approximately 84 MMBF of merchantable
timber from the USFS during 1995. Approximately one-third of this volume was
attributable to purchases made pursuant to the Salvage Act, which required the
USFS and the United States Bureau of Land Management (the "BLM") to increase
their harvesting and sale of fire and insect-damaged timber in certain federal
forests. The Salvage Act, which has been challenged by environmental groups,
includes some legal protection for the salvage sales and mandates the release
for harvest of federal timber sales which had been suspended due to
environmental litigation.
As a result of the reduced availability of federal timber, demand and price
for privately owned fee timber has increased. A number of these private timber
sources are farmers or landowners who only occasionally sell their timber
commercially, but who may be motivated to do so by price levels for logs as well
as concerns over potential limitations on future harvests as a result of
environmental laws. See "-- Federal and State Regulation." Due to the
non-contiguous nature of the Inland Timberlands, there is a substantial amount
of other private timber acreage in proximity to the Inland Manufacturing
Facilities. In 1995, the Partnership was party to approximately 500 timber
purchase contracts with private landowners of which approximately 60% were
generally active. As of December 31, 1995, Crown Pacific had approximately 157
MMBF of timber under contract from external sources, including the USFS, which
is expected to be harvested over the next three years.
The acquisition of the Eastside Timberlands and the closure of the plywood
manufacturing facility are expected to reduce significantly Crown Pacific's
reliance in the Oregon Region on more expensive logs purchased from third
parties. In the Inland Region, the anticipated decrease in Crown Pacific's
overall log requirements due to mill closures and increased mill efficiencies is
also expected to result in a reduction of its non-fee timber program. These
reductions are expected to have a favorable impact on operating margins.
FOREIGN LOG SOURCES. In response to the declining availability of federal
timber, Crown Pacific has pursued foreign sources of timber, primarily from New
Zealand. During the last two years, Crown Pacific has successfully processed and
sold a small amount of New Zealand Radiata pine as an alternative to the
Ponderosa pine used in its Oregon sawmills for certain window and door markets.
Although it has gained increasing acceptance in the lumber market, Radiata pine
is considered to be a lower quality substitute for Ponderosa pine and as a
result, sells at a discount to Ponderosa pine. During 1995, Crown Pacific
imported approximately 6 MMBF of Radiata pine logs from two New Zealand
suppliers.
The importation of timber may subject Crown Pacific to certain risks not
associated with the purchase of logs from domestic sources, such as fluctuations
in exchange rates, import limitations that may be imposed by the United States
government, and potential opposition within the source country to the export of
natural resources.
COMPETITION AND PRODUCTS
The forest products market is highly competitive with respect to price and
quality of products. In addition, the Partnership expects its products to
experience increasing competition from engineered wood products and other
substitute products. The Partnership believes it is able to compete effectively
due to its extensive private timber inventory, the maturity and diversity of its
timber holdings, the integration of its timberland and mill operations and its
demonstrated success in buying and selling forestry assets, in addition to its
efficient manufacturing processes and highly motivated work force.
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LOGS. Most of the timber harvest of Crown Pacific is utilized by the
Manufacturing Facilities. The exception is timber harvested from the Washington
Timberlands. During 1995 (prior to the acquisition of the Olympic Timberlands),
approximately 28% by fee harvest volume and 40% by revenue, respectively, of the
harvest from the Hamilton Timberlands was sold for export. The remainder of the
harvest from the Hamilton Timberlands was sold to other Washington forest
products companies. Export logs have historically commanded a premium over
domestic prices for comparable logs, although this premium has recently
decreased due to reduced Asian demand. See "-- The Timberlands -- Harvest
Plans."
Crown Pacific's log sales to third parties accounted for approximately 22%
of its revenues during 1995 (prior to the acquisition of the Eastside and
Olympic Timberlands). The percentage of Crown Pacific's revenues attributable to
export log sales during this period was 3%. The volume of logs sold for export
is expected to increase as a result of the Cavenham Acquisition.
Crown Pacific competes in the domestic log market with numerous private
industrial and non-industrial land and timber owners in the northwestern United
States, many of whom have significantly greater financial resources than Crown
Pacific, as well as with the States of Idaho, Montana and Washington and United
States government agencies, principally the USFS, BLM and BIA. Competitive
factors with respect to the domestic log market generally include price, species
and grade, proximity to wood processing facilities and ability to meet delivery
requirements.
In the export log market, Crown Pacific competes with other United States
companies, as well as Chile, New Zealand, Mexico, Russia and Scandinavia, many
of which have abundant timber resources. Principal competitive factors in the
export market are quality, size and species. In Japan, for example, residential
construction styles have historically emphasized large, exposed beams and other
wood surfaces, for which premium quality species are in high demand. Timber
supplied from United States government lands is often higher quality timber due
to longer rotation cycles and may therefore command higher prices than private
timber supplies. Timber supplied from United States government lands, however,
may not be sold in the export market. As a result, federal timber from the
Pacific Northwest that is of export quality typically sells for lower prices
than private timber that can be exported.
Crown Pacific expects to realize sales and marketing benefits in the log
export market as a result of its acquisition of the Olympic Timberlands. The
additional volume available from the Olympic Timberlands should give the
Partnership more log volume that can be sold in the export market (which has
historically commanded a premium over the domestic market), more flexibility in
harvest planning with the Hamilton Timberlands and the ability to negotiate more
favorable terms for sales in both the export and domestic markets from the
Washington region.
LUMBER. Crown Pacific produces an array of lumber products at four mills in
Oregon and Idaho, including dimension lumber, studs and boards. Crown Pacific's
mills in Prineville and Gilchrist, Oregon produce industrial-grade pine lumber
(in a variety of widths), shop and various grades of common. The primary
customers of the industrial-grade pine lumber are Oregon remanufacturers who
produce windows, doors and other specialty products, including Bright Wood
Corporation, Andersen Windows, Marvin Windows, Pella Corporation and Jeld-Wen,
Inc. and Crown Pacific's own remanufacturing facility. These remanufacturers are
generally sizable and well-established companies with a substantial presence in
several markets. Crown Pacific believes the Prineville and Gilchrist mills
together are among the largest producers of shop pine lumber in the Pacific
Northwest. Due to its high quality, the majority of Crown Pacific's shop pine
lumber has historically commanded a
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premium over the price for this product published in "Random Lengths," a leading
industry publication. The Prineville mill is being modified to enable it to
produce dimension lumber products from fir species harvested on the Eastside
Timberlands, in addition to the pine it already processes. See "-- Manufacturing
Facilities."
The Manufacturing Facilities in Idaho produce 2" dimension lumber (generally
Douglas fir/larch or white fir/hemlock), 1" boards (typically various pine
species, spruce and cedar), and Ponderosa pine shop lumber. The ultimate end
uses of these products in the construction industry include stud walls, roof
trusses and joists. Other uses include decks, laminated beams and remanufactured
items. Of the 243 MMBF of lumber produced by the Inland Manufacturing Facilities
in 1995, 68% were dimension lumber products, 25% were board products and 7% was
shop lumber.
Competition in the commodity-grade lumber market in which the Inland Region
operations compete is primarily based on price, while sales in the
remanufactured lumber market are strongly influenced by product quality,
customer service and efficiency of distribution. The Partnership continues to
enjoy strong relationships with its distributors. Since 1994, however,
distribution trends in the Partnership's markets have significantly changed,
with distributors adopting "just-in-time" purchasing patterns and reducing
inventories. The Partnership has responded by pursuing strategic alliances with
wholesalers who ship directly to retail dealers.
During 1995, lumber sales, including remanufactured lumber, accounted for
approximately 55% of Crown Pacific's revenues.
REMANUFACTURED PRODUCTS. Crown Pacific's remanufacturing facility is
located in Redmond, Oregon. The remanufacturing facility takes high-quality
lumber, frequently in much smaller pieces than is readily marketable, saws the
lumber into smaller pieces to eliminate defects and glues or otherwise attaches
the resulting pieces together into defect-free strips of lumber. The resulting
product is stronger than raw lumber, is blemish-free and can be sawed or milled
into desired sizes, such as for molding and door frames.
In addition to extensive production of solid and finger joint millwork,
including veneered frames and jambs, for sale to window and door manufacturers,
the remanufacturing facility supplies high-quality edge-glued products to the
export furniture market and domestic home centers. Specialty export products
include items manufactured from alder, a hardwood also grown on certain of the
Timberlands. This facility's product line also includes machined outside door
frames with weather-stripping installed. A quality priming line provides primed
or tinted finishes for many of this facility's finger jointed moldings.
Major customers include Lacy Forest Products Company, Home Depot, Andersen
Windows and Western Building Products, Inc. Among this facility's primary
competitors are Sierra Pacific Industries, Bright Wood Corporation and Huttig
Sash and Door Company. During 1995, sales of remanufactured products were
approximately 7% of Crown Pacific's revenues.
CHIPS. All of the Manufacturing Facilities produce wood chips as a
by-product of the applicable conversion process. Chips are typically sold to
regional pulp mills and paper mills. During 1995, the Manufacturing Facilities
produced 182,300 BDU of chips which represented approximately 6% of Crown
Pacific's revenues for this period. In June 1995, Crown Pacific purchased a
whole log chipping facility in Central Oregon that produces wood chips from dead
or diseased timber and from smaller logs produced by thinning activities in the
Oregon Region.
MANUFACTURING FACILITIES
Crown Pacific's Manufacturing Facilities consist of four sawmills in Oregon
and Idaho and a remanufacturing facility and a chipping facility in Oregon.
Crown Pacific employs modern technology in its Manufacturing Facilities in order
to implement its strategy of maximizing efficiency and
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utilization of its timber resources, reducing labor costs, and maintaining
high-quality standards of production. Crown Pacific owns all of the
Manufacturing Facilities except the land on which the remanufacturing facility
is located, which is leased from a third party.
MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
YEAR ANNUAL CAPACITY
LOCATION ACQUIRED TYPE OF FACILITY (1) SPECIES PROCESSED
- ----------------------------------- ---------- --------------------- ------------------ ----------------------
<S> <C> <C> <C> <C>
Various pine and fir
species
Prineville, Oregon 1988 Sawmill 58 MMBF
Primarily Ponderosa
pine
Gilchrist, Oregon 1991 Sawmill 84 MMBF
Various pine species,
alder
Redmond, Oregon 1993 Remanufacturing 20 MMBF
Douglas fir/larch,
white fir/ hemlock
Coeur d'Alene, Idaho 1993 Sawmill 104 MMBF
Douglas fir/larch,
white fir/ hemlock,
spruce
Bonners Ferry/Colburn, Idaho 1993 Sawmill 78 MMBF
Various pine species
La Pine, Oregon 1995 Chipping 60 MBDU
</TABLE>
- ------------------------
(1) Design capacity is based on two 8-hour shifts, operating five days per week.
The Prineville mill was extensively upgraded during the 1989-1993 period,
including enhancements to the facility's planer, modifications in its headrig
combination, saw and saw kerf (saw blade widths) upgrades and improvements in
kiln controls and the log yard. Significant capital expenditures at the
Gilchrist facility have included the addition of a sorter and upgrading of the
existing planer.
Crown Pacific plans to spend an additional $7.0 million on improvements to
the Prineville and Gilchrist mills in 1996. Among these enhancements will be the
equipping of the Prineville mill to process both pine and fir species (on an
anticipated 60%/40% volume basis), which will enable it to more efficiently cut
fir logs which can be supplied from the Eastside Timberlands. While the
dimension grade lumber produced from fir logs generally generates lower prices
than the pine products that have been produced at Prineville to date, the
increased raw material self sufficiency resulting from the expected reductions
in pine log purchases is anticipated to increase Crown Pacific's net cash flow.
Other upgrades planned for the Prineville mill include modifications to the
headrig, addition of different edgers and acquisition of a new automated stacker
and bin sorter. Improvements that are currently planned for the Gilchrist mill
include improved computerization of the large headrig, changes in the overhead
carriage system and addition of state-of-the-art edgers, which will enable this
facility to process smaller logs more efficiently.
In response to the planned reductions in harvest volumes from the Central
Oregon Timberlands, Crown Pacific intends to reduce production capacity at both
the Prineville and Gilchrist mills. This operating strategy is expected to lower
production costs, as the mills will continue to reduce their reliance on more
expensive purchased logs. The Gilchrist facility will also be able to increase
productivity by eliminating one of the two shifts currently operating at the
mill.
Crown Pacific acquired its Manufacturing Facilities in Coeur d'Alene and
Bonners Ferry/Colburn, Idaho in October 1993. Crown Pacific's predecessors from
1988 to 1993 undertook an extensive modernization program that had not been
completed at the time of the acquisition of these facilities. Crown Pacific has
benefited substantially from these prior capital expenditures and has invested
approximately $5.0 million since acquisition in improvements to these
facilities. Crown Pacific has
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capitalized on the proximity of the Bonners Ferry and Colburn Manufacturing
Facilities (17 miles apart) by integrating the operations of these two mills.
The initial debarking and sawing of the logs into green lumber occur at Colburn,
after which the lumber is transferred to Bonners Ferry for drying and planing.
Crown Pacific also expects to invest $1.8 million in capital improvements at its
Inland Manufacturing Facilities in 1996, which are expected to result in
improved recovery rates and lower labor costs, and an additional $400,000 at its
other Manufacturing Facilities.
Crown Pacific recently closed and sold the mill in Thompson Falls, Montana
and closed the mill in Albeni Falls, Idaho. Operations had previously been
interrupted at the Thompson Falls facility due to a strike in March-April 1995
and a fire in December 1995. Damage caused by the fire, including losses due to
business interruption, is covered by insurance. The Partnership believes that
these closures, coupled with improvements at the remaining Inland Manufacturing
Facilities, will more closely align log consumption at its mills with production
from its Timberlands. The price of purchasing logs to supply the Albeni Falls
mill was high in comparison to other mills in the Inland Region. Closure of this
facility will reduce Crown Pacific's overall cost of production. Reducing its
production capacity will also enable Crown Pacific to be more selective in the
quality of log that it acquires for processing, which is expected, in turn, to
improve product quality and profitability. Closure of these facilities will also
reduce demand on Crown Pacific's fee timber inventory, facilitating sound
long-term management of these resources. A sale of the Albeni Falls mill and a
portion of the mill equipment is scheduled to close in July 1996, and the
remaining mill equipment at Albeni Falls is scheduled to be sold at auction in
September 1996. The Albeni Falls mill represented 17% of Crown Pacific's 1995
lumber production and 9% of its 1995 revenues; the corresponding percentages for
the Thompson Falls mill were 7% and 4%, respectively.
Crown Pacific also plans to close the plywood facility in Redmond, Oregon
during the third quarter of 1996. The decision to close this facility was based
upon a sharp decline in plywood prices, which resulted from increased
competition from lower cost panel substitutes such as OSB.
The Partnership is not currently anticipating any other interruption of
operations at the Manufacturing Facilities, but no assurance can be given that
market conditions or other factors will not render such an action economically
advisable in the future.
All of the Manufacturing Facilities are serviced by either or both of the
Burlington Northern and Union Pacific Railways, with the exception of the
Prineville mill, which is served by a rail link owned by the City of Prineville
that connects to the Burlington Northern, and the Gilchrist mill, which is
served by a short-line rail link (owned by Crown Pacific) that connects to the
Southern Pacific.
Crown Pacific practices "zero waste" management in its Manufacturing
Facilities. Sawdust, shavings and wood chips are usually sold to paper mills,
and bark is frequently sold to cogeneration plants for use as fuel. Bark,
sawdust, shavings and wood chips that cannot be sold are used as "hog fuel" to
fire the boilers that heat the drying kilns.
TIMBER RESOURCE MANAGEMENT
Crown Pacific's timber operations involve harvesting operations, general
forest management and ongoing reforestation. These activities are based on
biological information and other data concerning species. Relevant information
includes site indices, classification of soils, the types and number of trees by
size and age classification and stocking per acre, as well as information on
forest management costs. From this data, Crown Pacific develops its annual
harvest plans, which are based upon silvicultural considerations and existing
and expected future economic and market conditions, with a view toward
maximizing the value of its timber and timberland assets over time.
Crown Pacific's harvest plans are generally designed to project harvest
schedules for ten-year periods. In addition, harvest plans are updated at least
annually and reviewed on a monthly basis to monitor performance and to make any
necessary modifications to the plans in response to changing forestry
conditions, market conditions, contractual and financing obligations, regulatory
limitations
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and other relevant conditions. Development of annual harvest plans begins
approximately one year in advance and is completed by mid-October of the
calendar year preceding the period covered by the plans.
Particular forestry practices vary by geographic region and depend upon
factors such as soil productivity, weather, terrain, tree size, age and
stocking. Forest stands are thinned periodically to improve growth and stand
quality until they are harvested. Different areas within a forest may be planted
or seeded in successive years to provide a distribution of age classes within
the forest. A distribution of age classes will tend to provide a regular source
of cash flow, as the various timber stands reach harvestable age.
The timing of harvest of merchantable timber depends in part on growth
cycles and in part on economic conditions. Growth cycles for timber tend to
change over time as a result of technological, biological and genetic advances
that improve forest management practices. Crown Pacific will continue to develop
its forest management operations to take advantage of such advances and to
improve timber yields.
Certain forestry practices, such as clear-cutting and controlled burning,
are subject to legislation on either the federal or state level. The Managing
General Partner does not consider the current regulatory requirements to be
materially burdensome to its operations. It is possible, however, that future
regulation will cause forest management practices to change.
Crown Pacific actively utilizes pre-commercial and commercial thinning
timber management practices, which were not generally employed by the previous
owners of the Timberlands. Pre-commercial thinning occurs when the timber
harvested is not merchantable. In the context of long-term value maximization,
pre-commercial thinning can be a worthwhile investment. Crown Pacific has found
that such thinning improves the overall productivity of the Timberlands by
enhancing the growth of the remaining trees. Because of recent strong markets
for wood chips, posts and poles, pre-commercial thinning has also generated
revenues. In 1995, approximately 4,800 acres of the Central Oregon Timberlands,
2,500 acres of the Hamilton Timberlands and 400 acres of the Inland Timberlands
benefited from pre-commercial or commercial thinning.
Crown Pacific emphasizes ecosystem management through selective harvesting.
No clear-cutting or even age harvesting is performed in Oregon, Idaho or Montana
other than in connection with insect infestation, disease or fire. The only even
age harvesting conducted by Crown Pacific is undertaken on the Washington
Timberlands. All such harvesting is performed in accordance with the strict
standards of the Washington Forest Practices Act.
Because of the proximity of the newly acquired Eastside and Olympic
Timberlands to the Central Oregon and Hamilton Timberlands, respectively, Crown
Pacific expects to realize operating and administrative savings in the
management of these Timberlands as a result of the acquisition. The Managing
General Partner believes that Crown Pacific's employee base will increase by
only ten people as a result of the acquisition of these Timberlands.
FEDERAL AND STATE REGULATION
GENERAL. Crown Pacific's operations are subject to federal, state and local
environmental laws and regulations relating to the protection of the
environment, including laws relating to water, air, solid waste and hazardous
substances. Although the Managing General Partner believes that Crown Pacific is
in material compliance with these requirements, there can be no assurance that
significant costs, civil and criminal penalties, and liabilities will not be
incurred, including those relating to claims for damages to property or natural
resources resulting from Crown Pacific's operations. Crown Pacific maintains
environmental and industrial safety and health compliance programs and
periodically conducts internal regulatory audits of the Manufacturing Facilities
to monitor compliance with such laws and regulations. In addition, extensive due
diligence with respect to environmental compliance was conducted in connection
with the acquisition of the various Manufacturing Facilities. The Manufacturing
Facilities have been, are currently, and may in the future be the subject of
compliance
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or enforcement proceedings under environmental laws and regulations. The
Managing General Partner anticipates that pending compliance matters will be
satisfactorily resolved without any material expenditure or substantial
impairment of activities or operations.
Environmental laws and regulations have changed substantially and rapidly
over the last 20 years, and the Managing General Partner anticipates there will
be continuing changes. The trend in environmental regulation is to place more
restrictions and limitations on activities that may affect the environment, such
as emissions of pollutants and the generation and disposal of wastes.
Increasingly strict environmental restrictions and limitations have resulted in
increased operating costs for Crown Pacific and it is possible that the costs of
compliance with environmental laws and regulations will continue to increase.
Crown Pacific's activities are also subject to federal and state laws and
regulations regarding forestry operations. In addition, the operations of the
Manufacturing Facilities and the Timberlands are subject to the requirements of
the federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes relating to the health and safety of their respective employees. Crown
Pacific conducts internal safety audits to identify potential violations of law
or unsafe conditions. The Managing General Partner believes that Crown Pacific
is in material compliance with safety and health laws and regulations.
There can be no assurance that future legislative, administrative or
judicial actions, which are becoming increasingly stringent, will not adversely
affect Crown Pacific or its ability to continue its activities and operations as
currently conducted. As of the date of this Prospectus, the Managing General
Partner is not aware of any pending legislative, administrative or judicial
action that could materially and adversely affect the Partnership.
TIMBERLANDS. In addition to federal environmental laws, the operation of
the Timberlands is subject to specialized statutes and regulations in the States
of Washington, Oregon, Idaho and Montana. These states have enacted laws which
regulate forestry operations, including (except for Montana) their respective
Forest Practices Acts, which address many growing, harvesting and processing
activities on forest lands. Among other requirements, these acts impose certain
reforestation obligations on the owners of forest lands. The States of Oregon,
Idaho and Montana require prior notification before beginning harvesting
activity. The State of Washington is more restrictive, requiring a rigorous
regulatory review taking from 15 to 30 days or more prior to harvesting,
depending upon the environmental and other sensitivities of the proposed logging
site.
Other state laws and regulations control timber slash burning, operations
during fire hazard periods, logging activities affecting or utilizing water
courses or in proximity to certain ocean and inland shore lines, water
anti-degradation and certain grading and road construction activities.
AIR QUALITY. The Manufacturing Facilities emit regulated substances that
are subject to the requirements of the federal Clean Air Act, as amended, and
comparable state statutes. Most of the Manufacturing Facilities are required to
obtain federal operating permits under Title V of the 1990 Clean Air Act
Amendments. Title V requires that major industrial sources of air pollution
obtain federally enforceable permits which contain all of the applicable air
quality restrictions for the facility. All of the applications for Title V
permits have been or will be timely filed. The Managing General Partner believes
that the cost of obtaining all of the required permits will not exceed a total
cost of $125,000, approximately $50,000 of which remains to be spent.
WATER QUALITY AND WASTEWATER. The federal Clean Water Act and comparable
state statutes regulate discharges of process wastewater, and require National
Pollutant Discharge Elimination System ("NPDES") permits for discharge of
industrial wastewater and stormwater into regulated public waters. The
Prineville Manufacturing Facility requires an NPDES wastewater permit for
discharge of compressor water, boiler blowdown water and log yard water. Crown
Pacific's environmental consultant has been discussing with the Oregon
Department of Environmental Quality the appropriate NPDES permit or permits to
cover these discharges. The Managing General Partner
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expects that the permit or permits will be granted without adverse consequences
to Crown Pacific at a total cost not exceeding $10,000. The other Manufacturing
Facilities are materially in compliance with NPDES wastewater and stormwater
requirements, where applicable.
The Manufacturing Facilities (as well as Crown Pacific's common carrier
subsidiary, Yellowstone Trucking and the maintenance shop at Hamilton,
Washington) will be required under the Clean Water Act to install equipment that
separates oil and water contained within the runoff resulting from the washing
of vehicles. Crown Pacific has obtained estimates with respect to the expense of
installing such equipment which indicate that the total cost should not exceed
$450,000.
SOLID AND HAZARDOUS WASTE DISPOSAL. Crown Pacific's Manufacturing
Facilities generate both hazardous and nonhazardous solid wastes, including wood
waste and boiler ash, which are subject to the RCRA and comparable state
statutes. Crown Pacific periodically reviews its waste disposal practices to
ensure compliance with applicable laws. The Manufacturing Facilities have in the
past utilized on-site and off-site facilities for the disposal of hazardous and
nonhazardous wastes, including landfills. While the Managing General Partner is
unaware of any problems associated with disposal sites, there can be no
assurance that Crown Pacific will not incur future environmental expenditures
for remedial activities associated with these disposal sites.
SUPERFUND. CERCLA, also known as Superfund, and comparable state laws
impose liability, without regard to fault or the legality of the original act,
on certain classes of persons that contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
a site and companies that disposed or arranged for the disposal of the hazardous
substances found at a site. Those statutes also authorize government
environmental authorities such as the U.S. Environmental Protection Agency and,
in some instances, third parties, to take actions in response to threats to the
public health or the environment and to seek recovery of the costs incurred from
the responsible persons. In the course of its ordinary operations, the
Manufacturing Facilities have in the past disposed of, and are expected to
continue to dispose of, wastes at various on-site and off-site disposal
facilities. Crown Pacific has not received any notification that it may be
potentially responsible for any cleanup costs under Superfund. Based on
environmental compliance auditing programs, the Managing General Partner is not
aware of any activities by Crown Pacific or any conditions on the Timberlands or
at the Manufacturing Facilities that would be likely to result in Crown Pacific
being named a potentially responsible party.
REMEDIATION AND COMPLIANCE ACTIVITY. While Crown Pacific maintains a
comprehensive environmental program designed to prevent the discharge of
materials that could cause contamination to soil or water, contamination of soil
and water has occurred in the past and may occur in the future. As Crown Pacific
becomes aware of these sites, it cooperates with the appropriate environmental
agencies to design and implement the necessary response measures. All known
contamination sites at the facilities have been or are being voluntarily
addressed.
Crown Pacific's maintenance shop adjoining the Hamilton Timberlands is
currently under the Washington Department of Ecology Independent Remedial Action
Program. The Managing General Partner believes that the actual cost of
remediation at this site will not exceed $25,000. Crown Pacific has had a Phase
I Environmental Site Assessment ("ESA") and a Phase II ESA prepared for the
Eastside and Olympic Timberlands acquired from Cavenham. Based on the Phase II
ESA, Crown Pacific believes the cost of necessary remediation on these
properties will not exceed $25,000.
LOG EXPORTS. Federal law prohibits the export of unprocessed timber
acquired from federal lands in the western United States, or the substitution of
unprocessed federal timber from the western United States for unprocessed
private timber that is exported. Persons owning timber-processing facilities may
seek authorization from the United States Department of Agriculture for a
"sourcing area" within which the person may purchase federal timber while
exporting unprocessed private timber originating from outside the sourcing area.
A sourcing area must be geographically and economically separate from any
geographic areas where the person or its affiliates harvest private
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timber for export. Crown Pacific has been granted sourcing areas which allow it
to purchase available federal timber to supply its Oregon and Inland
Manufacturing Facilities while selling logs for export from its Washington
Timberlands.
Various parties, including one of Crown Pacific's competitors, instituted
litigation in July 1995 in U.S. District Court in Idaho seeking to overturn the
government's approval of Crown Pacific's sourcing areas. These parties'
principal contention is that the sourcing areas are not geographically and
economically separate from the region from which Crown Pacific sells logs for
export. Although not named as a defendant, Crown Pacific has intervened in the
proceeding and the Partnership believes that the action will be favorably
resolved. Even if the litigation were resolved against Crown Pacific, the
resulting inability of Crown Pacific to acquire federal timber would have a
limited impact on Crown Pacific's financial results or operations, as it has
already assumed that federal timber would not be available in significant
quantities to supply its Manufacturing Facilities.
A new, more restrictive federal regulation regarding sourcing areas has been
promulgated by the USFS. Legislation has been implemented, however, that bars
the USFS from expending any funds to enforce or implement this regulation prior
to September 30, 1996. Congress has also prohibited the USFS from adopting any
policies that would restrain domestic transportation or processing of timber
from private lands. If the new regulation is subsequently adopted in its current
form, it would restrict Crown Pacific's ability to bring logs harvested from
private lands outside its sourcing areas into the sourcing areas for conversion.
Even if the regulation is subsequently enacted in its current form, the Managing
General Partner does not expect it to materially adversely affect Crown
Pacific's financial results or operations. In addition, while the export of logs
harvested from state land is generally prohibited, proposals made from time to
time either to ban or tax the export of unprocessed logs harvested from private
lands have been unsuccessful.
ENDANGERED SPECIES. The federal Endangered Species Act and counterpart
state legislation protect species threatened with possible extinction.
Protection of endangered species may include restrictions on timber harvesting,
road building and other silvicultural activities in areas containing the
affected species. A number of species indigenous to the Pacific Northwest have
been protected under the Endangered Species Act, including the northern spotted
owl (the "Owl"), marbled murrelet, mountain caribou, grizzly bear, bald eagle
and various anadromous fish species.
During 1994, Crown Pacific received reports from an independent consulting
firm regarding certain endangered species in the Inland Timberlands and
regarding the Owl on the Hamilton and Central Oregon Timberlands. The reports
indicated that the Owl was unlikely to be found on the Inland Timberlands, that
only 3,500 acres of the Central Oregon Timberlands were potentially suitable Owl
habitat and that the likelihood of the Owl inhabiting these lands was very low,
and that only 2,065 acres of the Hamilton Timberlands were suitable habitat for
the Owl, of which some 425 acres had already been designated for non-timber
uses. Only one Owl nest, affecting approximately 800 acres in the Hamilton
Timberlands, has been discovered within these Timberlands. An eagle management
plan will be required for the Olympic Timberlands, but this is not expected to
significantly affect Crown Pacific's operations.
Approximately 175 acres of the Hamilton Timberlands that were acquired in
1995 are believed to be suitable habitat for marbled murrelets. Crown Pacific's
inability to harvest this portion of the acquired property was reflected in the
appraisal used by Crown Pacific to negotiate the purchase price. Crown Pacific
is engaged in negotiations to sell a portion of the affected Timberlands to a
local Indian tribe.
During 1995, Crown Pacific began the process of developing a Habitat
Conservation Plan (the "HCP") for the Hamilton Timberlands in conjunction with
the United States Fish and Wildlife Service (the "USFWS"). Crown Pacific was not
required to develop the HCP, but acted on its own initiative in order to allow
for a more predictable harvest in the area. Once the HCP is complete and
accepted by the USFWS, it will serve as the basis for regulating Crown Pacific's
harvesting activities in
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this region. The Partnership anticipates that the HCP will be obtained by the
end of 1996 at a cost not exceeding $500,000. Crown Pacific is not currently
considering the development of HCPs with respect to its other Timberlands.
Anadromous fish species which have been listed as endangered or threatened
are found in rivers or streams which cross or border the Timberlands,
particularly in Washington, but the presence of these species has not materially
affected, and is not expected materially to affect, Crown Pacific's operations.
The Partnership anticipates that the listing of anadromous or other fish species
as threatened or endangered will primarily affect the availability of timber
from federal lands, a resource the Partnership has already assumed will be in
decline. See "Risk Factors -- Risks Inherent in the Partnership's Business."
Based on the reports described above, and on management's knowledge of the
Timberlands, the Partnership does not believe that there are any species
protected under the Endangered Species Act that would materially and adversely
affect Crown Pacific's ability to harvest the Timberlands in accordance with
current harvest plans. There can be no assurance, however, that species within
the Timberlands may not subsequently receive protected status under the
Endangered Species Act or that currently protected species may not be discovered
within the Timberlands.
SAFETY AND HEALTH. The Manufacturing Facilities are subject to the
requirements of OSHA and comparable state statutes. The Partnership believes
that the Manufacturing Facilities are in general compliance with OSHA
regulations, including general industry standards, permissible exposure levels
for toxic chemicals (including wood dust and formaldehyde) and record-keeping
requirements.
PRODUCT LIABILITY AND REGULATION. All of the states in the United States
and many foreign jurisdictions in which Crown Pacific sells its products have,
through some combination of legislation and judicial decision, provided for the
liability of the manufacturer and supplier of defective materials for resulting
personal injury and property damage. The operations of Crown Pacific entail
exposure to product liability in connection with both the export and domestic
sale of logs and lumber products. Crown Pacific has not been subject to any
litigation relating to products liability, and one products liability action
resulting from the operations of a predecessor, for which Crown Pacific assumed
liability, is expected to be settled for a small amount.
LITIGATION
There is no pending litigation, and to the knowledge of the Partnership,
there is no threatened litigation, the unfavorable resolution of which could
have a material adverse effect on the business or financial condition of Crown
Pacific.
EMPLOYEES
Crown Pacific has approximately 200 salaried and 1,100 hourly employees
(excluding any employees of the Albeni Falls and Thompson Falls manufacturing
facilities that have been closed but including approximately 200 hourly
employees at the plywood manufacturing facility scheduled to be closed during
the third quarter of 1996). The Partnership believes that employee relations are
good.
Crown Pacific has developed a Production Incentive Program to reward
employees for improvements in productivity. This program has resulted in as much
as $2.00 per hour in additional compensation to eligible employees. An
individual employee loses his incentive if he has unexcused absences, tardiness
or safety infractions. In addition, members of an employee team lose a portion
of their incentive if a member of the team is responsible for a safety
infraction. Since its institution in the Manufacturing Facilities, the program
has resulted in increased production, lower manufacturing costs, reduced
absenteeism and tardiness, declining incidence of substance abuse and decreasing
workers' compensation claims. The Partnership has also implemented a drug
testing program for all employees.
Of the approximately 1,300 Crown Pacific employees, approximately 400
(including the approximately 200 employees at the plywood manufacturing
facility) are represented by unions (either the Western Council of Industrial
Workers or the Woodworkers Local Lodge W10, Woodworker District
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Lodge 1, International Association of Machinists and Aerospace Workers,
AFL-CIO). Following the acquisition of the Manufacturing Facilities in the
Inland Region in late 1993, Crown Pacific successfully negotiated agreements
with both unions. The agreements in most respects represented a formal adoption
of the personnel practices of Crown Pacific. The same wage structure prevails
for both union and non-union employees. These agreements are due for renewal in
January 1997, and collective bargaining is expected to begin in late 1996. The
Partnership does not believe that unionization of its non-union employees is
likely. The Redmond plywood mill was closed for approximately two months in
early 1995 due to a strike instituted to force Crown Pacific to participate in
the union's health insurance trust. This strike was resolved (as was a companion
strike at the Thompson Falls mill), with the return of the labor force to work
under the existing terms of employment. As a result of the closure of the
Thompson Falls sawmill and the plywood facility, none of Crown Pacific's
employees will be represented by the Western Council of Industrial Workers.
Crown Pacific's employee benefits include a 401(k) savings plan for all
employees, a defined contribution profit sharing plan for all non-union
employees, a defined benefit and defined participation pension plan for union
employees, a health insurance plan (including co-payments and deductibles) for
all employees, a Section 125 cafeteria plan and an employee assistance program
for all employees.
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MANAGEMENT
PARTNERSHIP MANAGEMENT
The Managing General Partner manages the activities and operations of the
Partnership, and the Managing General Partner's activities are limited to such
management. Holders of Common Units do not directly or indirectly participate in
the management of the Partnership. The Managing General Partner owes a fiduciary
duty to the holders of Common Units, subject to certain limitations described in
"Conflicts of Interest and Fiduciary Responsibility."
As is commonly the case with publicly traded limited partnerships, the
Partnership does not directly employ any of the persons responsible for managing
the Partnership's operations, but instead reimburses the Managing General
Partner for the services of such persons.
The key executives and operating managers of the Partnership have many years
of experience in all aspects of the forest products industry.
DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
Set forth below is certain information concerning the directors and
executive officers of the Managing General Partner. As the general partners of
the Managing General Partner, Fremont and a corporation owned by Messrs. Stott
and Krage elect directors of the Managing General Partner on an annual basis.
All officers of the Managing General Partner serve at the discretion of the
directors of the Managing General Partner.
ROBERT JAUNICH II, 56, Chairman of the Board of Control of the Managing
General Partner since its formation. Mr. Jaunich has been Chairman of the Board
of Directors of the Special General Partner since 1991. Mr. Jaunich is a member
of the Managing General Partners' Executive Committee. Since 1991, he has been
Managing Director of direct investments of Fremont. From 1986 until he joined
Fremont, Mr. Jaunich was a member of the chief executive office and Executive
Vice President of Swiss-based Jacob Suchard AG, one of the world's top four
chocolate, sugar confectionery and coffee companies. Mr. Jaunich currently
serves on the board of directors of Consolidated Freightways, Inc., the board of
control of Petro Stopping Centers, L.P. (a leading operation of large,
multi-service truck stops in the United States in which Fremont has a
substantial equity investment) and on the boards of directors of various private
companies.
PETER W. STOTT, 52, Director of the Board of Control since its formation and
a member of the Executive Committee. He has been President and Chief Executive
Officer of the Managing General Partner since its inception in 1994. Mr. Stott
served as Chief Executive Officer and in various other capacities for
predecessors of the Partnership from 1988 until 1994. Mr. Stott is also Chairman
and founder of Market Transport, Ltd., a temperature controlled regional motor
carrier company located in Portland, Oregon, which employs over 350 people. Mr.
Stott has been involved in the ownership and operations of timberlands since
1983. Mr. Stott is a member of the Board of Trustees for the Nature Conservancy
and a member of the Board of Directors for Liberty Northwest Insurance Company.
JAMES A. BONDOUX, 56, Director of the Board of Control since its formation
and of the Special General Partner since 1991. Mr. Bondoux is a member of the
Managing General Partner's Executive Committee and Compensation Committee. He
has been a managing principal of Fremont since December 1984 concentrating on
private ventures and special situation equity investments. Mr. Bondoux currently
serves on the board of control of Petro Stopping Centers, L.P.
RICHARD B. KELLER, 67, was elected Director of the Board of Control in
January 1995 and is a member of the Compensation Committee. Mr. Keller has been
President of Keller Enterprises, Inc. since 1975. He was Senior Vice President
of Western Kraft Corporation, a division of Willamette Industries, Inc. from
1970 to 1975 and held various positions with Western Kraft from 1954. Mr. Keller
started his career in the forest products industry at Georgia-Pacific
Corporation where he served as an Assistant to the Vice Chairman.
JOHN W. LARSON, 58, was elected Director of the Board of Control in January
1995 and is a member of the Audit Committee. He was Chief Operating Officer of
Chronicle Publishing from 1990 to 1993.
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Since 1993, Mr. Larson has been a private investor. He was a General Partner in
J.H. Whitney and Company from 1984 to 1989. Mr. Larson served as Director of
McKinsey and Company from 1965 to 1984.
CHRISTOPHER G. MUMFORD, 50, was elected Director of the Board of Control in
January 1995 and is a member of the Audit Committee. He has been a General
Partner of Scarff, Sears & Associates in San Francisco since 1986. In addition
to his duties with this private investment partnership, Mr. Mumford was
Executive Vice President and Chief Financial Officer of Arcata Corporation from
1982 to June 1994, and has served as a director of several other privately owned
companies.
WILLIAM L. SMITH, 54, was elected Director of the Board of Control in
January 1995 and is a member of the Compensation Committee. Mr. Smith is
President of William Smith Properties, Inc., which he founded in 1983. Mr. Smith
has 20 years of experience managing timberland and developing recreational
properties, including his service as President of Brooks Resources Corporation
from 1973 to 1983. Mr. Smith also served as Planning Director of Brooks Scanlon,
Inc.
ROGER L. KRAGE, 48, has been Secretary and General Counsel of the General
Partners since 1994 and served in comparable capacities for the Partnership's
predecessors from 1988 to 1994. Mr. Krage has been involved in the legal,
administrative, financial and risk management aspects of the forest products
business for over 15 years. In addition to overseeing the legal affairs of Crown
Pacific, he is closely involved with corporate planning and execution.
G.P. ("PAT") HANNA, 67, Senior Vice President of the Managing General
Partner, oversees Crown Pacific's timberland and manufacturing operations. Mr.
Hanna, who joined Crown Pacific in 1989 from Willamette Industries, Inc., has
over 35 years experience in managing timberlands. He was the Raw Materials
Manager for Willamette Industries, Inc. from 1974 to 1989; and from 1969 until
1974, he was the Timber Contract Supervisor and Resident Forester for that
company.
P.A. ("TONY") LEINEWEBER, 51, Vice President of the Managing General
Partner, joined Crown Pacific in 1990 to oversee its administrative, personnel,
risk management and public relations functions. Mr. Leineweber has over 16 years
experience in managing these corporate functions.
RICHARD D. SNYDER, 49, Vice President and Interim Chief Financial Officer
and Treasurer of the Managing General Partner. Mr. Snyder joined Crown Pacific
in November 1992 as Treasurer and Chief Financial Officer. In September 1994,
Mr. Snyder assumed the duties of Assistant to the President. Subsequently, Mr.
Snyder temporarily reassumed the duties of the Chief Financial Officer and
Treasurer in September 1995. Mr. Snyder has over 25 years experience in the
accounting profession focusing primarily on the forest products industry. He
worked for seven years as a CPA with Arthur Andersen & Co. before serving five
years at Georgia-Pacific as Director of Corporate Finance. From 1981 through
1992, he was Vice President of Finance for Gregory Forest Products.
EMPLOYMENT AGREEMENTS
The Managing General Partner entered into employment agreements with Mr.
Stott and Mr. Krage in December 1994. Each agreement has a term of three years
and includes confidentiality provisions and, in the case of Mr. Stott's
agreement, noncompete provisions and an involuntary termination provision
pursuant to which the executive officer will receive severance pay equal to up
to six months base salary. In Mr. Stott's agreement, the confidentiality
provisions continue for 18 months following the later to occur of Mr. Stott's
termination of employment or his resignation or removal from the Board, and,
unless Mr. Stott is terminated without cause, the noncompete provisions continue
until the earlier to occur of (i) December 31, 1999 or (ii) the later to occur
of December 31, 1998 or the date on which Fremont and its affiliates dispose of
substantially all of their Subordinated Units to an unaffiliated third party. In
the case of Mr. Krage's agreement, the confidentiality provisions continue for
18 months following Mr. Krage's termination of employment.
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SELLING UNITHOLDERS AND SECURITY OWNERSHIP
Of the 10,102,800 Common Units being offered hereby, 7,455,330 are being
offered by the Partnership. The remaining 2,647,470 Common Units being offered
by this Prospectus are being offered by the Selling Unitholders identified in
the table below in the amounts indicated. Of the Common Units offered hereby,
2,305,000 constitute Common Units purchased by the Selling Unitholders in
connection with the Partnership's initial public offering in December 1994.
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Partnership agreed to register for resale
under the Act and applicable state securities laws the Common Units proposed to
be sold by the Selling Unitholders if an exemption from such registration
requirements is not otherwise available for such proposed transaction. The
Partnership is obligated to pay all expenses incidental to such registrations,
excluding underwriting discounts and commissions. The Selling Unitholders'
Common Units are included herein pursuant to such obligation.
The following table identifies the Selling Unitholders and the number of
Common Units being offered by each Selling Unitholder. None of the Selling
Unitholders will retain any Common Units after the offering.
<TABLE>
<CAPTION>
COMMON UNITS
BENEFICIALLY COMMON
SELLING UNITHOLDER OWNED UNITS OFFERED
- ---------------------------------------------------------------------------------- ----------------- -------------
<S> <C> <C>
Fremont Crown Partners (a)(b)..................................................... 1,865,000 1,865,000
Fremont CPL Partners, L.P. (a)(b)................................................. 17,329 17,329
Sequoia Ventures Inc. (a)(b)...................................................... 17,385 17,385
SK Partners (c)(d)................................................................ 635,000 440,000
Arbeit & Co....................................................................... 157,452 157,452
Hillside Master Retirement Trust.................................................. 51,431 51,431
Banque Paribas.................................................................... 36,001 36,001
Sahara Enterprises, Inc........................................................... 28,454 28,454
VIRG & Co......................................................................... 15,431 15,431
Lynn F. Alandt.................................................................... 3,163 3,163
Henry Ford II 1990 Trust.......................................................... 3,163 3,163
Charitable Lead Trust I........................................................... 3,163 3,163
Mousseteek Free, L.P.............................................................. 3,162 3,162
Gerald Rauenhorst Family Foundation............................................... 1,583 1,583
John N. Irwin III................................................................. 1,480 1,480
John N. Irwin II.................................................................. 1,447 1,447
Garco B........................................................................... 633 633
Nine Pines & Co................................................................... 319 319
Sieben Investment Co.............................................................. 319 319
Sieben Foundation................................................................. 319 319
Mrs. John N. Irwin II............................................................. 236 236
</TABLE>
- ------------------------
(a) Current address is 50 Fremont Street, Suite 3700, San Francisco, California
94105.
(b) After the offering, affiliated entities of Fremont Crown Partners will own
no Common Units but will continue to own 5,029,583 Subordinated Units,
including 2,711,318 Subordinated Units owned by SVE II, Inc., a wholly owned
subsidiary of the Special General Partner.
(c) Current address is 121 S.W. Morrison Street, Suite 1500, Portland, Oregon
97204.
(d) Mr. Stott and Mr. Krage are general partners of SK Partners. After the
offering Mr. Stott will continue to beneficially own 222,694 Common Units
(including the 195,000 Common Units owned by SK Partners) and 692,586
Subordinated Units; Mr. Stott disclaims beneficial ownership with respect to
an additional 2,711,318 Subordinated Units owned by SVE II, Inc. of which
Mr. Stott is a director. After the offering Mr. Krage will continue to
beneficially own 195,382 Common Units (including the 195,000 Common Units
owned by SK Partners) and 50,919 Subordinated Units.
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITY
CONFLICTS OF INTEREST
Certain conflicts of interest may arise as a result of the General Partners'
relationships with their stockholders or partners, on the one hand, and the
Partnership, on the other hand. The directors and officers of the general
partners of the Managing General Partner and of the Special General Partner have
fiduciary duties to manage such General Partner, including its investments in
its subsidiaries and affiliates, in a manner beneficial to its stockholders or
limited partners. In general, as general partners of the Partnership, the
General Partners have a fiduciary duty to manage the Partnership in a manner
beneficial to the Partnership and the Unitholders. The Partnership Agreement
contains provisions that allow the Managing General Partner to take into account
the interests of parties in addition to the Partnership in resolving conflicts
of interest, thereby limiting the fiduciary duties of the General Partners to
the Unitholders, as well as provisions that may restrict the remedies available
to Unitholders for actions taken that might, without such limitations,
constitute breaches of fiduciary duty. The duty of the directors and officers of
the general partners of the Managing General Partner and of the Special General
Partner to the stockholders or limited partners of such General Partner may,
therefore, come into conflict with their duties to the Partnership and the
Unitholders.
Conflicts of interest may arise in the situations described below, among
others:
CERTAIN ACTIONS TAKEN BY THE MANAGING GENERAL PARTNER MAY AFFECT THE AMOUNT
OF CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS OR HASTEN THE CONVERSION OF
SUBORDINATED UNITS. Decisions of the Managing General Partner with respect to
the amount and timing of timber harvests, property sales, cash expenditures,
participation in capital expansions and acquisitions, borrowings, issuance of
additional Units and reserves may affect whether, or the extent to which, there
is sufficient Available Cash constituting Cash from Operations to meet the
Minimum Quarterly Distribution and Target Distributions on all Units in such
quarter or subsequent quarters. The Partnership Agreement provides that any such
actions by the Partnership or the approval thereof by the Managing General
Partner will not constitute a breach of any duty owed by the Managing General
Partner to the Partnership or the Unitholders, including actions that have the
purpose or effect, directly or indirectly, of enabling the Managing General
Partner to receive incentive distributions or hastening the expiration of the
Subordination Period and the conversion of the Subordinated Units into Common
Units; provided that the Managing General Partner may not use increases in
working capital borrowings to hasten the expiration of the Subordination Period
or the conversion of any Subordinated Units into Common Units. The Partnership
Agreement provides that the Partnership may borrow funds from the Managing
General Partner and its affiliates on terms no less favorable to the Partnership
than would be obtained from an unrelated third party lender. The General
Partners and their affiliates may not borrow funds from the Partnership.
Further, any actions taken by the Managing General Partner consistent with the
standards of reasonable discretion set forth in the definitions of Available
Cash, Cash from Operations and Cash from Interim Capital Transactions will be
deemed not to constitute breaches of any duties of the Managing General Partner
to the Partnership or the Unitholders.
THE PARTNERSHIP REIMBURSES THE MANAGING GENERAL PARTNER AND ITS AFFILIATES
FOR CERTAIN EXPENSES. Under the terms of the Partnership Agreement, the
Managing General Partner and its affiliates are reimbursed by the Partnership
for certain expenses incurred on behalf of the Partnership, including costs
incurred in providing staff and support services to the Partnership. See
"Management."
THE MANAGING GENERAL PARTNER MAY SEEK TO LIMIT THE LIABILITY OF THE GENERAL
PARTNERS WITH RESPECT TO THE PARTNERSHIP'S OBLIGATIONS. Whenever possible, the
Managing General Partner may seek to limit the Partnership's liability under
contractual arrangements to all or particular assets of the Partnership, with
the other party thereto having no recourse against the Managing General Partner,
the Special General Partner or their respective assets. The Partnership
Agreement provides that any action by the Managing General Partner in so
limiting the liability of the General Partners or
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that of the Partnership will not be deemed to be a breach of the Managing
General Partner's fiduciary duties, even if the Partnership could have obtained
more favorable terms without such limitation on liability.
CONTRACTS BETWEEN THE PARTNERSHIP, ON THE ONE HAND, AND THE MANAGING GENERAL
PARTNER AND ITS AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH
NEGOTIATIONS. Under the terms of the Partnership Agreement, the Managing
General Partner is not restricted from paying itself or its affiliates for any
services rendered (provided such services are rendered on terms fair and
reasonable to the Partnership), or entering into additional contractual
arrangements with any of them on behalf of the Partnership. Neither the
Partnership Agreement nor any of the other agreements, contracts and
arrangements between the Partnership, on the one hand, and the Managing General
Partner and its affiliates, on the other, are or will be the result of
arm's-length negotiations. All such transactions must be on terms which are fair
and reasonable to the Partnership. Any such transaction will be deemed fair and
reasonable if (i) approved by the Audit Committee, (ii) its terms are no less
favorable to the Partnership than those generally being provided to or available
from unrelated third parties, or (iii) taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership), the
transaction is fair to the Partnership. The Managing General Partner and its
affiliates will have no obligation to permit the Partnership to use any
facilities or assets of the Managing General Partner and such affiliates, except
as may be provided in contracts entered into from time to time specifically
dealing with such use, nor will the Managing General Partner and its affiliates
have any obligation to enter into any such contracts.
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE GENERAL
PARTNERS AND THEIR AFFILIATES UNDER AGREEMENTS WITH THE PARTNERSHIP. Any
agreements between the Partnership and a General Partner and its affiliates will
not grant to the holders of Common Units, separate and apart from the
Partnership, the right to enforce the obligations of such General Partner and
its affiliates in favor of the Partnership. Therefore, the Managing General
Partner, in its capacity as a general partner of the Partnership, will be
primarily responsible for enforcing such obligations.
AFFILIATES OF THE GENERAL PARTNERS MAY COMPETE WITH THE PARTNERSHIP. The
General Partners and their affiliates are restricted from competing with the
Partnership by engaging in the following activities ("Restricted Activities"):
the (i) acquisition, exchange, operation or sale of timber-producing real
property or rights to harvest timber, a principal purpose of which is producing
logs or other forest products, (ii) harvesting of timber other than harvesting
which is incidental to the ownership or operation of real property not owned or
operated for a principal purpose of producing logs or other forest products,
(iii) sale, exchange or purchase of logs other than sales, exchanges or
purchases which are incidental to the ownership or operation of real property
not owned or operated for a principal purpose of producing logs or other forest
products, (iv) acquisition or sale of any facilities used to convert logs into
lumber, plywood or other wood products, (v) conversion of logs into lumber,
plywood or other wood products, (vi) marketing and sale of lumber, plywood or
other wood products, (vii) import or export of logs, lumber, plywood or other
wood products to or from the United States, (viii) manufacture, marketing or
sale of manufactured, engineered or substitute wood products to the extent such
products compete with products produced by the Partnership or the Operating
Partnership and (ix) any and all other activities relating to the United States
forest products industry to the extent such activities compete with activities
of the Partnership or the Operating Partnership; provided, however, that (a) the
sale, lease, exchange, transfer or other disposition by the Special General
Partner of (1) any timber-producing real property owned by the Special General
Partner on December 22, 1994, and (2) any timber-producing real property
subsequently acquired by the Special General Partner in exchange for or
utilizing the proceeds from the sale of the property described in the foregoing
clause (1) or (b) the harvesting of timber by the Special General Partner from
any real property described in the foregoing clause (a), is permitted so long as
the resulting logs are sold to the Operating Partnership on terms and conditions
permitted under the Partnership Agreement. Affiliates of the General Partners
and the Special General Partner may, however, engage in any other
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activity in competition with the Partnership. Notwithstanding the foregoing,
Fremont, Sequoia and their subsidiaries may make or maintain (i) a
non-controlling investment in any entity that engages in Restricted Activities
and (ii) a controlling investment in any entity that engages in Restricted
Activi-
ties (A) if such Restricted Activities do not directly and materially compete
with the Partnership, (B) if such Restricted Activities (except as provided in
clause (C) below) are conducted in North America and directly and materially
compete with the Partnership, provided that prior to making such investment
Fremont, Sequoia or their subsidiaries first offer the Partnership the
opportunity to make such investment or (C) if such entity conducts all of its
operations outside of North America except for the marketing and sale of logs,
lumber, plywood or other wood products (including manufactured, engineered or
substitute wood products) in North America. None of Fremont, Sequoia or their
subsidiaries will be so restricted if and when none of them any longer own an
interest in either of the General Partners. As a result, conflicts of interest
may arise between Fremont, Sequoia and their subsidiaries on the one hand, and
the Partnership, on the other. There can be no assurance that there will not be
competition between the Partnership and Fremont, Sequoia or their subsidiaries.
Although Bechtel Group, Inc., Bechtel Enterprises, Inc. and their subsidiaries
(collectively, the "Bechtel Entities") may be within the definition of
"affiliates" (as defined in the Partnership Agreement) of the General Partners
by virtue of the overlapping equity ownership among these entities and Fremont
and Sequoia, the foregoing competition restrictions do not apply to the Bechtel
Entities.
COMMON UNITS ARE SUBJECT TO THE GENERAL PARTNER'S LIMITED CALL RIGHT. The
Partnership Agreement provides that it does not constitute a breach of the
Managing General Partner's fiduciary duties if the Managing General Partner
exercises its right to call for and purchase Common Units as provided in the
Partnership Agreement or assign this right to its affiliates or to the
Partnership. The Managing General Partner thus may use its own discretion, free
of fiduciary duty restrictions, in determining whether to exercise such right.
As a consequence, a Common Unitholder may have his Common Units purchased even
though he may not desire to sell them, and even though the price paid may be
less than the amount he would desire to receive upon sale of his Common Units.
For a description of such right, see "The Partnership Agreement -- Limited Call
Right."
FIDUCIARY DUTIES OF THE GENERAL PARTNERS
The General Partners are accountable to the Partnership and the Unitholders
as fiduciaries. Consequently, the General Partners must exercise good faith and
integrity in handling the business and affairs of the Partnership. In contrast
to the relatively well developed law concerning fiduciary duties owed by
officers and directors to the shareholders of a corporation, the law concerning
the duties owed by general partners to other partners and to partnerships is
relatively undeveloped. The Delaware Act does not define with particularity the
fiduciary duties owed by general partners, but fiduciary duties are generally
considered to include an obligation to act with the highest good faith, fairness
and loyalty. Such duty of loyalty would generally prohibit a general partner of
a Delaware limited partnership from taking any action or engaging in any
transaction as to which it has a conflict of interest. However, the Delaware Act
provides that Delaware limited partnerships may, in their partnership
agreements, restrict or expand the fiduciary duties that might otherwise be
applied by a court in analyzing the standard duty owed by general partners to
limited partners. In order to induce the Managing General Partner to manage the
business of the Partnership, the Partnership Agreement, as permitted by the
Delaware Act, contains various provisions that have the effect of restricting
the fiduciary duties that might otherwise be owed by the Managing General
Partner to the Partnership and its partners and waiving or consenting to conduct
by the Managing General Partner and its affiliates that might otherwise raise
issues as to compliance with fiduciary duties or applicable law.
The Partnership Agreement provides that whenever a conflict of interest
arises between the General Partners or their affiliates, on the one hand, and
the Partnership or any other partner, on the other, the Managing General Partner
will resolve such conflict. The General Partners will not be in breach of their
obligations under the Partnership Agreement or their duties to the Partnership
or the Unitholders if the resolution of such conflict is fair and reasonable to
the Partnership, and any resolution will conclusively be deemed to be fair and
reasonable to the Partnership if (i) approved by
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the Audit Committee, (ii) such resolution is on terms no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties or (iii) is fair to the Partnership, taking into account the
totality of the relationship between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership). In resolving such conflict, the Managing General Partner may
(unless the resolution is specifically provided for in the Partnership
Agreement) consider the relative interests of the parties involved in such
conflict or affected by such action, any customary or accepted industry
practices or historical dealings with a particular person or entity and, if
applicable, generally accepted accounting practices or principles and such other
factors as it deems relevant. Thus, unlike the strict duty of a fiduciary who
must act solely in the best interests of his beneficiary, the Partnership
Agreement permits the Managing General Partner to consider the interests of all
parties to a conflict of interest, including the interests of the General
Partners. In connection with the resolution of any conflict that arises, unless
the Managing General Partner has acted in bad faith, the action taken by the
Managing General Partner will not constitute a breach of the Partnership
Agreement, any other agreement or any standard of care or duty imposed by the
Delaware Act or other applicable law. The Partnership Agreement also provides
that in certain circumstances the Managing General Partner may act in its sole
discretion, in good faith or pursuant to other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of a partnership (a partnership derivative action) to recover damages
from a third party where the general partner has failed to institute the action
or where an effort to cause the general partner to do so is not likely to
succeed. In addition, the statutory or case law of certain jurisdictions may
permit a limited partner to institute a legal action on behalf of himself and
all other similarly situated limited partners (a class action) to recover
damages from a general partner for violations of its fiduciary duties to the
limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation is modified, waived or limited, to the extent permitted by law, as
required to permit the Managing General Partner and its officers and directors
to act under the Partnership Agreement or any other agreement contemplated
therein and to make any decision pursuant to the authority prescribed in the
Partnership Agreement so long as such action is reasonably believed by the
Managing General Partner to be in, or not inconsistent with, the best interests
of the Partnership. Further, the Partnership Agreement provides that the General
Partners and officers and directors acting on their behalf (or on behalf of any
general partner thereof) will not be liable for monetary damages to the
Partnership, the limited partners or assignees for errors of judgment or for any
acts or omissions of the General Partners if such other persons acted in good
faith. In addition, under the terms of the Partnership Agreement, the
Partnership is required to indemnify the General Partners and the officers,
directors, employees, affiliates, partners, agents and trustees acting on their
behalf, to the fullest extent permitted by law, against liabilities, costs and
expenses incurred by the General Partners or other such persons, if the General
Partners or such persons acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the Partnership and,
with respect to any criminal proceedings, had no reasonable cause to believe the
conduct was unlawful. See "The Partnership Agreement -- Indemnification." Thus,
the General Partners may be indemnified for their negligent acts if they meet
such requirements concerning good faith and the best interests of the
Partnership.
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Act that allow the fiduciary duties of a general
partner to be waived or restricted by a partnership agreement have not been
tested in a court of law, and the General Partners have not obtained an opinion
of counsel covering the provisions of the Partnership Agreement that purport to
waive or restrict fiduciary duties of the General Partners. Holders of Units
should consult their own legal counsel concerning the fiduciary responsibilities
of the General Partners and the officers and directors acting on their behalf
and the remedies available to such holders.
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DESCRIPTION OF THE COMMON UNITS
The Common Units are registered under the Exchange Act, and the rules and
regulations promulgated thereunder.
Purchasers of Common Units in this public offering and subsequent
transferees of Common Units (or their brokers, agents or nominees on their
behalf) will be required to execute Transfer Applications, the form of which is
included as Appendix B to this Prospectus. Purchasers in this offering may hold
Common Units in nominee accounts, provided that the broker (or other nominee)
executes and delivers a Transfer Application and becomes a limited partner. The
Partnership will be entitled to treat the nominee holder of a Common Unit as the
absolute owner thereof, and the beneficial owner's rights will be limited solely
to those that it has against the nominee holder as a result of or by reason of
any understanding or agreement between such beneficial owner and nominee holder.
THE UNITS
Generally, the Common Units and the Subordinated Units represent limited
partner interests in the Partnership, which entitle the holders thereof to
participate in Partnership distributions and exercise the rights or privileges
available to limited partners under the Partnership Agreement. For a description
of the relative rights and preferences of holders of Common Units and holders of
Subordinated Units in and to Partnership distributions, together with a
description of the circumstances under which Subordinated Units may convert into
Common Units, see "Cash Distribution Policy." For a description of the rights
and privileges of limited partners under the Partnership Agreement, see "The
Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
DUTIES. American Stock Transfer & Trust Company acts as a registrar and
transfer agent (the "Transfer Agent") for the Common Units and receives a fee
from the Partnership for serving in such capacities. All fees charged by the
Transfer Agent for transfers of Common Units are borne by the Partnership and
not by the holders of Common Units, except that fees similar to those
customarily paid by stockholders for surety bond premiums to replace lost or
stolen certificates, taxes and other governmental charges, special charges for
services requested by a holder of a Common Unit and other similar fees or
charges will be borne by the affected holder. There is no charge to holders for
disbursements of the Partnership's cash distributions. The Partnership will
indemnify the Transfer Agent, its agents and each of their respective
shareholders, directors, officers and employees against all claims and losses
that may arise out of acts performed or omitted in respect of its activities as
such, except for any liability due to any negligence, gross negligence, bad
faith or intentional misconduct of the indemnified person or entity.
RESIGNATION OR REMOVAL. The Transfer Agent may at any time resign, by
notice to the Partnership, or be removed by the Partnership, such resignation or
removal to become effective upon the appointment by the Managing General Partner
of a successor transfer agent and registrar and its acceptance of such
appointment. If no successor has been appointed and accepted such appointment
within 30 days after notice of such resignation or removal, the Managing General
Partner is authorized to act as the transfer agent and registrar until a
successor is appointed.
TRANSFER OF UNITS
Until a Common Unit has been transferred on the books of the Partnership,
the Partnership and the Transfer Agent, notwithstanding any notice to the
contrary, may treat the record holder thereof as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations. The
transfer of the Common Units to persons that purchase directly from the
Underwriters will be accomplished through the completion, execution and delivery
of a Transfer Application by such investor in connection with such Common Units.
Any subsequent transfers of a Common Unit will not be recorded by the Transfer
Agent or recognized by the Partnership unless the transferee executes and
delivers a Transfer Application. By executing and delivering a Transfer
Application (the form of
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which is set forth as Appendix B to this Prospectus and which is also set forth
on the reverse side of the certificates representing the Common Units), the
transferee of Common Units (i) becomes the record holder of such Common Units
and shall constitute an assignee until admitted into the Partnership as a
substitute limited partner, (ii) automatically requests admission as a
substituted limited partner in the Partnership, (iii) agrees to be bound by the
terms and conditions of, and executes, the Partnership Agreement, (iv)
represents that such transferee has the capacity, power and authority to enter
into the Partnership Agreement, (v) grants powers of attorney to the Managing
General Partner and any liquidator of the Partnership as specified in the
Partnership Agreement and (vi) makes the consents and waivers contained in the
Partnership Agreement. An assignee will become a substituted limited partner of
the Partnership in respect of the transferred Common Units upon the consent of
the Managing General Partner and the recordation of the name of the assignee on
the books and records of the Partnership. Such consent may be withheld in the
sole discretion of the Managing General Partner.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in the Partnership in respect of the transferred
Common Units. A purchaser or transferee of Common Units who does not execute and
deliver a Transfer Application obtains only (a) the right to assign the Common
Units to a purchaser or other transferee and (b) the right to transfer the right
to seek admission as a substituted limited partner in the Partnership with
respect to the transferred Common Units. Thus, a purchaser or transferee of
Common Units who does not execute and deliver a Transfer Application will not
receive cash distributions unless the Common Units are held in a nominee or
"street name" account and the nominee or broker has executed and delivered a
Transfer Application with respect to such Common Units, and may not receive
certain federal income tax information or reports furnished to record holders of
Common Units. The transferor of Common Units will have a duty to provide such
transferee with all information that may be necessary to obtain registration of
the transfer of the Common Units, but a transferee agrees, by acceptance of the
certificate representing Common Units, that the transferor will not have a duty
to insure the execution of the Transfer Application by the transferee and will
have no liability or responsibility if such transferee neglects or chooses not
to execute and forward the Transfer Application to the Transfer Agent. See "The
Partnership Agreement -- Transfer Restrictions."
THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of certain provisions of the
Partnership Agreement. The form of Partnership Agreement is included in this
Prospectus as Appendix A. The Partnership will provide prospective investors
with a copy of the Limited Partnership Agreement for the Operating Partnership
(the "Operating Partnership Agreement") upon request at no charge. The following
discussion is qualified in its entirety by reference to the Partnership
Agreement. The Partnership is the sole limited partner of the Operating
Partnership, which owns, manages and operates the Partnership's business. The
Managing General Partner and the Special General Partner serve as the general
partners of the Partnership, owning a 0.99% and 0.01% general partner interest,
respectively, in the Partnership. The Managing General Partner is the sole
general partner of the Operating Partnership, owning a 1.0101% general partner
interest in the Operating Partnership. The General Partners collectively own a
2% general partner interest in the business and properties owned by the
Partnership and the Operating Partnership on a combined basis. Unless
specifically described otherwise, references herein to the "Partnership
Agreement" constitute references to the Partnership Agreement and the Operating
Partnership Agreement, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to various transactions and
relationships of the Partnership with the General Partners and their affiliates,
see "Conflicts of Interest and Fiduciary Responsibility."
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With regard to distributions of Available Cash, see "Cash Distribution Policy."
With regard to allocations of taxable income and taxable loss, see "Tax
Considerations." Prospective investors are urged to review these sections of
this Prospectus and the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership are Delaware limited
partnerships. The Managing General Partner and the Special General Partner are
the general partners of the Partnership, and the Managing General Partner is the
sole general partner of the Operating Partnership. The General Partners holds an
effective 2% interest as general partners, and the Unitholders hold a 98%
interest as limited partners in the Partnership and the Operating Partnership on
a combined basis. The Partnership will dissolve on December 31, 2084, unless
sooner dissolved pursuant to the terms of the Partnership Agreement.
PURPOSE
The purpose of the Partnership under the Partnership Agreement is limited to
serving as the limited partner of the Operating Partnership and engaging in any
business activity that may be engaged in by the Operating Partnership or that is
approved by the Managing General Partner. The Operating Partnership Agreement
provides that the Operating Partnership may engage in any activity engaged in by
its predecessors immediately prior to the formation of the Operating Partnership
in 1994, any activities that are, in the sole judgment of the Managing General
Partner, reasonably related thereto and any other activity approved by the
Managing General Partner. The Managing General Partner is authorized in general
to perform all acts deemed necessary to carry out such purposes and to conduct
the business of the Partnership.
CAPITAL CONTRIBUTIONS
The holders of Units are not obligated to make additional capital
contributions to the Partnership, except as described below under "-- Limited
Liability."
POWER OF ATTORNEY
Each limited partner, and each person who acquires a Unit from the holder
thereof and executes and delivers a Transfer Application with respect thereto,
grants to the Managing General Partner and, if a liquidator of the Partnership
has been appointed, to such liquidator, a power of attorney to, among other
things, execute and file certain documents required in connection with the
qualification, continuance or dissolution of the Partnership, or the amendment
of the Partnership Agreement in accordance with the terms thereof and to make
consents and waivers contained in the Partnership Agreement.
RESTRICTIONS ON AUTHORITY OF THE MANAGING GENERAL PARTNER
The authority of the Managing General Partner is limited in certain respects
under the Partnership Agreement. The Managing General Partner is prohibited,
without the prior approval of holders of record of at least a majority of the
Units (excluding, during the Subordination Period, Units held by the General
Partners and their affiliates), from, among other things, selling, exchanging or
otherwise disposing of all or substantially all of the Partnership's assets in a
single transaction or a series of related transactions (including by way of
merger, consolidation or other combination) or approving on behalf of the
Partnership the sale, exchange or other disposition of all or substantially all
of the assets of the Operating Partnership; provided that the Partnership may
mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the Partnership's assets without such approval. The
Partnership may also sell all or substantially all of its assets pursuant to a
foreclosure or other realization upon the foregoing encumbrances without such
approval. The Unitholders are not entitled to dissenters' rights of appraisal
under the Partnership Agreement or applicable Delaware law in the event of a
merger or consolidation of the Partnership, a sale of substantially all of the
Partnership's assets or any other event. Except as otherwise provided in the
Partnership Agreement, any amendment to a provision of the Partnership Agreement
generally will require the approval of the holders of at least a majority of the
outstanding Units. See "-- Amendment of Partnership Agreement" below.
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In general, the Managing General Partner may not take any action, or refuse
to take any reasonable action, without the consent of the holders of at least a
majority of each class of outstanding Units (excluding, during the Subordination
Period, Units owned by the General Partners and their affiliates), the effect of
which would be to cause the Partnership to be treated as an association taxable
as a corporation or otherwise taxed as an entity for federal income tax
purposes.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNERS
The Managing General Partner has agreed not to withdraw voluntarily as a
general partner of the Partnership and the Operating Partnership prior to
December 31, 2004 (with limited exceptions described below), without obtaining
the approval of at least 66 2/3% of the outstanding Units (excluding Units held
by the General Partners and their affiliates) and furnishing an opinion of
counsel that such withdrawal (following the selection of a successor managing
general partner) will not result in the loss of the limited liability of the
limited partners of the Partnership or cause the Partnership to be treated as an
association taxable as a corporation or otherwise taxed as an entity for federal
income tax purposes (an "Opinion of Counsel"). On or after December 31, 2004,
the Managing General Partner may withdraw as a general partner (without first
obtaining approval from the Unitholders) by giving 90 days' written notice, and
such withdrawal will not constitute a violation of the Partnership Agreement.
Notwithstanding the foregoing, the Managing General Partner may withdraw without
Unitholder approval upon 90 days' notice to the limited partners if more than
50% of the outstanding Units are held or controlled by one person and its
affiliates (other than the General Partners and their affiliates). The Special
General Partner may withdraw as a general partner of the Partnership at any time
upon 90 days' written notice and furnishing an Opinion of Counsel.
In addition, the Partnership Agreement permits the General Partners (in
certain limited instances) to sell all of their general partner interests in the
Partnership without the approval of the Unitholders. See "-- Transfer of General
Partner Interests." The Special General Partner shall withdraw as a general
partner of the Partnership at any time after a transfer of its general partner
interest in the Partnership upon obtaining the consent of the Managing General
Partner. If the Special General Partner is removed or withdraws and no successor
is appointed, the Managing General Partner will continue the business of the
Partnership.
Upon the withdrawal or removal of the Managing General Partner under any
circumstances (other than as a result of a transfer by the Managing General
Partner of all or a part of its general partner interest in the Partnership),
the holders of a majority of the outstanding Units (excluding Units held by the
General Partners and their affiliates) may select a successor to such
withdrawing or removed Managing General Partner. If such a successor is not
elected, or is elected but an Opinion of Counsel cannot be obtained, the
Partnership will be dissolved, wound up and liquidated, unless within 180 days
after such withdrawal a majority of the Unitholders (excluding Units held by the
General Partners and their affiliates) agree in writing to continue the business
of the Partnership and to the appointment of a successor managing general
partner. See "-- Termination and Dissolution."
Neither the Managing General Partner nor the Special General Partner may be
removed unless such removal is approved by the vote of the holders of not less
than 66 2/3% of the outstanding Units (excluding Units held by the General
Partners and their affiliates) and the Partnership receives an Opinion of
Counsel. Any such removal is also subject to the appointment of a successor
managing general partner in the manner described above. The Partnership
Agreement also provides that if the Managing General Partner is removed other
than for cause, the Subordination Period will end and all outstanding
Subordinated Units will convert into Common Units and any existing Common Units
Arrearages will be extinguished.
Withdrawal or removal of the Managing General Partner as a general partner
of the Partnership also constitutes withdrawal or removal, as the case may be,
of the Managing General Partner as general partner of the Operating Partnership.
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In the event of withdrawal of a General Partner where such withdrawal
violates the Partnership Agreement or removal of a General Partner by the
limited partners under circumstances where cause exists, a successor general
partner will have the option to purchase the general partner interest of the
departing General Partner (the "Departing Partner") in the Partnership and the
Operating Partnership for a cash payment equal to the fair market value of such
interest. Under all other circumstances where a General Partner withdraws or is
removed by the limited partners, the Departing Partner will have the option to
require the successor general partner to purchase such general partner interest
of the Departing Partner for such amount. In each case, such fair market value
will be determined by agreement between the Departing Partner and the successor
general partner, or if no agreement is reached, by an independent investment
banking firm or other independent expert selected by the Departing Partner and
the successor general partner (or if no expert can be agreed upon, by an expert
chosen by agreement of the experts selected by each of them). In addition, the
Partnership will also be required to reimburse the Departing Partner for all
amounts due the Departing Partner, including without limitation, all
employee-related liabilities, including severance liabilities, incurred in
connection with the termination of the employees employed by the Departing
Partner for the benefit of the Partnership.
If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing Partner's
general partner interest in the Partnership will be converted into Common Units
equal to the fair market value of such interest as determined by an investment
banking firm or other independent expert selected in the manner described in the
preceding paragraph.
TRANSFER OF GENERAL PARTNER INTERESTS
Except for a transfer by either General Partner of all, but not less than
all, of its general partner interest in the Partnership to an affiliate or in
connection with the merger or consolidation of either General Partner with or
into another entity or the transfer by either of the General Partners of all or
substantially all of its assets to another person or entity, the General
Partners may not transfer all or any part of their general partner interests in
the Partnership to another person or entity prior to December 31, 2004, without
the approval of holders of at least a majority of the outstanding Units
(excluding, during the Subordination Period, any Units held by the General
Partners or their affiliates); provided that, in each case, such transferee
assumes the rights and duties of the General Partner to whose interest such
transferee has succeeded, agrees to be bound by the provisions of the
Partnership Agreement, furnishes an Opinion of Counsel and, in the case of the
Managing General Partner, agrees to purchase all (or the appropriate portion
thereof, as applicable) of the Managing General Partner's interest in the
Operating Partnership and agrees to be bound by the provisions of the Operating
Partnership Agreement. At any time, the partners or shareholders of the General
Partners may sell or transfer their interests in the General Partners to a third
party without the approval of the Unitholders.
REIMBURSEMENT FOR SERVICES
The Partnership Agreement provides that the General Partners are not
entitled to receive any compensation for their services as general partners of
the Partnership; PROVIDED, HOWEVER, that Fremont is paid a semi-annual fee of
$50,000 by the Managing General Partner for management services and is
reimbursed for its out-of-pocket expenses incurred in the provision of such
services. In addition, the General Partners are entitled to be reimbursed on a
monthly basis (or such other basis as the Managing General Partner may
reasonably determine in its sole discretion) for all direct and indirect
expenses they incur or payments they make on behalf of the Partnership,
including the fee paid to Fremont, and all other necessary or appropriate
expenses allocable to the Partnership or otherwise reasonably incurred by the
General Partners in connection with the operation of the Partnership's business.
The Partnership Agreement provides that the Managing General Partner shall
determine the fees and expenses that are allocable to the Partnership in any
reasonable manner determined by the Managing General Partner in its sole
discretion.
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CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove the Managing General
Partner as managing general partner of the Partnership or otherwise change
management of the Partnership. If the Managing General Partner is removed other
than for cause, the Subordination Period will end and all outstanding
Subordinated Units will convert into Common Units and any existing Common Unit
Arrearages will be extinguished. If any person or group other than the General
Partners and their affiliates acquires beneficial ownership of 20% or more of
the Common Units, such person or group loses voting rights with respect to all
of its Common Units; provided, that any person who, directly or indirectly,
acquires beneficial ownership of 20% or more of the Common Units from Fremont,
Fremont's affiliates or subsequent transferees of the Common Units owned by
Fremont or its affiliates will not lose its voting rights with respect to any
Common Units beneficially owned by such person.
TRANSFER RESTRICTIONS
Except as described below under "-- Limited Liability," the Units will be
fully paid, and holders of Units will not be required to make additional
contributions to the Partnership.
Each purchaser of Common Units in this offering or in the open market who
wishes to become a holder of record must execute and deliver to the Partnership
a Transfer Application (the form of which is attached as Appendix B to this
Prospectus) whereby such recipient requests admission as a substituted limited
partner in the Partnership, makes certain representations and agrees to certain
provisions. If such action is not taken, a recipient will not be registered as a
record holder of Common Units or issued a Common Unit certificate. Purchasers
may hold Common Units in nominee accounts. See "Description of the Common
Units."
An assignee of a Common Unit, after executing and delivering a Transfer
Application, but pending its admission as a substitute limited partner in the
Partnership, is entitled to an interest in the Partnership equivalent to that of
a limited partner with respect to the right to share in allocations and
distributions from the Partnership, including liquidating distributions. The
Managing General Partner will vote and exercise other powers attributable to
Common Units owned by an assignee who has not become a substitute limited
partner at the written direction of such assignee. See "-- Meetings; Voting." A
transferee who does not execute and deliver a Transfer Application will be
treated neither as an assignee nor as a record holder of Common Units, and will
not receive cash distributions, federal income tax allocations or reports
furnished to record holders of Common Units. The only right such a transferee
will have is the right to negotiate such Common Units to a purchaser or other
transferee and the right to transfer the right to request admission as a
substitute limited partner or a substitute special limited partner in respect of
the transferred Common Units to a purchaser or other transferee who executes and
delivers a Transfer Application in respect of the Common Units. A nominee or
broker who has executed a Transfer Application with respect to Common Units held
in street name or nominee accounts will receive the distributions, allocations
and reports pertaining to such Common Units. An assignee will become a
substitute limited partner only with the Managing General Partner's consent,
which consent may be given or withheld in its absolute and sole discretion.
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the Managing General
Partner, create a substantial risk of cancellation or forfeiture of any property
in which the Partnership has an interest because of the nationality, citizenship
or other related status of any limited partner or assignee, the Partnership may
redeem the Common Units held by such limited partner or assignee at their
Current Market Price. In order to avoid any such cancellation or forfeiture, the
Managing General Partner may require each limited partner or assignee to furnish
information about his nationality, citizenship, residency or related status. If
a limited partner or assignee fails to furnish information about such
nationality, citizenship, residency or other related status within 30 days after
a request for such information, such limited partner or assignee may be treated
as a non-citizen assignee (a "Non-citizen Assignee"). In addition to
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other limitations on the rights of an assignee who is not a substitute limited
partner, a Non-citizen Assignee does not have the right to direct the voting of
his Common Units and may not receive distributions in kind upon liquidation of
the Partnership. See "-- Transfer Restrictions."
ISSUANCE OF ADDITIONAL SECURITIES
Subject to certain exceptions, the Partnership may issue an unlimited number
of additional Units or other equity securities of the Partnership for such
consideration and on such terms and conditions as are established by the
Managing General Partner in its sole discretion without the approval of any
limited partners. After this offering and prior to the end of the Subordination
Period, however, the Partnership may not issue (a) in excess of 1,544,670 Common
Units (29,250 Common Units if the Underwriters' over-allotment option is
exercised in full) (excluding Common Units issued upon conversion of
Subordinated Units) or an equivalent amount of securities ranking on a parity
with the Common Units or (b) any equity securities of the Partnership with
rights as to distributions and allocations or in liquidation ranking prior or
senior to the Common Units, in either case without the approval of the holders
of at least 66 2/3% of the outstanding Common Units (excluding Common Units held
by the General Partners and their affiliates); PROVIDED, HOWEVER, that if Units
are to be issued in connection with a merger or consolidation requiring the
approval of a majority of the outstanding Common Units, the required vote shall
be a majority of the outstanding Common Units (excluding, during the
Subordination Period, Common Units held by the General Partners and their
affiliates).
After the end of the Subordination Period, there is no restriction under the
Partnership Agreement on the ability of the Partnership to issue additional
limited or general partner interests having rights to distributions or rights in
liquidation on a parity with or senior to the Common Units. Therefore, after the
Subordination Period, the Managing General Partner, without a vote of the
Unitholders, may cause the Partnership to issue additional Common Units or other
equity securities of the Partnership on a parity with or senior to the Common
Units. In addition, in accordance with Delaware law and the provisions of the
Partnership Agreement, the Managing General Partner may cause the Partnership to
issue additional partnership interests that, in the Managing General Partner's
sole discretion, have special voting rights to which the Common Units are not
entitled. The Partnership Agreement does not impose any restriction on the
Partnership's ability to issue equity securities ranking junior to the Common
Units at any time.
The General Partners will have the right, which they may from time to time
assign in whole or in part to any of their affiliates, to purchase Common Units,
Subordinated Units or other equity securities of the Partnership from the
Partnership whenever, and on the same terms that, the Partnership issues such
securities to persons other than the General Partners and their affiliates, to
the extent necessary to maintain the percentage interest of the General Partners
and their affiliates in the Partnership that existed immediately prior to each
such issuance.
Additional issuances of Units, including Subordinated Units or other equity
securities of the Partnership ranking junior to the Common Units, may reduce the
likelihood of, and the amount of, any distributions above the Minimum Quarterly
Distribution or Target Distributions.
LIMITED CALL RIGHT
If at any time less than 10% of the then issued and outstanding Common Units
are held by persons other than the General Partners and their affiliates, the
Managing General Partner will have the right, which it may assign in whole or in
part to any of its affiliates or to the Partnership, to acquire all, but not
less than all, of the remaining Common Units held by such unaffiliated persons
as of a record date to be selected by the Managing General Partner, on at least
30 but not more than 60 days' notice. The purchase price in the event of such a
purchase shall be the greater of (a) the highest price paid by either of the
General Partners or any of their affiliates for any Common Units purchased
within the 90 days preceding the date on which the Managing General Partner
first mails notice of its election to purchase such Common Units and (b) the
Current Market Price as of the date three days prior to the date such notice is
mailed. As a consequence of the Managing General Partner's right to
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purchase outstanding Common Units, a holder of Common Units may have his Common
Units purchased even though he may not desire to sell them, or the price paid
may be less than the amount the holder would desire to receive upon the sale of
his Common Units.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the Managing General Partner. In order to adopt a proposed amendment,
the Managing General Partner is required to obtain written approval of the
holders of the number of Units required to approve such amendment or call a
meeting of the limited partners to consider and vote upon the proposed
amendment, except as described below. Proposed amendments (unless otherwise
specified) must be approved by holders of at least a majority of the outstanding
Units, except that no amendment may be made which would (i) enlarge the
obligations of any limited partner without its consent, (ii) enlarge the
obligations of either of the General Partners, without its consent, which may be
given or withheld in its sole discretion, (iii) restrict in any way any action
by or rights of the Managing General Partner as set forth in the Partnership
Agreement, (iv) modify the amounts distributable, reimbursable or otherwise
payable by the Partnership to the General Partners, (v) change the term of the
Partnership or (vi) give any person the right to dissolve the Partnership other
than the Managing General Partner's right to dissolve the Partnership with the
approval of at least a majority of the outstanding Units (excluding, during the
Subordination Period, Units held by the General Partners and their affiliates)
or change such right of the Managing General Partner in any way.
The Managing General Partner may make amendments to the Partnership
Agreement without the approval of any limited partner or assignee to reflect (i)
a change in the name of the Partnership, the location of the principal place of
business of the Partnership or the registered agent or the registered office of
the Partnership, (ii) admission, substitution, withdrawal or removal of partners
in accordance with the Partnership Agreement, (iii) a change that, in the sole
discretion of the Managing General Partner, is necessary or appropriate to
qualify or continue the qualification of the Partnership as a partnership in
which the limited partners have limited liability or to ensure that the
Partnership and the Operating Partnership will not be treated as associations
taxable as a corporation or otherwise subject to taxation as an entity for
federal income tax purposes, (iv) an amendment that is necessary, in the opinion
of counsel to the Partnership, to prevent the Partnership or the General
Partners (or any general partner thereof) or their directors, officers or
managers acting on their behalf (or on behalf of any general partner thereof)
from in any manner being subjected to the provisions of the Investment Company
Act of 1940, as amended, the Investment Advisors Act of 1940, as amended, or
"plan asset" regulations adopted under the Employee Retirement Income Security
Act of 1974, as amended, whether or not substantially similar to plan asset
regulations currently applied or proposed, (v) subject to the limitations on the
issuance of additional Common Units or other limited or general partner
interests described above, an amendment that in the sole discretion of the
Managing General Partner is necessary or desirable in connection with the
authorization of additional limited or general partner interests, (vi) any
amendment expressly permitted in the Partnership Agreement to be made by the
Managing General Partner acting alone, (vii) an amendment effected, necessitated
or contemplated by a merger agreement that has been approved pursuant to the
terms of the Partnership Agreement, (viii) any amendment that, in the sole
discretion of the Managing General Partner, is necessary or desirable in
connection with the formation by the Partnership of, or its investment in, any
corporation, partnership or other entity (other than the Operating Partnership)
as otherwise permitted by the Partnership Agreement, (ix) a change in the fiscal
year and taxable year of the Partnership and changes related thereto and (x) any
other amendments substantially similar to any of the foregoing.
In addition, the Managing General Partner may make amendments to the
Partnership Agreement without the approval of any limited partner or assignee if
such amendments (i) do not (in the sole discretion of the Managing General
Partner) adversely affect the limited partners in any material respect, (ii) are
necessary or desirable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, ruling or regulation of any federal or
state agency or judicial authority or
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contained in any federal or state statute, (iii) are necessary or desirable to
implement certain tax-related provisions of the Partnership Agreement, (iv) are
necessary or desirable to facilitate the trading of the Units or to comply with
any rule, regulation, guideline or requirement of any securities exchange on
which the Units are or will be listed for trading, compliance with any of which
the Managing General Partner deems to be in the best interests of the
Partnership and the Unitholders or (v) are required or contemplated by the
Partnership Agreement.
The Managing General Partner is not required to obtain an Opinion of Counsel
as to the tax consequences or the possible effect on limited liability of
amendments described in the two immediately preceding paragraphs. No other
amendments to the Partnership Agreement may become effective without the
approval of holders of at least 95% of the Units unless the Partnership obtains
an Opinion of Counsel to the effect that such amendment will not cause the
Partnership to be treated as an association taxable as a corporation or
otherwise cause the Partnership to be subject to entity level taxation for
federal income tax purposes and will not affect the limited liability of any
limited partner in the Partnership or the limited partner of the Operating
Partnership.
Any amendment that materially and adversely affects the rights or
preferences of any type or class of limited partner interests in relation to
other types or classes of limited partner interests or the general partner
interests requires the approval of at least a majority of the type or class of
limited partner interests so affected (excluding any such limited partner
interests held by the General Partners and their affiliates).
MEETINGS; VOTING
Except as described below with respect to a person or group owning 20% or
more of all Common Units, Unitholders or assignees who are record holders of
Common and Subordinated Units on the record date set pursuant to the Partnership
Agreement are entitled to notice of, and to vote at, meetings of limited
partners of the Partnership and to act with respect to matters as to which
approvals may be solicited. With respect to voting rights attributable to Common
Units that are owned by an assignee who is a record holder but who has not yet
been admitted as a limited partner, the Managing General Partner will be deemed
to be the limited partner with respect thereto and will, in exercising the
voting rights in respect of such Common Units on any matter, vote such Common
Units at the written direction of such record holder. Absent such direction,
such Common Units will not be voted (except that, in the case of Common Units
held by the Managing General Partner on behalf of Non-citizen Assignees, the
Managing General Partner will distribute the votes in respect of such Common
Units in the same ratios as the votes of limited partners in respect of other
Common Units are cast).
Any action that is required or permitted to be taken by the limited partners
may be taken either at a meeting of the limited partners or without a meeting if
consents in writing waiving notice and setting forth the action so taken are
signed by holders of such number of limited partner interests as would be
necessary to authorize or take such action at a meeting of the limited partners.
Meetings of the limited partners may be called by the Managing General Partner
or by limited partners owning at least 20% of the outstanding Units of the class
for which a meeting is proposed. Limited partners may vote either in person or
by proxy at meetings. A majority (or two-thirds, if that is the vote required to
take action at the meeting in question) of the outstanding limited partner
interests of the class for which a meeting is to be held (excluding, if such are
excluded from such vote, limited partner interests held by the General Partners
and their affiliates) represented in person or by proxy constitutes a quorum at
a meeting of limited partners of the Partnership.
Each record holder of a Unit has a vote according to his percentage interest
in the Partnership, although additional limited partner interests having special
voting rights could be issued by the Managing General Partner. See "-- Issuance
of Additional Securities." However, Common Units owned beneficially by any
person and its affiliates (other than the General Partners and their affiliates,
including without limitation Fremont or its affiliates) that own beneficially
20% or more of all Common Units may not be voted on any matter and will not be
considered to be outstanding when
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sending notices of a meeting of limited partners, calculating required votes,
determining the presence of a quorum or for other similar purposes; PROVIDED,
that the Common Units beneficially owned by any person who acquires, directly or
indirectly, from Fremont, Fremont's affiliates or subsequent transferees of the
Units owned by Fremont or its affiliates on December 22, 1994 will be considered
to be outstanding for such purposes. The Partnership Agreement provides that
Units held in nominee or street name account will be voted by the broker (or
other nominee) pursuant to the instruction of the beneficial owner unless the
arrangement between the beneficial owner and his nominee provides otherwise.
Except as otherwise provided in the Partnership Agreement, Subordinated Units
will vote together with Common Units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Units (whether or not such record
holder has been admitted as a limited partner) under the terms of the
Partnership Agreement will be delivered to the record holder by the Partnership
or by the Transfer Agent at the request of the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify and
hold harmless each General Partner, any departing General Partner, any general
partner of a General Partner or a departing General Partner, any person who is
or was an officer, director, employee, agent or trustee of a General Partner, a
departing General Partner, or a general partner of a General Partner or a
departing General Partner, any person who is or was an affiliate of a General
Partner, a departing General Partner, or a general partner of a General Partner
or a departing General Partner, and any person who is or was serving at the
request of a General Partner or a departing General Partner as an officer,
director, employee, agent, trustee or partner of another person (collectively,
"Indemnitees" and individually each an "Indemnitee"), to the fullest extent
permitted by law, from and against any and all losses, claims, damages,
liabilities (joint or several), expenses (including, without limitation, legal
fees and expenses), judgments, fines, penalties, interest, settlements and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as any of the foregoing, provided that in
each case the Indemnitee acted in good faith and in a manner which such
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Partnership and, with respect to any criminal proceeding, had no reasonable
cause to believe its conduct was unlawful. Any indemnification under these
provisions will be only out of the assets of the Partnership, and the General
Partners will not be personally liable for, or have any obligation to contribute
or loan funds or assets to the Partnership to enable it to effectuate, such
indemnification. The Partnership is authorized to purchase and maintain (or to
reimburse the General Partners or their affiliates for the cost of) insurance
against liabilities asserted against and expenses incurred by such persons in
connection with the Partnership's activities, whether or not the Partnership
would have the power to indemnify such person against such liabilities under the
provisions described above.
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of the
business of the Partnership within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Partnership in respect of his Common Units plus his share of any
undistributed profits and assets of the Partnership. However, if it were
determined that the right or exercise of the right by the limited partners as a
group to remove or replace the General Partners, or the rights of the limited
partners to approve certain amendments to the Partnership Agreement or to take
other action pursuant to the Partnership Agreement constituted "participation in
the control" of the Partnership's business for the purposes of the Delaware Act,
then the limited partners could be held personally liable for the Partnership's
obligations under the laws of the State of Delaware to the same extent as the
General Partners.
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Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
nonrecourse liabilities, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to nonrecourse liability shall be included in the assets of the limited
partnership only to the extent that the fair value of that property exceeds that
nonrecourse liability. The Delaware Act provides that a limited partner who
receives such a distribution and knew at the time of the distribution that the
distribution was in violation of the Delaware Act will be liable to the limited
partnership for the amount of the distribution for three years from the date of
the distribution. Under the Delaware Act, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the obligations of his
assignor to make contributions to the partnership, except the assignee is not
obligated for liabilities that are unknown to him at the time he became a
limited partner and could not be ascertained from the partnership agreement.
The Operating Partnership conducts business in the States of Washington,
Oregon, Idaho and Montana and may conduct business in other states. Maintenance
of limited liability may require compliance with legal requirements in the
jurisdictions in which the Operating Partnership conducts business, including
qualifying the Operating Partnership to do business there. Limitations on the
liability of limited partners for the obligations of a limited partnership have
not been clearly established in many jurisdictions. If it were determined that
the Partnership was, by virtue of its limited partner interest in the Operating
Partnership or otherwise, conducting business in any state without compliance
with the applicable limited partnership statute, or that the right or exercise
of the right by the limited partners as a group to remove or replace the General
Partners, or the rights of the limited partners or the special limited partners
to approve certain amendments to the Partnership Agreement, or to take other
action pursuant to the Partnership Agreement constituted "participation in the
control" of the Partnership's business for the purposes of the statutes of any
relevant jurisdiction, then the limited partners could be held personally liable
for the Partnership's obligations under the law of such jurisdiction to the same
extent as the General Partners. The Partnership will operate in such manner as
the Managing General Partner deems reasonable and necessary or appropriate to
preserve the limited liability of Unitholders.
BOOKS AND REPORTS
The Managing General Partner is required to keep appropriate books of the
business of the Partnership at the principal offices of the Partnership. The
books will be maintained for both tax and financial reporting purposes on an
accrual basis. The fiscal year of the Partnership is the calendar year.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the Managing General Partner will furnish each record
holder of Units (as of a record date selected by the Managing General Partner)
with an annual report containing audited financial statements of the Partnership
for the past fiscal year, prepared in accordance with generally accepted
accounting principles. As soon as practicable, but in no event later than 90
days after the close of each quarter (except the fourth quarter), the Managing
General Partner will furnish each record holder of Units (as of a record date
selected by the Managing General Partner) a report containing unaudited
financial statements of the Partnership with respect to such quarter and such
other information as may be required by law.
The Managing General Partner will use all reasonable efforts to furnish each
record holder of Units information reasonably required for tax reporting
purposes within 90 days after the close of each calendar year. Such information
is expected to be furnished in summary form so that certain complex calculations
normally required of partners can be avoided. The Managing General Partner's
ability to furnish such summary information to holders of Units will depend on
the cooperation of such holders in supplying certain information to the Managing
General Partner. Every holder of Units
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(without regard to whether he supplies such information to the Managing General
Partner) will receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a limited partner can for a purpose
reasonably related to such person's interest as a limited partner, upon
reasonable demand and at his own expense, have furnished to him (i) a current
list of the name and last known address of each partner, (ii) a copy of the
Partnership's tax returns, (iii) information as to the amount of cash, and a
description and statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on which each
became a partner, (iv) copies of the Partnership Agreement, the certificate of
limited partnership of the Partnership, amendments thereto and powers of
attorney pursuant to which the same have been executed, (v) information
regarding the status of the Partnership's business and financial condition and
(vi) such other information regarding the affairs of the Partnership as is just
and reasonable. The Managing General Partner may, and intends to, keep
confidential from the limited partners trade secrets or other information the
disclosure of which the Managing General Partner believes in good faith is not
in the best interests of the Partnership or which the Partnership is required by
law or by agreements with third parties to keep confidential.
TERMINATION AND DISSOLUTION
The Partnership will continue until December 31, 2084, unless sooner
dissolved pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (i) the election of the Managing General Partner to dissolve the
Partnership, if approved by at least a majority of the outstanding Units
(excluding, during the Subordination Period, Units held by the General Partners
and their affiliates), (ii) the sale, exchange or other disposition of all or
substantially all of the assets and properties of the Partnership and the
Operating Partnership, (iii) the entry of a decree of judicial dissolution of
the Partnership or (iv) the withdrawal or removal of the Managing General
Partner or the occurrence of any other event that results in its ceasing to be
the Managing General Partner (other than by reason of a transfer of its general
partner interest in accordance with the Partnership Agreement or withdrawal or
removal following approval and admission to the Partnership of a successor).
Upon a dissolution pursuant to clause (iv), the holders of at least a majority
of the Units (excluding, during the Subordination Period, Units held by the
General Partners and their affiliates) may elect, within certain time
limitations, to reconstitute the Partnership and continue its business on the
same terms and conditions set forth in the Partnership Agreement by forming a
new limited partnership on terms identical to those set forth in the Partnership
Agreement and having as managing general partner an entity approved by at least
the holders of a majority of the Units (excluding, during the Subordination
Period, Units held by the General Partners and their affiliates), subject to
receipt by the Partnership of an Opinion of Counsel.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up the
affairs of the Partnership (the "Liquidator") will, acting with all of the
powers of the Managing General Partner that such Liquidator deems necessary or
desirable in its good faith judgment in connection therewith, liquidate the
Partnership's assets and apply the proceeds of the liquidation first to the
payment of all creditors of the Partnership and the creation of a reserve for
contingent liabilities and then to all partners in accordance with the positive
balances in their respective capital accounts. Under certain circumstances and
subject to certain limitations, the Liquidator may defer liquidation or
distribution of the Partnership's assets for a reasonable period of time or
distribute assets to partners in kind if it determines that a sale would be
impractical or would cause undue loss to the partners.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Partnership has agreed to register for resale
under the Act and applicable state securities
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laws any Common Units proposed to be sold by certain investors who received
Units in the offering by the Partnership in 1994 or by the General Partners (or
their affiliates) if an exemption from such registration requirements is not
otherwise available for such proposed transaction. The Partnership is obligated
to pay all expenses incidental to such registrations, excluding underwriting
discounts and commissions. See "Selling Unitholders and Security Ownership."
TAX CONSIDERATIONS
This section is a summary of all material tax considerations that may be
relevant to prospective unitholders and, to the extent set forth below under
"Legal Opinions and Advice," represents the opinion of Andrews & Kurth L.L.P.,
special counsel to the General Partners and the Partnership ("Counsel"), insofar
as it relates to matters of law and legal conclusions. This section is based
upon current provisions of the Code, existing regulations and, to the extent
noted, proposed regulations thereunder and current administrative rulings and
court decisions, all of which are subject to change with and without retroactive
effect. Subsequent changes in such authorities may cause the tax consequences to
vary substantially from the consequences described below.
LEGAL OPINIONS AND ADVICE
Counsel has expressed its opinion that, based on the accuracy of the
representations and subject to the qualifications set forth in the detailed
discussion that follows, for federal income tax purposes (i) the Partnership,
the Operating Partnership and the other subsidiary partnerships ("Subsidiary
Partnerships") will each be treated as a partnership, (ii) owners of Units (with
certain exceptions, as described in "-- Tax Consequences of Unit Ownership --
Limited Partner Status" below) will be treated as partners of the Partnership
(but not the Operating Partnership or any Subsidiary Partnership), (iii)
distributions by the Partnership generally will not be taxable to the Unitholder
to the extent of his basis in his Units immediately before the distribution, and
(iv) with the exception of the allocation of recapture income (discussed below),
allocations under the Partnership Agreement will be given effect in determining
a partner's distributive share of items of income, gain, loss or deduction. In
addition, all statements as to matters of law and legal conclusions contained in
this section, unless otherwise noted, reflect the opinion of Counsel.
Although no attempt has been made in the following discussion to comment on
all federal income tax matters affecting the Partnership or prospective
unitholders, Counsel has advised the General Partners that, based on current
law, the following is a general description of the principal federal income tax
consequences that should arise from the ownership and disposition of Units,
insofar as it relates to matters of law and legal conclusions, which addresses
all material tax consequences to prospective unitholders of the ownership and
disposition of Units. The discussion focuses on prospective unitholders who are
individual citizens or residents of the United States and has only limited
application to corporations, estates, trusts or non-resident aliens.
Accordingly, each prospective unitholder should consult, and should depend on,
his own tax advisor in analyzing the federal, state, local and foreign tax
consequences to him of the ownership or disposition of Units.
For the reasons hereinafter described, counsel has not rendered an opinion
with respect to the following federal income tax issues: (i) the treatment of a
Unitholder whose Units are loaned to a "short seller" to cover a short sale of
Units (see "-- Tax Treatment of Operations -- Treatment of Short Sales"), (ii)
whether a Unitholder acquiring Units in separate transactions must maintain a
single aggregate adjusted tax basis in his Units (see "-- Disposition of Units
- -- Recognition of Gain or Loss"), (iii) whether the Partnership's monthly
convention for allocating taxable income and losses is permitted by existing
Treasury Regulations (see "-- Disposition of Units -- Allocations between
Transferors and Transferees"), and (iv) whether the Partnership's method for
depreciating Section 743 adjustments is sustainable (see "-- Uniformity of
Units").
Except as set forth below under "-- Tax Consequences of Unit Ownership --
Partnership Status," no ruling has been received or requested from the IRS with
respect to the foregoing issues or any other matter affecting the Partnership or
prospective Unitholders. Instead, the Partnership will
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rely on an opinion of Counsel as to the matters set forth above. It should be
noted that an opinion of counsel represents only that counsel's best legal
judgment and does not bind the IRS or the courts. Thus, no assurance can be
provided that the opinions and statements set forth herein would be sustained by
a court if contested by the IRS. The costs of any contest with the IRS will be
borne directly or indirectly by the Unitholders and the General Partners.
Furthermore, no assurance can be given that the treatment of the Partnership or
an investment therein will not be significantly modified by future legislative
or administrative changes or court decisions. Any such modification may or may
not be retroactively applied.
TAX CONSEQUENCES OF UNIT OWNERSHIP
CURRENT TAX RATES; CHANGES IN FEDERAL INCOME TAX LAWS. The top marginal
income tax rate for individuals is 36% subject to a 10% surtax on individuals
with taxable income in excess of $256,500 per year. The surtax is computed by
applying a 39.6% rate to taxable income in excess of the threshold. The net
capital gain of an individual remains subject to a maximum 28% tax rate.
The 1995 Proposed Legislation would have altered the tax reporting system
and the deficiency collection system applicable to large partnerships (generally
defined as electing partnerships with more than 100 partners) and would have
made certain additional changes to the treatment of large partnerships. Certain
of the proposed changes are discussed later in this section. The 1995 Proposed
Legislation was generally intended to simplify the administration of the tax
rules governing large partnerships. In addition, the 1995 Proposed Legislation
contained provisions which would have reduced the maximum tax rate applicable to
net capital gains of an individual to 19.8%. President Clinton vetoed the 1995
Proposed Legislation on December 6, 1995.
The 1996 Proposed Legislation, currently pending in Congress, would affect
the taxation of certain financial products, including partnership interests. The
1996 Proposed Legislation would treat a taxpayer as having sold an "appreciated"
partnership interest (one in which gain would be recognized if such interest
were sold) if the taxpayer or related persons enter into one or more positions
with respect to the same or substantially identical property which, for some
period, substantially eliminates both the risk of loss and opportunity for gain
on the appreciated financial position (including selling "short against the box"
transactions). Certain of these proposed changes are also discussed later in
this section under "Disposition of Common Units."
As of the date of this Prospectus, it is not possible to predict whether any
of the changes set forth in the 1995 Proposed Legislation or the 1996 Proposed
Legislation or any other changes in the federal income tax laws that would
impact the Partnership and the Common Unitholders will ultimately be enacted or,
if enacted, what form they will take, what the effective dates will be, and
what, if any, transition rules will be provided.
PARTNERSHIP STATUS. A partnership is not a taxable entity and incurs no
federal income tax liability. Instead, each partner is required to take into
account his allocable share of items of income, gain, loss and deduction of the
Partnership in computing his federal income tax liability, regardless of whether
cash distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of any cash distributed is in excess of
the partner's adjusted basis in his partnership interest.
Other than as described below, no ruling has been sought or received from
the IRS as to the status of the Partnership, the Operating Partnership or any
subsidiary partnership as a partnership for federal income tax purposes. Instead
the Partnership has relied on the opinion of Counsel that, based upon the Code,
the regulations thereunder, published revenue rulings and court decisions, the
Partnership, the Operating Partnership and each existing subsidiary partnership
will be classified as a partnership for federal income tax purposes.
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In rendering its opinion, Counsel has relied on the accuracy of the factual
matters set forth below as to which the General Partners have made
representations. Such factual matters are as follows:
(a) The Special General Partner, at all times while acting as a general
partner of the Partnership, will have a net worth, computed on a fair market
value basis, excluding its interests in, and any notes or receivables due
from, the Partnership, the Operating Partnership and any subsidiary
partnership, of not less than $25 million;
(b) The Partnership will be operated in accordance with (i) all
applicable partnership statutes and (ii) the Partnership Agreement;
(c) The Operating Partnership and each subsidiary partnership will be
operated in accordance with (i) all applicable partnership statutes and (ii)
the applicable partnership agreement; and
(d) For each taxable year, more than 90% of the gross income of the
Partnership will be derived from (i) the exploration, development,
production, processing, refining, transportation or marketing of any mineral
or natural resource, including timber or (ii) other items of "qualifying
income" within the meaning of Section 7704(d) of the Code.
Regulations recently proposed by the IRS (the "Check the Box Regulations")
may, if adopted as final, make certain of these representations unnecessary. The
Check the Box Regulations generally allow entities such as the Partnership to
choose partnership or corporate treatment for federal income tax purposes. It
cannot be predicted whether the Check the Box Regulations will become final or
the form they will take if they become final.
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the "Qualifying
Income Exception") exists with respect to a publicly-traded partnership if 90%
or more of its gross income for every taxable year consists of "qualifying
income." Qualifying income includes income from the processing, refining,
marketing or transportation of timber. The Partnership's principal sources of
income include income from the sale of timber, the transportation of timber and
the operation of sawmills. The IRS has issued a ruling to CPL, on behalf of the
Partnership, that income from the operation of sawmills (and the production of
plywood) is qualified for this purpose.
The Managing General Partner, based upon the above ruling and analysis,
believes that more than 90% of the Partnership's gross income will be qualified
income. The Managing General Partner believes that less than 5% of the
Partnership's gross income will not be qualified income. The Managing General
Partner will use its best efforts to ensure that more than 90% of the
Partnership's gross income will be qualified income.
If the Partnership fails to meet the Qualifying Income Exception (other than
a failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery), the Partnership will be treated as if
it had transferred all of its assets (subject to liabilities) to a newly formed
corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in the
Partnership. This contribution and liquidation should be tax-free to Unitholders
and the Partnership, so long as the Partnership, at that time, does not have
liabilities in excess of the basis of its assets. Thereafter, the Partnership
would be treated as a corporation for federal income tax purposes.
If the Partnership were treated as an association taxable as a corporation
in any taxable year, either as a result of a failure to meet the Qualifying
Income Exception or otherwise, its items of income, gain, loss and deduction
would be reflected only on its tax return rather than being passed through to
the Unitholders, and its net income would be taxed at the Partnership level at
corporate rates. In addition, any distribution made to a Unitholder would be
treated as either taxable dividend income (to the extent of the Partnership's
current or accumulated earnings and profits) or (in the
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absence of earnings and profits) as a nontaxable return of capital (to the
extent of the Unitholder's basis in his Common Units) or taxable capital gain
(after the Unitholder's basis in the Common Units is reduced to zero).
Accordingly, treatment of either the Partnership, the Operating Partnership or
any subsidiary partnership as an association taxable as a corporation would
result in a material reduction in a Unitholder's cash flow and after-tax return.
The discussion below is based on the assumption that the Partnership, the
Operating Partnership and each existing subsidiary partnership will each be
classified as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS. Unitholders who have become limited partners will
be treated as partners of the Partnership for federal income tax purposes.
Moreover, the IRS has ruled that assignees of partnership interests who have not
been admitted to a partnership as partners, but who have the capacity to
exercise substantial dominion and control over the assigned partnership
interests, will be treated as partners for federal income tax purposes. On the
basis of this ruling, except as otherwise described herein, Counsel is of the
opinion that (a) assignees who have executed and delivered Transfer
Applications, and are awaiting admission as limited partners and (b) Unitholders
whose Units are held in street name or by another nominee and who have the right
to direct the nominee in the exercise of all substantive rights attendant to the
ownership of their Units will be treated as partners of the Partnership for
federal income tax purposes. As this ruling does not extend, on its facts, to
assignees of Units who are entitled to execute and deliver Transfer Applications
and thereby become entitled to direct the exercise of attendant rights, but who
fail to execute and deliver Transfer Applications, Counsel's opinion does not
extend to these persons. Income, gain, deductions or losses would not appear to
be reportable by such a Unitholder, and any cash distributions received by such
a Unitholder would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in the Partnership for federal income tax purposes. A purchaser or other
transferee of Units who does not execute and deliver a Transfer Application may
not receive certain federal income tax information or reports furnished to
record holders of Units unless the Units are held in a nominee or street name
account and the nominee or broker has executed and delivered a Transfer
Application with respect to such Units.
A beneficial owner of Units whose Units have been transferred to a short
seller to complete a short sale would appear to lose his status as a partner
with respect to such Units for federal income tax purposes. See "-- Tax
Treatment of Operations -- Treatment of Short Sales."
FLOW-THROUGH OF TAXABLE INCOME. No federal income tax will be paid by the
Partnership. Instead, each Unitholder will be required to report on his income
tax return his allocable share of the income, gains, losses and deductions of
the Partnership without regard to whether corresponding cash distributions are
received by him. Consequently, a Unitholder may be allocated income from the
Partnership even if he has not received a cash distribution.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS. Distributions by the Partnership to
a Unitholder generally will not be taxable to the Unitholder for federal income
tax purposes to the extent of his basis in his Units immediately before the
distribution. Cash distributions in excess of a Unitholder's basis generally
will be considered to be gain from the sale or exchange of the Units, taxable in
accordance with the rules described under "-- Disposition of Units" below. Any
reduction in a Unitholder's share of the Partnership's liabilities for which no
partner, including the General Partners, bears the economic risk of loss
("nonrecourse liabilities") will be treated as a distribution of cash to that
Unitholder. A decrease in a Common Unitholder's limited partner interest in the
Partnership because of the issuance by the Partnership of additional Common
Units could decrease such Common Unitholder's share of nonrecourse liabilities
of the Partnership, and thus could result in a corresponding deemed distribution
of cash. To the extent that Partnership distributions cause a Unitholder's "at
risk" amount to be less than zero at the end of any taxable year, he must
recapture any losses deducted in previous years. See "-- Limitations on
Deductibility of Partnership Losses."
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RATIO OF TAXABLE INCOME TO DISTRIBUTIONS. The General Partners estimate
that a purchaser of Common Units in this offering who holds such Common Units
from the date of the closing of this offering to the record date for the last
quarter of 1997 will be allocated, on a cumulative basis, an amount of federal
taxable income for such period that will be approximately 20% of cash
distributed with respect to that period. Substantially all of such taxable
income will be treated as Section 1231 income which may be treated as capital
gains, depending upon a Unitholder's particular tax circumstances, as a result
of an election made pursuant to Section 631(a) of the Code, and as a result of
transactions qualifying for treatment under Section 631(b) of the Code. The
General Partners further estimate that after 1997 the taxable income allocable
to the Unitholders will constitute an increasing percentage of cash distributed
to Unitholders. These estimates are based upon the assumption that Available
Cash will approximate an amount required to make the First and Second Target
Distributions with respect to the Common and the Subordinated Units and other
assumptions with respect to capital expenditures, cash flow and anticipated cash
distributions. These estimates and assumptions are subject to, among other
things, numerous business, economic, regulatory, competitive and political
uncertainties beyond the control of the General Partners, especially the assumed
prices for logs and lumber. Further, the estimates are based on current tax law
and certain tax reporting positions that the General Partners have adopted or
intend to adopt and with which the IRS could disagree. Accordingly, no assurance
can be given that the estimates will prove to be correct. The actual percentage
could be higher or lower and that difference could be material.
BASIS OF UNITS. A Unitholder's initial tax basis for his Units will be the
amount he paid for the Units plus his share of the Partnership's nonrecourse
liabilities. That basis will be increased by his share of Partnership income and
by any increases in his share of Partnership nonrecourse liabilities. That basis
will be decreased (but not below zero) by distributions from the Partnership, by
the Unitholder's share of Partnership losses, by any decrease in his share of
Partnership nonrecourse liabilities and by his share of expenditures of the
Partnership that are not deductible in computing its taxable income and are not
required to be capitalized. A limited partner will have no share of Partnership
debt which is recourse to a partner, but will have a share, generally based on
his share of profits, of Partnership debt which is not recourse to any partner.
See "-- Disposition of Units -- Recognition of Gain or Loss."
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES. The passive loss
limitations generally provide that individuals, estates, trusts and certain
closely held corporations and personal service corporations can deduct losses
from passive activities (generally, activities in which the taxpayer does not
materially participate) only to the extent of the taxpayer's income from those
passive activities. The passive loss limitations are applied separately with
respect to each publicly-traded partnership. Consequently, any passive losses
generated by the Partnership will only be available to offset future income
generated by the Partnership other than certain portfolio income and will not be
available to offset income from other passive activities or investments
(including other publicly-traded partnerships) or salary or active business
income. Passive losses which are not deductible because they exceed a Common
Unitholder's income (other than certain portfolio income) generated by the
Partnership may be deducted in full when he disposes of his entire investment in
the Partnership in a fully taxable transaction to an unrelated party. The
passive activity loss rules are applied after other applicable limitations on
deductions such as the at risk rules and the basis limitation, described below.
In addition to the passive loss limitations, the deduction by a Common
Unitholder of his share of Partnership losses will be limited to the tax basis
in his Common Units and, in the case of an individual Unitholder or a corporate
Unitholder (if more than 50% of the value of its stock is owned directly or
indirectly by five or fewer individuals or certain tax-exempt organizations), to
the amount which the Common Unitholder is considered to be "at risk" with
respect to the Partnership's activities. A Common Unitholder must recapture
losses deducted in previous years to the extent that Partnership distributions
cause the Common Unitholder's at risk amount to be less than zero at the end of
any taxable year. Losses disallowed to a Common Unitholder or recaptured as a
result of these limitations will carry forward and will be allowable to the
extent that the Common Unitholder's basis
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or at risk amount (whichever is the limiting factor) is subsequently increased.
Upon the taxable disposition of a Common Unit, any gain recognized by a Common
Unitholder can be offset by losses that were previously suspended by the at risk
limitation but may not be offset by losses suspended by the basis limitation.
Any excess loss (above such gain) previously suspended by the at risk or basis
limitations is no longer utilizable.
LIMITATIONS ON INTEREST DEDUCTIONS. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
such taxpayer's "net investment income." As noted, a Unitholder's net passive
income from the Partnership will be treated under Treasury Regulations which are
to be issued as investment income for this purpose. In addition, the
Unitholder's share of the Partnership's portfolio income will be treated as
investment income. Investment interest expense includes (i) interest on
indebtedness properly allocable to property held for investment, (ii) a
partnership's interest expense attributed to portfolio income and (iii) the
portion of interest expense incurred to purchase or carry an interest in a
passive activity to the extent attributable to portfolio income. The computation
of a Unitholder's investment interest expense will take into account interest on
any margin account borrowing or other loan incurred to purchase or carry a Unit
to the extent attributable to portfolio income of the Partnership. Net
investment income includes gross income from property held for investment and
amounts treated as portfolio income pursuant to the passive loss rules less
deductible expenses (other than interest) directly connected with the production
of investment income, but generally does not include gains attributable to the
disposition of property held for investment.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION. In general, if
the Partnership has a net profit, items of income, gain, loss and deduction will
be allocated among the General Partners and the Unitholders in accordance with
their respective interest in the Partnership. A class of Unitholders (such as
Common Unitholders) that receives more cash than another class, on a per Unit
basis, with respect to a year will be allocated additional income equal to that
excess. If the Partnership has a net loss, items of income, gain, loss and
deduction will generally be allocated (1) first, to the General Partners and the
Unitholders in accordance with their respective interests in the Partnership to
the extent of their positive capital accounts; and (2) second, to the General
Partners.
As required by Section 704(c) of the Code, certain items of Partnership
income, deduction, gain and loss will be allocated to account for the difference
between the tax basis and fair market value of certain property held by the
Partnership ("Contributed Property"). Under the Code, the partners in a
partnership cannot be allocated more depletion, depreciation, gain or loss than
the total amount of any such item recognized by that partnership in a particular
taxable period (the "ceiling limitation"). To the extent the ceiling limitation
is or becomes applicable, the Partnership Agreement requires that certain items
of income and deduction be allocated in a way designed to effectively "cure"
this problem and eliminate the impact of the ceiling limitation. Recently
released Regulations under Section 704(c) of the Code permit a Partnership to
make reasonable allocations to reduce or eliminate book-tax disparities.
In addition, certain items of recapture income will be allocated, to the
extent possible, to the partner allocated the deduction giving rise to the
treatment of such gain as recapture income in order to minimize the recognition
of ordinary income by some Common Unitholders, but these allocations may not be
respected. If these allocations of recapture income are not respected, the
amount of the income or gain allocated to a Common Unitholder will not change,
but a change in the character of the income allocated to a Common Unitholder
would result.
Counsel is of the opinion that, with the exception of the allocation of
recapture income discussed above, allocations under the Partnership Agreement
will be given effect for federal income tax purposes in determining a partner's
distributive share of an item of income, gain, loss or deduction. There are,
however, uncertainties in the Treasury Regulations relating to allocations of
partnership income, and investors should be aware that the allocations of
recapture income in the Partnership Agreement may be successfully challenged by
the IRS.
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TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR. The Partnership uses December 31 as the
end of its taxable year and has adopted the accrual method of accounting for
federal income tax purposes. Each Unitholder will be required to include in
income his allocable share of Partnership income, gain, loss and deduction for
the fiscal year of the Partnership ending within or with the taxable year of the
Unitholder. In addition, a Unitholder who has a taxable year ending on other
than December 31 and who disposes of all his Units following the close of the
Partnership's taxable year but before the close of his taxable year must include
his allocable share of Partnership income, gain, loss and deduction in income
for his taxable year with the result that he will be required to report in
income for his taxable year his distributive share of more than one year of
Partnership income, gain, loss and deduction. See "Disposition of Units --
Allocations Between Transferors and Transferees."
INITIAL TAX BASIS, DEPLETION, DEPRECIATION AND AMORTIZATION. The tax basis
of the assets of the Partnership will be used for purposes of computing
depletion, depreciation and cost recovery deductions and, ultimately, gain or
loss on the disposition of such assets. The Partnership assets initially had a
tax basis equal to the tax basis of the assets in the hands of the Partnership's
predecessors immediately prior to the formation of the Partnership plus the
amount of gain recognized by partners in the Partnership's predecessors as a
result of the formation of the Partnership. The federal income tax burden
associated with the difference between the fair market value of property held by
the Partnership and its tax basis immediately prior to this offering will be
borne by partners holding interests in the Partnership prior to this offering.
If the Partnership disposes of depreciable property (which would not include
timber assets) by sale, foreclosure, or otherwise, all or a portion of any gain
(determined by reference to the amount of depreciation previously deducted and
the nature of the property) may be subject to the recapture rules and taxed as
ordinary income rather than capital gain. Similarly, a partner who has taken
cost recovery or depreciation deductions with respect to property owned by the
Partnership may be required to recapture such deductions upon a sale of his
interest in the Partnership. See "-- Tax Consequences of Unit Ownership --
Allocation of Partnership Income, Gain, Loss and Deduction" and "-- Disposition
of Units -- Recognition of Gain or Loss."
Costs incurred in organizing the Partnership are being amortized over a
period of 60 months. The costs incurred in promoting the issuance of Units must
be capitalized and cannot be deducted currently, ratably or upon termination of
the Partnership. There are uncertainties regarding the classification of costs
as organization expenses, which may be amortized, and as syndication expenses,
which may not be amortized.
TIMBER INCOME. Section 631 of the Code provides special rules by which
gains or losses on the sale of timber, cut logs or the products into which cut
logs are converted, which would otherwise be taxable as ordinary income or loss,
may be treated, in whole or in part, as gains or losses from the sale of
property used in a trade or business under Section 1231 of the Code. For a
discussion of the treatment of Section 1231 gains and losses, see "-- Sales of
Timberlands."
Section 631(a) of the Code provides that, if an election is made, the
cutting of timber during the year by a taxpayer who owns the timber or a
contract right to cut the timber shall be treated as the sale of that timber for
an amount equal to the fair market value of the timber as of the first day of
the taxable year in which the timber is cut. In computing the amount of gain or
loss, the taxpayer is entitled to offset his basis in the timber against its
fair market value. The gain or loss is recognized in the year the timber is cut
and is treated under Section 1231 of the Code as gain or loss from the sale of
property used in a trade or business. For a discussion of the treatment of
Section 1231 gains and losses, see "-- Sales of Timberlands." The fair market
value of the standing timber as of the first day of the taxable year in which
the timber is cut will become the tax basis of the cut timber (or the product
into which it is converted) for purposes of determining gain or loss on a
subsequent sale, which gain or loss would be ordinary income or loss in the year
of sale. The election under Section 631(a) is available only with respect to
timber or contract rights to cut timber that the taxpayer held for a period of
more
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than one year before such cutting. The election applies to all timber that the
taxpayer owns or has the right to cut, and once made cannot be revoked without
the consent of the IRS. The Partnership has made the election provided by
Section 631(a).
Section 631(b) of the Code provides that if the owner of timber (including a
holder of a contract right to cut timber) held for more than one year disposes
of such timber under any contract by virtue of which he "retains an economic
interest in such timber," the gain or loss realized will be treated under
Section 1231 of the Code as gain or loss from property used in a trade or
business. For a discussion of the treatment of Section 1231 gains and losses,
see "-- Sales of Timberlands." In computing such gain or loss, the amount
realized is reduced by the adjusted basis in such timber, determined as
described in "-- Timber Depletion." For purposes of Section 631(b), the timber
generally is deemed to be disposed of on the day on which the timber is cut
(which is generally deemed to be the date when, in the ordinary course of
business, the quantity of the timber cut is first definitely determined).
Although the Partnership is not aware of any pending or proposed legislation
which would amend Section 631 of the Code, that Section could be amended in a
manner which causes timber income to be treated as other than Section 1231
income and any such amendment could have an adverse impact on Unitholders.
Gains from sale of timber by the Partnership that do not qualify under
Section 631 generally will be taxable as ordinary income in the year of sale.
TIMBER DEPLETION. Timber is subject to cost depletion and is not subject to
accelerated cost recovery, depreciation or percentage depletion. Timber
depletion is determined with respect to each separate timber account (containing
timber located in a timber "block") and is equal to the product obtained by
multiplying the units of timber cut by a fraction, the numerator of which is the
aggregate adjusted basis of all timber included in such account and the
denominator of which is the total number of timber units in such timber account.
The depletion allowance so calculated represents the adjusted tax basis of such
timber for purposes of determining gain or loss on disposition. The tax basis of
timber in each timber account is reduced by the depletion allowance for such
account.
If a Section 631(a) election is in effect, the taxpayer will be entitled to
a depletion allowance as discussed above. Thereafter, the taxpayer's adjusted
basis with respect to such timber will be the fair market value of the timber as
of the first day of the taxable year in which the timber is cut. As the cut
timber (or the product into which it was converted) is sold, the taxpayer's
adjusted basis will be taken into account for purposes of determining gain or
loss on the sale. In the case of an outright sale of timber or a disposition of
timber treated as a sale under Section 631(b) of the Code, the amount realized
for the timber is reduced by the adjusted basis in such timber. A taxpayer
disposing of timber with a retained economic interest in a transaction which
fails to qualify under Section 631(b) also reduces the amount realized from such
disposition by the adjusted basis in the timber.
SALES OF TIMBERLANDS. If any tract of timberland is sold or otherwise
disposed of in a taxable transaction, the Partnership will recognize gain or
loss measured by the difference between the amount realized (including the
amount of any indebtedness assumed by the purchaser upon such disposition or to
which such property is subject) and the adjusted tax basis of such property.
Generally, the character of any gain or loss recognized upon that disposition
will depend upon whether the tract of timberland (i) is held for sale to
customers in the ordinary course of business (I.E., the Partnership is a
"dealer" with respect to such property), (ii) is held for "use in a trade or
business" within the meaning of Section 1231 of the Code or (iii) is held by the
Partnership as a "capital asset" within the meaning of Section 1221 of the Code.
In determining dealer status with respect to timberlands and other types of real
estate, the courts have identified a number of factors for distinguishing
between a particular property held for sale in the ordinary course of business
and one held for investment. Any determination must be based on all the facts
and circumstances surrounding the particular property and sale in question.
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The Partnership intends to hold its Timberlands for the purposes of
generating cash flow from the periodic harvesting and sale of timber and
achieving long-term capital appreciation. Although the Managing General Partner
may consider strategic sales of timberlands consistent with achieving long-term
capital appreciation, the Managing General Partner does not anticipate frequent
sales, nor significant marketing, improvement or subdivision activity in
connection with any strategic sale of timberland. However, in light of the
factual nature of this question, there can be no assurance that the purposes of
the Partnership will not change and that future activities of the Partnership
will not cause it to be a "dealer" in timberlands.
In addition, were the IRS successfully to contend that any of the
Partnership's predecessors was a dealer with respect to any tracts of timberland
distributed to the Partnership, gains from sales of these tracts within a
five-year period from the date of contribution would be taxable as ordinary
income. The Managing General Partner, however, believes that none of the
Partnership's predecessors was a dealer with respect to any of its timberland
holdings.
If the Partnership is not a dealer with respect to a particular tract of
timberland and the Partnership has held the timberland for a one-year period
primarily for use in its trade or business, the character of any gain or loss
realized from the disposition of such timberland will be determined under
Section 1231 of the Code. If the Partnership has not held a timberland tract for
more than one year at the time of sale, gain or loss from the sale thereof will
be ordinary.
A Unitholder's distributive share of any Section 1231 gain or loss of the
Partnership will be aggregated with any other gains and losses realized by such
Unitholder from the disposition of property used in the trade or business, as
defined in Section 1231(b) of the Code, and from the involuntary conversion of
such properties and of capital assets held in connection with a trade or
business or a transaction entered into for profit for the requisite holding
period. If a net gain results, all such gains and losses will be capital gains
and losses; if a net loss results, all such gains and losses will be ordinary
income and losses. Capital gains of individual taxpayers are currently taxed at
a maximum rate of 28%; ordinary income of individual taxpayers is currently
taxed at a maximum marginal rate of 39.6%. Net Section 1231 gains will be
treated as ordinary income to the extent of prior net Section 1231 losses of the
taxpayer or predecessor taxpayer for the five most recent prior taxable years
beginning after December 31, 1981, to the extent such losses have not previously
been offset against Section 1231 gains. Losses are deemed recaptured in the
chronological order in which they arose.
If the Partnership is not a dealer with respect to a particular tract of
timberland, and the timberland is not used in a trade or business, that tract
will be a "capital asset" within the meaning of Section 1231 of the Code. Gain
or loss recognized from the disposition of that timberland will be taxable as
capital gain or loss, and the character of such capital gain or loss as
long-term or short-term will be based upon the Partnership's holding period in
such property at the time of its sale. The requisite holding period for
long-term capital gain is more than one year.
Because amounts realized upon the sale, exchange or other disposition of a
tract of timberland by the Partnership may be used to reduce any liability to
which the tract of timberland is subject, it is possible, although not
anticipated, that the Partnership's gain on the sale of such a tract could
exceed the distributive proceeds of the sale, and the income taxes payable on
the sale by the Unitholders could exceed their distributive share of any such
proceeds.
SECTION 754 ELECTION. The Partnership has made the election permitted by
Section 754 of the Code, which election is irrevocable without the consent of
the IRS. The election will generally permit a purchaser of Common Units to
adjust his share of the basis in the Partnership's properties ("inside basis")
pursuant to Section 743(b) of the Code to fair market value (as reflected by his
Unit price). The Section 743(b) adjustment is attributed solely to a purchaser
of Common Units and is not added to the
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bases of the Partnership's assets associated with all of the Unitholders. (For
purposes of this discussion, a partner's inside basis in the Partnership's
assets will be considered to have two components: (1) his share of the
Partnership's actual basis in such assets ("Common Basis") and (2) his Section
743(b) adjustment allocated to each such asset.)
Although Counsel is unable to opine as to the validity of such an approach,
the Partnership intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of depreciable Contributed
Property (to the extent of any unamortized book-tax disparity) using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the Common Basis of such property, despite its
inconsistency with certain proposed and final Treasury regulations and certain
legislative history (none of which is expected to directly apply to a material
portion of the Partnership's assets). See "-- Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the principles of Section 1060 of the Code. Based on these principles, the
IRS may seek to reallocate some or all of any Section 743(b) adjustment not so
allocated by the Partnership to goodwill which, as an intangible asset, may be
amortizable over a longer period of time than the Partnership's tangible
depletable or depreciable assets. Alternatively, it is possible that the IRS
might seek to treat the portion of such Section 743(b) adjustment attributable
to the underwriters' discount as if it were allocable to a non-deductible
syndication cost.
A Section 754 election is advantageous if the transferee's basis in his
Units is higher than such Units' share of the aggregate basis to the Partnership
of the Partnership's assets immediately prior to the transfer. In such a case,
pursuant to the election, the transferee would take a new and higher basis in
his share of the Partnership's assets for purposes of calculating, among other
items, his depletion and depreciation deductions and his share of any gain or
loss on a sale of the Partnership's assets. Conversely, a Section 754 election
is disadvantageous if the transferee's basis in such Units is lower than such
Unit's share of the aggregate basis of the Partnership's assets immediately
prior to the transfer. Thus, the amount which a Unitholder will be able to
obtain upon the sale of his Common Units may be affected either favorably or
adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by the Partnership on the basis of certain assumptions as to the value
of Partnership assets and other matters. There is no assurance that the
determinations made by the Partnership will not be successfully challenged by
the IRS and that the deductions attributable to them will not be disallowed or
reduced. Should the IRS require a different basis adjustment to be made, and
should, in the Managing General Partner's opinion, the expense of compliance
exceed the benefit of the election, the Managing General Partner may seek
permission from the IRS to revoke the Section 754 election for the Partnership.
If such permission is granted, a purchaser of Units subsequent to such
revocation probably will incur increased tax liability.
ALTERNATIVE MINIMUM TAX. Each Unitholder will be required to take into
account his distributive share of any items of Partnership income, gain or loss
for purposes of the alternative minimum tax applicable to his alternative
minimum taxable income. A Unitholder's alternative minimum taxable income
derived from the Partnership may be higher than his share of Partnership net
income because the Partnership may use accelerated methods of depreciation for
purposes of computing federal taxable income or loss. The 1993 Budget Act
increased the minimum tax rate applicable to noncorporate Unitholders from 24%
to 26% on the first $175,000 of alternative minimum taxable income in excess of
the exemption amount and to 28% on any additional alternative minimum taxable
income. Prospective Unitholders should consult with their tax advisors as to the
impact of an investment in Units on their liability for the alternative minimum
tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES. The federal
income tax consequences of the acquisition, ownership and disposition of Units
will depend in part on estimates by the Managing General Partner of the relative
fair market values, and determinations of the initial tax
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basis, of the assets of the Partnership. Although the Managing General Partner
may from time to time consult with professional appraisers with respect to
valuation matters, many of the relative fair market value estimates will be made
solely by the Managing General Partner. These estimates and determinations of
basis are subject to challenge and will not be binding on the IRS or the courts.
If the estimates of fair market value or determinations of basis are
subsequently found to be incorrect, the character and amount of items of income,
gain, loss or deductions previously reported by Unitholders might change, and
Unitholders might be required to adjust their tax liability for prior years.
TREATMENT OF SHORT SALES. It would appear that a Unitholder whose Units are
loaned to a "short seller" to cover a short sale of Units will be considered as
having transferred beneficial ownership of those Units and would, thus, no
longer be a partner with respect to those Units during the period of the loan.
As a result, during this period, any Partnership income, gain, deduction or loss
with respect to those Units would appear not to be reportable by the Unitholder,
any cash distributions received by the Unitholder with respect to those Units
would be fully taxable and all of such distributions would appear to be treated
as ordinary income. The IRS may also contend that a loan of Units to a "short
seller" constitutes a taxable exchange. If this contention were successfully
made, the lending Unitholder may be required to recognize gain or loss.
Unitholders desiring to assure their status as partners should modify any
brokerage account agreements to prohibit their brokers from borrowing their
Units. The IRS has announced that it is actively studying issues relating to the
tax treatment of short sales of partnership interests. See "-- Current Tax
Rates; Changes in Federal Income Tax Laws."
DISPOSITION OF UNITS
RECOGNITION OF GAIN OR LOSS. Gain or loss will be recognized on a sale of
Units equal to the difference between the amount realized and the Unitholder's
tax basis for the Units sold. A Unitholder's amount realized will generally be
measured by the sum of the cash or the fair market value of other property
received plus his share of Partnership nonrecourse liabilities. Because the
amount realized includes a Unitholder's share of Partnership nonrecourse
liabilities, the gain recognized on the sale of Units may result in a tax
liability in excess of any cash received from such sale.
Prior Partnership distributions in excess of cumulative net taxable income
in respect of a Unit which decreased a Unitholder's tax basis in such Unit will,
in effect, become taxable income if the Unit is sold at or above original cost
(and may partially become taxable income even if the Unit is sold below original
cost.)
Gain or loss recognized by a Unitholder (other than a "dealer" in Units) on
the sale or exchange of a Unit held for more than one year will generally be
taxable as long-term capital gain or loss. A portion of this gain or loss,
however, will be separately computed and taxed as ordinary income or loss under
Section 751 of the Code to the extent attributable to assets giving rise to
depreciation recapture or other "unrealized receivables" or to "substantially
appreciated inventory" owned by the Partnership. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Inventory is considered to be "substantially appreciated" if its
value exceeds 120% of its adjusted basis to the Partnership. Ordinary income
attributable to unrealized receivables, substantially appreciated inventory and
depreciation recapture may exceed net taxable gain realized upon the sale of the
Unit and may be recognized even if there is a net taxable loss realized on the
sale of the Unit. Thus, a Unitholder may recognize both ordinary income and a
capital loss upon a disposition of Units. Net capital loss may offset no more
than $3,000 of ordinary income in the case of individuals and may only be used
to offset capital gain in the case of a corporation.
The IRS has ruled that a partner acquiring interests in a partnership in
separate transactions must maintain an aggregate adjusted tax basis in a single
partnership interest and that, upon sale or other disposition of some of the
interests, a portion of that tax basis must be allocated to the interests sold
on the basis of some equitable apportionment method not specified by the IRS.
The ruling is unclear as to how the holding period is affected by this
aggregation concept. If this ruling is applicable to the holders of Units, the
aggregation of tax bases of a holder of Units effectively prohibits him from
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choosing among Units with varying amounts of unrealized gain or loss as would be
possible in a stock transaction. Thus, the ruling may result in an acceleration
of gain or deferral of loss on a sale of a portion of a Unitholder's Units. It
is not clear whether the ruling applies to publicly-traded partnerships, such as
the Partnership, the interests in which are evidenced by separate certificates.
Accordingly Counsel is unable to opine as to the effect such ruling will have on
the Unitholders. In addition, under the financial product provisions of the 1996
Proposed Legislation, in the case of interests in publicly traded partnerships
which are substantially identical, the basis of such interests and any
adjustments to basis would be determined on an average basis. A Unitholder
considering the purchase of additional Units or a sale of Units purchased at
differing prices should consult his tax advisor as to the possible consequences
of such ruling and subsequent legislation.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Partnership's taxable income and losses will be determined annually and will be
prorated on a monthly basis and subsequently apportioned among the Unitholders
in proportion to the number of Units owned by them as of the opening of the
first business day of the month to which they relate. However, gain or loss
realized on a sale or other disposition of Partnership assets other than in the
ordinary course of business will be allocated among the Unitholders of record as
of the opening of the NYSE on the first business day of the month in which that
gain or loss is recognized. As a result of this monthly allocation, a Unitholder
transferring Units in the open market may be allocated income, gain, loss and
deduction accrued after the date of transfer.
The use of this monthly convention may not be permitted by existing Treasury
Regulations and, accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Common Units. If a monthly convention is not allowed by the
Treasury Regulations (or only applies to transfers of less than all of the
Unitholder's interest), taxable income or losses of the Partnership might be
reallocated among the Unitholders. The Managing General Partner is authorized to
revise the Partnership's method of allocation between transferors and
transferees (as well as among partners whose interests otherwise vary during a
taxable period) to conform to a method permitted by future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a distribution with respect to that
quarter will be allocated items of Partnership income and gain attributable to
the quarter during which those Units were owned but will not be entitled to
receive that cash distribution.
NOTIFICATION REQUIREMENTS. A Unitholder who sells or exchanges Units is
required to notify the Partnership in writing of that sale or exchange within 30
days of the sale or exchange and in any event by no later than January 15 of the
year following the calendar year in which the sale or exchange occurred. The
Partnership is required to notify the IRS of that transaction and to furnish
certain information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects that sale through a broker.
Additionally, a transferor and a transferee of a Unit will be required to
furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, which set forth the amount
of the consideration received for the Unit that is allocated to goodwill or
going concern value of the Partnership. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
CONSTRUCTIVE TERMINATION. The Partnership and the Operating Partnership
(and any Subsidiary Partnership) will be considered to have been terminated if
there is a sale or exchange of 50% or more of the total interests in Partnership
capital and profits within a 12-month period. Under the 1995 Proposed
Legislation, termination of a large partnership would not occur by reason of the
sale or exchange of interests in the partnership. A termination of the
Partnership will cause a termination of the Operating Partnership and any
Subsidiary Partnership. A termination of the Partnership will result in the
closing of the Partnership's taxable year for all Unitholders. In the case of a
Unitholder
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reporting on a taxable year other than a fiscal year ending December 31, the
closing of the Partnership's taxable year may result in more than 12 months'
taxable income or loss of the Partnership being includable in his taxable income
for the year of termination. New tax elections required to be made by the
Partnership, including a new election under Section 754 of the Code, must be
made subsequent to a termination, and a termination could result in a deferral
of Partnership deductions for depreciation. A termination could also result in
penalties if the Partnership were unable to determine that the termination had
occurred. Moreover, a termination might either accelerate the application of, or
subject the Partnership to, any tax legislation enacted prior to the
termination.
Under current regulations, a termination of the Partnership would result in
a deemed distribution of the Partnership's assets to the Unitholders followed by
a deemed reconveyance of the assets to the Partnership, and the Partnership
would be treated as a new partnership. As a result of the deemed distribution,
each Unitholder would realize taxable gain to the extent that any money deemed
to have been distributed to him exceeds the adjusted basis of his Units.
Moreover, the deemed distribution and reconveyance could result in a loss of
basis adjustments under Section 754 of the Code if the Partnership were unable
to determine that the termination had occurred. Under recently proposed
regulations, which will apply only to terminations occurring after the proposed
regulations are adopted in final form, a termination of the Partnership would
result in a deemed transfer by the Partnership of its assets to a new
partnership in exchange for an interest in the new partnership followed by a
deemed distribution of interests in the new partnership to the Unitholders in
liquidation of the Partnership. Consequently, the tax consequences that would
result from the deemed distribution and reconveyance of assets upon a
termination subject to current regulations would not occur upon a Partnership
termination subject to the proposed regulations.
ENTITY-LEVEL COLLECTIONS. If the Partnership is required or elects under
applicable law to pay any federal, state or local income tax on behalf of any
Unitholder or the General Partners or any former Unitholder, the Managing
General Partner is authorized to pay those taxes from Partnership funds. Such
payments, if made, will be treated as current distributions of cash to the
Unitholders and the General Partners. The Managing General Partner is authorized
to amend the Partnership Agreement in the manner necessary to maintain
uniformity of intrinsic tax characteristics of Units and to adjust subsequent
distributions, so that after giving effect to such deemed distributions, the
priority and characterization of distributions otherwise applicable under the
Partnership Agreement is maintained as nearly as is practicable. Payments by the
Partnership as described above could give rise to an overpayment of tax on
behalf of an individual partner in which event the partner could file a claim
for credit or refund.
UNIFORMITY OF UNITS
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained.
Although Counsel is unable to opine as to the validity of such an approach,
in order to maintain uniformity, the Partnership intends to depreciate the
portion of a Section 743(b) adjustment attributable to unrealized appreciation
in the value of depreciable Contributed Property or Adjusted Property (to the
extent of any unamortized Book-Tax Disparity) using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the Common Basis of such property, despite its inconsistency
with certain proposed and final Treasury Regulations and legislative history
(none of which is expected to directly apply to a material portion of the
Partnership's assets). See "-- Tax Treatment of Operations -- Section 754
Election." These positions are commonly taken by publicly traded partnerships.
Nevertheless, the IRS may challenge any method of depreciating the Section
743(b) adjustment adopted by the Partnership. If such a challenge were
sustained, the uniformity of Units might be affected.
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TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS. Ownership of Units by
employee benefit plans, other tax-exempt organizations, nonresident aliens,
foreign corporations, other foreign persons and regulated investment companies
raises issues unique to such persons and, as described below, may have
substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including individual retirement accounts (or IRAs) and other
retirement plans) are subject to federal income tax on unrelated business
taxable income. Virtually all of the taxable income derived by such an
organization from the ownership of a Unit will be unrelated business taxable
income and thus will be taxable to such a Unitholder.
Regulated investment companies are required to derive 90% or more of their
gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or certain related sources. It is not anticipated
that any significant amount of the Partnership's gross income will qualify as
such income.
Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units and as a consequence will be required to file
federal tax returns in respect of their distributive shares of Partnership
income, gain, loss or deduction and pay federal income tax at regular rates on
that income. Generally, a partnership is required to pay a withholding tax on
the portion of the partnership's income which is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly-traded
partnerships, the Partnership will withhold (currently at the rate of 39.6%) on
actual cash distributions made quarterly to foreign Unitholders. Each foreign
Unitholder must obtain a taxpayer identification number from the IRS and submit
that number to the Transfer Agent of the Partnership on a Form W-8 in order to
obtain credit for the taxes withheld. A change in law may require the
Partnership to change these procedures.
Because a foreign corporation which owns Units will be treated as engaged in
a United States trade or business, such a Unitholder will be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Partnership's earnings and profits (as
adjusted for changes in the foreign corporation's "U.S. net equity") which are
effectively connected with the conduct of a United States trade or business.
Such a tax may be reduced or eliminated by an income tax treaty between the
United States and the country with respect to which the foreign corporate
Unitholder is a "qualified resident." In addition, such a Unitholder is subject
to special information reporting requirements under Section 6038C of the Code.
Under an IRS ruling, a foreign Unitholder who sells or otherwise disposes of
a Unit will be subject to federal income tax on gain realized on the disposition
of such Unit to the extent that such gain is effectively connected with a United
States trade or business of the foreign Unitholder. The Partnership does not
expect that any material portion of any such gain will avoid United States
taxation. If less than all of any such gain is so taxable, then Section 897 of
the Code may increase the portion of any gain which is recognized by a foreign
Unitholder which is subject to United States income tax if that foreign
Unitholder has held more than 5% in value of the Units during the five-year
period ending on the date of the disposition or if the Units are not regularly
traded on an established securities market at the time of the disposition.
ADMINISTRATIVE MATTERS
PARTNERSHIP INFORMATION RETURNS AND AUDIT PROCEDURES. The Partnership
intends to furnish to each Unitholder, within 90 days after the close of each
calendar year, certain tax information, including a Schedule K-1, which sets
forth each Unitholder's allocable share of the Partnership's income, gain, loss
and deduction for the preceding Partnership taxable year. In preparing this
information, which will generally not be reviewed by counsel, the Managing
General Partner will use various
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accounting and reporting conventions, some of which have been mentioned in the
previous discussion, to determine the respective Unitholders' allocable share of
income, gain, loss and deduction. There is no assurance that any of those
conventions will yield a result which conforms to the requirements of the Code,
regulations or administrative interpretations of the IRS. The Managing General
Partner cannot assure prospective Unitholders that the IRS will not successfully
contend in court that such accounting and reporting conventions are
impermissible.
The federal income tax information returns filed by the Partnership may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to adjust a prior year's tax liability, and possibly may result in an
audit of the Unitholder's own return. Any audit of a Unitholder's return could
result in adjustments of non-Partnership as well as Partnership items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined at the partnership level in a unified
partnership proceeding rather than in separate proceedings with the partners.
The Code provides for one partner to be designated as the "Tax Matters Partner"
for these purposes. The Partnership Agreement appoints the Managing General
Partner as the Tax Matters Partner.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against Unitholders with respect to Partnership
items. The Tax Matters Partner may bind a Unitholder with less than a 1% profits
interest in the Partnership to a settlement with the IRS unless such Unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review (by which
all the Unitholders are bound) of a final Partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any Unitholder having at least 1% interest in the profits of the
Partnership and by the Unitholders having in the aggregate at least a 5% profits
interest. However, only one action for judicial review will go forward, and each
Unitholder with an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on the Partnership's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to substantial
penalties. Under the 1995 Proposed Legislation, partners in electing large
partnerships, such as the Partnership, would have been required to treat all
partnership items in a manner consistent with the partnership return.
The U.S. House of Representatives version of the 1995 Proposed Legislation
would also have made a number of changes to the tax compliance and
administrative rules relating to partnerships. One provision would have been
required that each partner in a large partnership, such as the Partnership, take
into account his share of any adjustments to partnership items in the year such
adjustments are made. Under current law, adjustments relating to partnership
items for a previous taxable year are taken into account by those persons who
were partners in the previous taxable year. Alternatively, under the 1995
Proposed Legislation, a partnership could have elected to or, in some
circumstances, could have been required to, directly pay the tax resulting from
any such adjustments. In either case, therefore, Common Unitholders could bear
significant economic burdens associated with tax adjustments relating to periods
predating their acquisition of Common Units.
It cannot be predicted whether or in what form the 1995 Proposed
Legislation, or other tax legislation that might affect Common Unitholders, will
be enacted. However, if tax legislation is enacted which includes provisions
similar to those discussed above, a Common Unitholder might experience a
reduction in cash distributions.
NOMINEE REPORTING. Persons who hold an interest in the Partnership as a
nominee for another person are required to furnish to the Partnership (a) the
name, address and taxpayer identification
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number of the beneficial owner and the nominee; (b) whether the beneficial owner
is (i) a person that is not a United States person, (ii) a foreign government,
an international organization or any wholly-owned agency or instrumentality of
either of the foregoing or (iii) a tax-exempt entity; (c) the amount and
description of Units held, acquired or transferred for the beneficial owner; and
(d) certain information including the dates of acquisitions and transfers, means
of acquisitions and transfers, and acquisition cost for purchases, as well as
the amount of net proceeds from sales. Brokers and financial institutions are
required to furnish additional information, including whether they are United
States persons and certain information on Units they acquire, hold or transfer
for their own account. A penalty of $50 per failure (up to a maximum of $100,000
per calendar year) is imposed by the Code for failure to report such information
to the Partnership. The nominee is required to supply the beneficial owner of
the Units with the information furnished to the Partnership.
REGISTRATION AS A TAX SHELTER. The Code requires that "tax shelters" be
registered with the Secretary of the Treasury. The temporary Treasury
Regulations interpreting the tax shelter registration provisions of the Code are
extremely broad and the Managing General Partner has registered the Partnership
as a tax shelter with the IRS in the absence of assurance that the Partnership
will not be subject to tax shelter registration and in light of the substantial
penalties which might be imposed if registration is required and not undertaken.
The IRS has issued the following tax shelter registration number to the
Partnership: 95074000266. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE
THAT AN INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN
REVIEWED, EXAMINED OR APPROVED BY THE IRS. The Partnership must furnish the
registration number to the Unitholders, and a Unitholder who sells or otherwise
transfers a Unit in a subsequent transaction must furnish the registration
number to the transferee. The penalty for failure of the transferor of a Unit to
furnish the registration number to the transferee is $100 for each such failure.
The Unitholders must disclose the tax shelter registration number of the
Partnership on Form 8271 to be attached to the tax return on which any
deduction, loss or other benefit generated by the Partnership is claimed or
income of the Partnership is included. A Unitholder who fails to disclose the
tax shelter registration number on his return, without reasonable cause for that
failure, will be subject to a $250 penalty for each failure. Any penalties
discussed herein are not deductible for federal income tax purposes.
ACCURACY-RELATED PENALTIES. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax which is attributable to one or more of
certain listed causes, including negligence or disregard of rules or
regulations, substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Code. No penalty will be imposed, however, with
respect to any portion of an underpayment if it is shown that there was a
reasonable cause for that portion and that the taxpayer acted in good faith with
respect to that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (i)
with respect to which there is, or was, "substantial authority" or (ii) as to
which there is a reasonable basis and the pertinent facts of such position are
disclosed on the return. Certain more stringent rules apply to "tax shelters,"a
term that in this context, does not appear to include the Partnership. If any
Partnership item of income, gain, loss or deduction included in the distributive
shares of Unitholders might result in such an "understatement" of income for
which no "substantial authority" exists, the Partnership must disclose the
pertinent facts on its return. In addition, the Partnership will make a
reasonable effort to furnish sufficient information for Unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct
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amount of such valuation or adjusted basis. No penalty is imposed unless the
portion of the underpayment attributable to a substantial valuation misstatement
exceeds $5,000 ($10,000 for most corporations). If the valuation claimed on a
return is 400% or more than the correct valuation, the penalty imposed increases
to 40%.
OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will generally be subject
to other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which the Partnership does business or owns property.
Although an analysis of those various taxes is not presented here, each
prospective Unitholder should consider their potential impact on his investment
in the Partnership. The Partnership currently owns property and conducts
substantially all of its business in Oregon, Idaho, Washington and Montana. A
Unitholder will generally be required to file state income tax returns and to
pay taxes in all these states other than Washington and may be subject to
penalties for failure to comply with those requirements. Taxable income of the
Partnership in other jurisdictions has historically been de minimis, and filing
requirements with respect to such jurisdictions have generally been met by the
Partnership. In certain states, tax losses may not produce a tax benefit in the
year incurred (if, for example, the Partnership has no income from sources
within that state) and also may not be available to offset income in subsequent
taxable years. Some of the states may require the Partnership, or the
Partnership may elect, to withhold a percentage of income from amounts to be
distributed to a Unitholder who is not a resident of the state. Withholding, the
amount of which may be greater or less than a particular Unitholder's income tax
liability to the state, generally does not relieve the non-resident Unitholder
from the obligation to file an income tax return. Amounts withheld will be
treated as if distributed to Unitholders for purposes of determining the amounts
distributed by the Partnership. Based on current law and its estimate of future
Partnership operations, the General Partners anticipate that any amounts
required to be withheld will not be material. There can be no assurance that in
the future the Partnership will not conduct material business operations in
jurisdictions other than those described above.
Each Unitholder should investigate the legal and tax consequences, under the
laws of pertinent states and localities, of his investment in the Partnership.
Accordingly, each prospective Unitholder should consult, and must depend upon,
his own tax counsel or other advisor with regard to those matters. Further, it
is the responsibility of each Unitholder to file all state and local, as well as
federal, tax returns that may be required of such Unitholder. Counsel has not
rendered an opinion on the state or local tax consequences of an investment in
the Partnership.
108
<PAGE>
INVESTMENT IN THE PARTNERSHIP
BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or Individual Retirement Accounts established
or maintained by an employer or employee organization. Among other things,
consideration should be given to (a) whether such investment is prudent under
Section 404(a)(1)(B) of ERISA; (b) whether in making such investment, such plan
will satisfy the diversification requirement of Section 404(a)(1)(C) of ERISA;
and (c) whether such investment will result in recognition of unrelated business
taxable income by such plan and, if so, the potential after-tax investment
return. See "Tax Considerations -- Uniformity of Units -- Tax-Exempt
Organizations and Certain Other Investors." The person with investment
discretion with respect to the assets of an employee benefit plan (a
"fiduciary") should determine whether an investment in the Partnership is
authorized by the appropriate governing instrument and is a proper investment
for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
Individual Retirement Accounts that are not considered part of an employee
benefit plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in the Partnership, be deemed to own an
undivided interest in the assets of the Partnership, with the result that the
General Partners also would be fiduciaries of such plan and the operations of
the Partnership would be subject to the regulatory restrictions of ERISA,
including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code.
The Department of Labor issued final regulations on November 13, 1986
providing guidance with respect to whether the assets of an entity in which
employee benefit plans acquire equity interests would be deemed "plan assets"
under certain circumstances. Pursuant to these regulations, an entity's assets
would not be considered to be "plan assets" if, among other things, (a) the
equity interest acquired by employee benefit plans are publicly offered
securities -- I.E., the equity interests are widely held by 100 or more
investors independent of the issuer and each other, freely transferable and
registered pursuant to certain provisions of the federal securities laws, (b)
the entity is an "operating company" -- I.E., it is primarily engaged in the
production or sale of a product or service other than the investment of capital
either directly or through a majority owned subsidiary or subsidiaries or (c)
there is no significant investment by benefit plan investors, which is defined
to mean that less than 25% of the value of each class of equity interest
(disregarding certain interests held by the General Partners, their affiliates,
and certain other persons) is held by the employee benefit plans referred to
above, Individual Retirement Accounts and other employee benefit plans not
subject to ERISA (such as governmental plans). The Partnership's assets should
not be considered "plan assets" under these regulations because it is expected
that the investment will satisfy the requirements in (a) and (b) above and may
also satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of Units should consult with their
own counsel regarding the consequences under ERISA and the Code in light of the
serious penalties imposed on persons who engage in prohibited transactions or
other violations.
109
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Partnership and the Selling Unitholders agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Smith Barney
Inc., Lehman Brothers Inc., Dean Witter Reynolds Inc., A.G. Edwards & Sons, Inc.
and PaineWebber Incorporated are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Partnership, the
respective number of Common Units set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON UNITS
- ------------------------------------------------------------------------------ --------------
<S> <C>
Smith Barney Inc.............................................................. 1,259,560
Lehman Brothers Inc........................................................... 1,259,560
Dean Witter Reynolds Inc...................................................... 1,259,560
A.G. Edwards & Sons, Inc...................................................... 1,259,560
PaineWebber Incorporated...................................................... 1,259,560
Bear, Stearns & Co. Inc....................................................... 150,000
CS First Boston Corporation................................................... 150,000
Goldman, Sachs & Co........................................................... 150,000
Oppenheimer & Co., Inc........................................................ 150,000
Prudential Securities Incorporated............................................ 150,000
Ragen MacKenzie Incorporated.................................................. 150,000
Schroder Wertheim & Co. Incorporated.......................................... 150,000
Advest, Inc................................................................... 95,000
Arnhold and S. Bleichroeder, Inc.............................................. 95,000
Black & Company, Inc.......................................................... 95,000
J.C. Bradford & Co............................................................ 95,000
Coburn & Meredith, Inc........................................................ 95,000
Cowen & Company............................................................... 95,000
Dain Bosworth Incorporated.................................................... 95,000
D. A. Davidson & Co. Incorporated............................................. 95,000
Dominick & Dominick, Incorporated............................................. 95,000
Fahnestock & Co. Inc.......................................................... 95,000
First Albany Corporation...................................................... 95,000
First of Michigan Corporation................................................. 95,000
J.J.B. Hilliard, W.L. Lyons, Inc.............................................. 95,000
Janney Montgomery Scott Inc................................................... 95,000
Jensen Securities Co.......................................................... 95,000
Ladenburg, Thalmann & Co. Inc................................................. 95,000
Legg Mason Wood Walker, Incorporated.......................................... 95,000
McDonald & Company Securities, Inc............................................ 95,000
Morgan Keegan & Company, Inc.................................................. 95,000
Nesbitt Burns Securities Inc.................................................. 95,000
The Ohio Company.............................................................. 95,000
Pacific Crest Securities...................................................... 95,000
Parker/Hunter Incorporated.................................................... 95,000
Pennsylvania Merchant Group Ltd............................................... 95,000
Piper Jaffray Inc............................................................. 95,000
The Robinson-Humphrey Company, Inc............................................ 95,000
Roney & Co.................................................................... 95,000
Scott & Stringfellow, Inc..................................................... 95,000
Sutro & Co. Incorporated...................................................... 95,000
--------------
Total..................................................................... 10,102,800
--------------
--------------
</TABLE>
110
<PAGE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters by
counsel and various other conditions. The nature of the Underwriters'
obligations is such that they are committed to take and pay for all of the
Common Units offered hereby if any are purchased.
The Underwriters propose to offer the Common Units in part directly to the
public at the public offering price set forth on the cover of this Prospectus,
and in part to certain securities dealers at such price, less a concession of
$0.57 per Common Unit. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $0.10 per Common Unit to certain other brokers and
dealers. After completion of the initial offering of Common Units, the offering
price and other selling terms may be changed by the Representatives.
The Partnership has agreed that it will not, directly or indirectly, offer,
sell or otherwise dispose of any Common Units or Subordinated Units, or any
securities convertible into or exchangeable for, or any rights to purchase or
acquire, Common Units or Subordinated Units (other than the grant of options to
purchase Common Units pursuant to option plans existing on the date hereof), for
a period of 120 days after the date of this Prospectus without the prior written
consent of Smith Barney Inc., Lehman Brothers Inc. and Dean Witter Reynolds Inc.
In addition, the Selling Unitholders, the directors and officers of the Managing
General Partner and certain other holders of Common Units have agreed that they
will not, directly or indirectly offer, sell or otherwise dispose of any Common
Units for a period of 120 days after the date of this Prospectus without the
prior written consent of Smith Barney Inc., Lehman Brothers Inc. and Dean Witter
Reynolds Inc.
The Partnership has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to 1,515,420 additional
Common Units solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of Common Units to be purchased by each of them, as
shown in the foregoing table, bears to the number of Common Units offered.
Because the National Association of Securities Dealers, Inc. ("NASD") views
the Common Units offered hereby as interests in a direct participation program,
the offering is being made in compliance with Rule 2810 of the NASD's Conduct
Rules. Investor suitability of the Common Units should be judged similarly to
the suitability of other securities which are listed for trading on a national
securities exchange.
The Partnership, the Operating Partnership and the General Partners have
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act or to contribute to payments that
the Underwriters may be required to make in respect thereof.
Certain of the Representatives have performed investment banking and other
financial advisory services for the Partnership in the past, for which they have
received customary compensation.
VALIDITY OF THE COMMON UNITS
The validity of the Common Units will be passed upon for the Partnership by
Andrews & Kurth L.L.P., Houston, Texas. Certain legal matters in connection with
the Common Units will be passed upon for the Underwriters by Baker & Botts,
L.L.P., Houston, Texas.
EXPERTS
The financial statements included in this Prospectus or incorporated in this
Prospectus by reference to the Annual Report on Form 10-K for the year ended
December 31, 1995 of Crown Pacific Partners, L.P. and the December 31, 1995
balance sheets of Crown Pacific, Ltd. and Crown Pacific Management Limited
Partnership have been so included or incorporated in this Prospectus in reliance
on the reports of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
111
<PAGE>
Information relating to the Partnership's timber inventory and age and
species of the Partnership's timber included herein has been reviewed by Mason,
Bruce & Girard, Inc., independent timber appraisers, and are included herein in
reliance upon the authority of such firm as an expert in timber appraisals.
112
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CROWN PACIFIC PARTNERS, L.P. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants........................................................................ F-2
Consolidated Statement of Income -- Years Ended December 31, 1993, 1994 and 1995 and Three Months Ended
March 31, 1995 and 1996 (unaudited)..................................................................... F-3
Consolidated Balance Sheet -- December 31, 1994 and 1995 and March 31, 1996 (unaudited).................. F-4
Consolidated Statement of Cash Flows -- Years Ended December 31, 1993, 1994 and 1995 and Three Months
Ended March 31, 1995 and 1996 (unaudited)............................................................... F-5
Consolidated Statement of Changes in Partners' and Shareholders' Equity -- Years Ended December 31, 1993,
1994 and 1995 and Three Months Ended March 31, 1996 (unaudited)......................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
CROWN PACIFIC, LTD. CONSOLIDATED BALANCE SHEET:
Report of Independent Accountants........................................................................ F-20
Consolidated Balance Sheet -- December 31, 1995 and March 31, 1996 (unaudited)........................... F-21
Notes to Consolidated Balance Sheet...................................................................... F-22
CROWN PACIFIC MANAGEMENT LIMITED PARTNERSHIP BALANCE SHEET:
Report of Independent Accountants........................................................................ F-27
Balance Sheet -- December 31, 1995 and March 31, 1996 (unaudited)........................................ F-28
Notes to Balance Sheet................................................................................... F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Control of
Crown Pacific Management Limited Partnership
and the Partners of Crown Pacific Partners, L.P.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in partners' and shareholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Crown Pacific Partners, L.P. and its subsidiaries and affiliates at
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Portland, Oregon
January 23, 1996
F-2
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE QUARTER ENDED
------------------------------------- MARCH 31,
1994 ------------------------
1993 PRE-IPO & 1995 1995 1996
PRE-IPO PARTNERSHIP PARTNERSHIP PARTNERSHIP PARTNERSHIP
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 220,586 $ 397,326 $ 383,383 $ 97,834 $ 84,555
Operating costs:
Cost of products sold......................... 151,379 328,882 313,490 80,995 66,882
Selling, general and administrative
expenses..................................... 10,379 21,148 21,653 5,309 5,312
----------- ----------- ----------- ----------- -----------
Operating income................................ 58,828 47,296 48,240 11,530 12,361
Interest expense................................ 14,201 23,894 31,053 7,522 8,245
Amortization of debt issuance costs............. 997 2,184 508 116 126
Other (income) expenses, net.................... 3,208 (1,034) (599) (224) (174)
----------- ----------- ----------- ----------- -----------
Income before provision for income taxes........ 40,422 22,252 17,278 4,116 4,164
Provision for income taxes...................... 1,501 2,514 -- -- --
----------- ----------- ----------- ----------- -----------
Income before extraordinary item................ 38,921 19,738 17,278 4,116 4,164
Extraordinary item -- loss on extinguishment of
debt........................................... -- (16,178) -- -- --
----------- ----------- ----------- ----------- -----------
Net income...................................... 38,921 3,560 17,278 4,116 4,164
Accretion and income relative to mandatorily
redeemable partnership interests............... (3,243) (8,624) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) allocated to partnership and
shareholders' interests........................ $ 35,678 $ (5,064) $ 17,278 $ 4,116 $ 4,164
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings per Unit (pro forma for 1994):
Income before extraordinary item.............. $ 1.07 $ 0.94 $ 0.22 $ 0.23
Extraordinary item............................ (0.88) -- -- --
----------- ----------- ----------- -----------
Net income per Unit........................... $ 0.19 $ 0.94 $ 0.22 $ 0.23
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 6,421 $ 10,292 $ 13,676
Accounts receivable..................................................................... 22,267 32,576 32,845
Notes receivable........................................................................ 64 5,571 9,443
Inventories............................................................................. 47,439 46,747 44,476
Deposits on timber cutting contracts.................................................... 12,194 9,399 8,190
Prepaid and other current assets........................................................ 5,449 5,395 5,723
-------- -------- -----------
Total current assets.................................................................. 93,834 109,980 114,353
Property, plant and equipment, net........................................................ 37,505 40,920 41,656
Timber, timberlands and roads, net........................................................ 325,311 320,063 328,005
Other assets.............................................................................. 4,897 5,542 6,301
-------- -------- -----------
Total assets.......................................................................... $461,547 $476,505 $490,315
-------- -------- -----------
-------- -------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Notes payable........................................................................... $ 3,508 $ 19,100 $ 15,100
Accounts payable........................................................................ 24,645 10,938 9,614
Accrued expenses........................................................................ 13,348 10,469 13,507
Accrued interest........................................................................ 649 2,736 10,107
-------- -------- -----------
Total current liabilities............................................................. 42,150 43,243 48,328
Long-term debt............................................................................ 300,000 326,000 340,000
Other non-current liabilities............................................................. -- 206 206
-------- -------- -----------
342,150 369,449 388,534
-------- -------- -----------
Commitments and contingent liabilities
Partners' capital:
General partners........................................................................ (35) (152) (204)
Limited partners (18,133,527 Units outstanding)......................................... 119,432 107,208 101,985
-------- -------- -----------
Total partners' capital............................................................... 119,397 107,056 101,781
-------- -------- -----------
Total liabilities and partners' capital............................................... $461,547 $476,505 $490,315
-------- -------- -----------
-------- -------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE QUARTER ENDED
------------------------------------- MARCH 31,
1994 ------------------------
1993 PRE-IPO & 1995 1995 1996
PRE-IPO PARTNERSHIP PARTNERSHIP PARTNERSHIP PARTNERSHIP
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 38,921 $ 3,560 $ 17,278 $ 4,116 $ 4,164
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item -- loss on extinguishment of
debt................................................ -- 16,178 -- -- --
Depletion, depreciation and amortization............. 31,229 40,870 34,959 6,261 9,005
Gain on sale of property............................. (8,652) (3,278) (6,816) (224) (2,073)
Other................................................ 1,685 (4,995) 5,034 35 1
Net change in current assets and current liabilities:
Restricted cash...................................... (2,062) 2,062 -- -- --
Accounts and notes receivable........................ (4,497) 1,452 (16,310) (3,920) (2,758)
Inventories.......................................... (3,872) 7,940 692 8,535 2,271
Prepaid and other current assets..................... (895) 1,824 2,207 1,270 881
Accounts payable and accrued expenses................ 7,814 (8,128) (14,068) (7,475) 8,725
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities.............. 59,671 57,485 22,976 8,598 20,216
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to timberlands............................... (2,549) (6,173) (26,218) (3,988) (2,924)
Additions to timber cutting rights..................... (8,681) (9,621) (4,993) -- (12,842)
Additions to property, plant and equipment............. (1,885) (14,799) (10,437) (3,425) (2,456)
Proceeds from sales of property........................ 17,179 15,679 11,538 2,862 979
Acquisition of businesses, net of cash................. (240,431) -- -- -- --
Other investing activities............................. (645) 3,517 (617) (412) (116)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities.................... (237,012) (11,397) (30,727) (4,963) (17,359)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of partnership interests............ 24,243 193,324 -- -- --
Retirement of equity interests......................... (30,437) (3,327) -- -- --
Net increase (decrease) in short-term borrowing........ -- -- 15,592 (508) (4,000)
Proceeds from issuance of long-term debt............... 174,486 527,963 68,600 -- 32,000
Repayments of long-term debt........................... (34,348) (545,224) (42,600) -- (18,000)
Distributions to partners.............................. (11,957) (219,350) (29,342) -- (9,436)
Capital contributions.................................. 63,524 -- -- -- --
Other financing activities............................. (11,239) (1,697) (628) (409) (37)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities...... 174,272 (48,311) 11,622 (917) 527
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents..... (3,069) (2,223) 3,871 2,718 3,384
Cash and cash equivalents at beginning of period......... 11,713 8,644 6,421 6,421 10,292
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period............... $ 8,644 $ 6,421 $ 10,292 $ 9,139 $ 13,676
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' AND SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CPLP
CPL --------------------------------------- CP INLAND
------------------ PREFERRED -------------------------
RETAINED GENERAL LIMITED LIMITED GENERAL LIMITED
COMMON EARNINGS PARTNERSHIP PARTNERSHIP PARTNERSHIP PARTNERSHIP PARTNERSHIP
STOCK (DEFICIT) INTEREST INTERESTS INTERESTS INTEREST INTERESTS
-------- -------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992........ $21,752 ($22,585) $ 2,203 $ 41,704 $ 26,956 $ $
Retirement of limited partnership
interests......................... (30,437)
Contributions of capital........... 10 34,025
Issuance of warrants............... 600 504
Net income (loss) for the year..... 9,611 3,944 5,382 29,777 303
Distributions...................... (1,030) (3,354) (11,297) (96)
-------- -------- ----------- ----------- ----------- ----- -----------
Balances, December 31, 1993........ 21,752 (12,974) 5,117 13,295 46,036 10 34,736
Equity issuance costs..............
Issuance of partnership Units in
initial public offering...........
Net income (loss) for the year..... 4,620 1,960 2,979 16,910 71 (11,867)
Distributions...................... (4,679) (15,913) (96,458) (81) (47,897)
Accretion of mandatorily re-
deemable partnership interests.... (4,666)
Allocation of distributions in
excess of (less than) historical
recorded costs:
Mandatorily redeemable preferred
interests.......................
Other partnership interests...... (2,398) (361) 33,512 29,694
Elimination of CPL from combined
group............................. (21,752 ) 8,354
-------- -------- ----------- ----------- ----------- ----- -----------
Balances, December 31, 1994........ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
-------- -------- ----------- ----------- ----------- ----- -----------
-------- -------- ----------- ----------- ----------- ----- -----------
Equity issuance costs..............
Net income for the year............
Distributions......................
Balances, December 31, 1995........
Net income for the period
(unaudited).......................
Distributions (unaudited)..........
Balances, March 31, 1996
(unaudited).......................
<CAPTION>
CP LEASING CP PARTNERS
------------------------- -------------------------
GENERAL LIMITED GENERAL LIMITED
PARTNERSHIP PARTNERSHIP PARTNERSHIP PARTNERSHIP TOTAL
INTEREST INTEREST INTEREST INTEREST ELIMINATIONS EQUITY
----------- ----------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992........ $ $ $ $ ($1,594 ) $ 68,436
--------
--------
Retirement of limited partnership
interests.........................
Contributions of capital........... 10
Issuance of warrants...............
Net income (loss) for the year..... (85) (10)
Distributions......................
(7,661)
----- ----------- ----------- ----------- ------------ --------
Balances, December 31, 1993........ (85) 0 (9,255) $ 98,632
--------
--------
Equity issuance costs.............. (4,139)
Issuance of partnership Units in
initial public offering........... 197,463
Net income (loss) for the year..... 101 1,525 (35) (3,431)
Distributions...................... (16) (1,525)
Accretion of mandatorily re-
deemable partnership interests....
Allocation of distributions in
excess of (less than) historical
recorded costs:
Mandatorily redeemable preferred
interests....................... (4,314)
Other partnership interests...... (66,147)
Elimination of CPL from combined
group.............................
9,255
----- ----------- ----------- ----------- ------------ --------
Balances, December 31, 1994........ $ 0 $ 0 (35) 119,432 $ 0 $119,397
----- ----------- ------------ --------
----- ----------- ------------ --------
Equity issuance costs.............. (277)
Net income for the year............ 173 17,105
Distributions...................... (290) (29,052)
----------- -----------
Balances, December 31, 1995........ ($152) $107,208 $107,056
--------
--------
Net income for the period
(unaudited)....................... 41 4,123
Distributions (unaudited).......... (93) (9,346)
----------- -----------
Balances, March 31, 1996
(unaudited)....................... ($204) $101,985 $101,781
----------- ----------- --------
----------- ----------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Crown Pacific Partners, L.P. (the "Partnership"), a
Delaware limited partnership, through its 99% owned subsidiary, Crown Pacific
Limited Partnership (the "Operating Partnership"), was formed to acquire, own
and operate the timberland properties and related manufacturing assets of the
former Crown Pacific Limited Partnership ("CPLP") and Crown Pacific Inland
Limited Partnership ("CP Inland"). The Partnership primarily operates in Oregon,
Idaho, Washington and Montana and sells logs and manufactured wood products to a
variety of markets across the U.S. and the Pacific Rim. Crown Pacific Management
Limited Partnership (the "Managing General Partner") manages the businesses of
the Partnership and the Operating Partnership and owns a 0.99% general partner
interest in the Partnership. The Managing General Partner owns the remaining 1%
interest in the Operating Partnership. Crown Pacific, Ltd., the Special General
Partner of the Partnership, together with the Managing General Partner, comprise
the General Partners of the Partnership. The Special General Partner owns a .01%
general partner interest and a 14.8% limited partnership interest in the
Partnership. As used herein, "Company" and "Crown Pacific" refer to the
Partnership and the Operating Partnership taken as a whole.
Effective December 22, 1994, the Partnership completed an initial public
offering (the "Offering") of 9,850,000 common limited partnership units. As used
herein, unless otherwise indicated, "Units" refers to common limited partnership
units and subordinated limited partnership units taken as a whole. Concurrent
with the Offering, the Partnership consummated an offer and consent solicitation
whereby it effectively acquired substantially all of CPLP, CP Inland, and other
affiliates in exchange for cash and 8,283,527 limited partnership interests.
Since less than 80% of the limited partnership interests were sold to the public
and because the General Partners (or their affiliates) were also the general
partners of the companies/partnerships (the "Former Entities") that preceded the
Partnership, the assets were not recorded as a purchase and therefore remain at
their historical cost. The financial information for the periods prior to the
initial public offering of Units on December 22, 1994 ("Pre-IPO") represents the
financial results of the Former Entities. The Former Entities consisted of two
corporations, Crown Pacific, Ltd. ("CPL") and Crescent Creek Company, and three
limited partnerships, CPLP, CP Inland and Crown Pacific Leasing Limited
Partnership ("CP Leasing"). These organizations were under common control in
that they had significant common partners and shareholders, common management,
and completed certain asset transfers among the entities as part of
reorganizations. Additionally, CPL provided certain management and
administrative services for all of the enterprises within the group. As legal
entities, the corporations and partnerships were not consolidated; however, due
to the common ownership and management, combination for financial statement
purposes was presented to properly reflect the results of operations, cash flows
and financial position of the Former Entities.
RESULTS FOR THE TEN DAYS ENDED DECEMBER 31, 1994. Since the Company became
effective on December 22, 1994, its results of operations for the ten-day period
ended December 31, 1994 were not significant compared to the results of the
combined Former Entities taken as a whole. The operations of the Company have
been combined with the results of the Former Entities for the year ended
December 31, 1994, and have been presented together on the accompanying 1994
Statement of Income.
F-7
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The results of the Company for the period from December 22, 1994 through
December 31, 1994 were as follows:
<TABLE>
<S> <C>
Revenues........................................................ $ 9,647
Operating loss.................................................. (323)
Loss before extraordinary item.................................. (1,159)
Extraordinary item -- loss on extinguishment of debt............ (2,376)
Net loss........................................................ (3,535)
Pro forma net loss per Unit..................................... ($ 0.19)
</TABLE>
Included in the net loss for the ten-day period was an extraordinary loss
related to the refinancing of certain debt assumed by the Company from the
Former Entities.
PRINCIPLES OF CONSOLIDATION. All significant intercompany accounts, profits
and transactions have been eliminated in the consolidated financial statements.
Certain eliminations are also reflected in the Pre-IPO Consolidated Statement of
Changes in Partners' and Shareholders' Equity, which relate to CPL's investment
in CPLP, its equity in the income of CPLP and elimination of profit on
intercompany sales. The reconciliation of net income (loss) in the Pre-IPO
periods is as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED JAN. 1 THRU DEC. 22 THRU
DECEMBER 31, DEC. 22, DEC. 31,
1993 1994 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) per the Consolidated Statement
of Income........................................ $ 38,921 $ 7,095 $ (3,535)
CPL's equity in the net income of CPLP............ 14,128 9,271 --
Minority interest................................. -- -- 69
Net income allocated to mandatorily redeemable
limited partnership interests.................... (3,243) (3,958) --
Elimination of intercompany profit and other...... (884) 3,891 --
------------ ------------ ------------
Net income (loss) per the Consolidated Statement
of Changes in Partners' and Shareholders'
Equity........................................... $ 48,922 $ 16,299 $ (3,466)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
REVENUE RECOGNITION. The Company recognizes revenue on log sales upon
delivery to the customer. Revenue on lumber, plywood and millwork sales is
recognized upon shipment. Sales of real property, including standing timber, are
recognized when title transfers, upon the receipt of a sufficient down payment
and when collectibility of any outstanding receivable from the purchaser is
assured. The allowance for doubtful accounts was $0.07 million and $0.09 million
as of December 31, 1994 and 1995, respectively.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents primarily represent
funds invested in overnight repurchase agreements. The Company considers all
highly liquid investments which have original maturities of three months or less
to be cash equivalents.
EXPORT SALES. The Company sells logs to customers engaged in export
activities. Logs sold to exporters during the years ended December 31, 1993,
1994 and 1995 were $14.9 million, $11.0 million, and $11.1 million,
respectively.
F-8
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES. Inventories, consisting of lumber, plywood and logs, are
stated at the lower of LIFO cost or market. Supplies are valued at the lower of
average cost or market.
DEPOSITS ON TIMBER CUTTING CONTRACTS. The Company purchases timber under
cutting contracts with government agencies and private land owners. Title to the
timber does not pass until timber is harvested and measured. Therefore, timber
remaining under contract is considered to be a commitment and is not recorded as
an asset or liability until the timber is removed and measured (see Note 14).
Deposits are generally required to be made on contracts and are applied to the
purchase of timber as it is harvested.
TIMBER AND TIMBERLANDS. Timber and timberlands, including logging roads,
are stated at cost less depletion for timber harvested and accumulated
amortization related to roads. Cost of the Company's timber harvested is
determined based on the volume of timber harvested in relation to the amount of
estimated recoverable timber. The Company estimates its timber inventory using
statistical information and data obtained from physical measurements, site maps,
photo-types and other information gathering techniques. These estimates are
updated periodically and any adjustments are recognized prospectively (see Note
5). In addition, the Company purchases fee simple interests in standing timber.
These interests are recorded as cutting rights and depleted over the harvest.
The cost of logging roads is amortized based upon the estimated useful life of
the roads.
PROPERTY, PLANT AND EQUIPMENT. Buildings, machinery and equipment are
recorded at cost and include those additions and improvements that add to
productive capacity or extend useful life. When properties are sold or otherwise
retired, the cost and related accumulated depreciation are removed from the
respective accounts and the resulting profit or loss is recorded in income. The
costs of repairs and maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over useful lives as
follows:
<TABLE>
<S> <C>
Machinery and equipment..................................... 3 to 10 years
Buildings and leasehold improvements........................ 15 to 25 years
Aircraft.................................................... 5 to 8 years
Furniture and fixtures...................................... 10 years
</TABLE>
In March 1995, the Financial Accounting Standards Board issued the Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company will
adopt the statement in fiscal 1996; however, the adoption is not expected to
have a significant impact on the Company's financial statements.
DEBT ISSUANCE COSTS. Debt issuance costs, a component of other assets,
include all costs and fees incurred that are directly related to obtaining
credit facilities. These costs are amortized over the term of the related credit
agreement.
In conjunction with the 1994 refinancing of the Former Entities' borrowings,
certain of the deferred debt issuance costs were written off as an extraordinary
charge, which totaled $16.2 million or $0.88 on a pro forma per Unit basis.
INCOME TAXES. The Partnership is not subject to most income taxes and its
items of income, gains, losses and deductions are included in the tax returns of
the individual unitholders.
Income taxes for CPL in 1993 and 1994 were calculated in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". This statement requires that the
F-9
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
balance sheet amounts for deferred income taxes be computed based upon the tax
effect of aggregate temporary differences arising prior to year end and
reversing subsequent to year end. Such effects were calculated based upon tax
rates enacted. CPLP, CP Inland and CP Leasing were limited partnerships and
Crescent Creek Company was a Subchapter S corporation and were not liable for
federal or state income taxes.
STATEMENT OF CASH FLOWS SUPPLEMENTARY INFORMATION. The Company and/or
Former Entities made the following cash payments:
<TABLE>
<CAPTION>
QUARTER ENDED, MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest........................... $ 28,932 $ 24,795 $ 11,881 $ 692 $ 820
Income taxes....................... -- 1,388 2,841 -- --
</TABLE>
PER UNIT INFORMATION. Earnings per Unit is calculated using the average
number of common and subordinated Units outstanding, plus Unit equivalents when
dilutive, divided into net income (loss), after adjusting for the General
Partner interest. At December 31, 1994 and 1995, the weighted average number of
Units outstanding was 18,133,527.
The 1994 Earnings per Unit computation was calculated on a pro forma basis,
combining the Former Entities' 1994 operations with the Company's ten days of
operations in 1994.
FINANCIAL INSTRUMENTS. All of the Company's significant financial
instruments are recognized in its consolidated balance sheet. Carrying values
approximate fair market value for most financial assets and liabilities. The
fair market value of certain financial instruments was estimated as follows:
- Notes Receivable -- The interest rate on the Company's notes receivable
approximates current market rates for these type of notes; therefore, the
recorded value of the notes approximates fair value.
- Notes Payable -- The bank credit facilities include interest rates that
are tied to current credit markets. Therefore, the recorded value for the
debt approximates fair value.
- Senior Notes -- The estimated fair value of the Company's Senior Notes,
based upon interest rates at December 31, 1995 for similar obligations
with like maturities, was approximately $384 million and was carried at
$300 million.
CERTAIN RISKS, UNCERTAINTIES AND CONCENTRATION OF CREDIT RISK. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates, including estimates
related to timber volumes, and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments and trade and
notes receivable. The Company restricts investment of temporary cash investments
to financial institutions with high credit standing. Credit risk on trade
receivables is minimized as a result of the large and diverse nature of the
Company's customer base. At December 31, 1995, the Company had no significant
concentration of credit risk, except for a $5.0 million note receivable that is
fully secured (See Note 3).
F-10
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL STATEMENT RECLASSIFICATIONS. Certain financial statement
reclassifications have been made to the years presented for comparability
purposes and had no impact on net income or partners' and shareholders' equity.
2. ACQUISITIONS
On September 8, 1993, CPL, CPLP and CP Leasing purchased for $29.4 million
the facilities and certain other assets of the DAW Forest Products Company, L.P.
("DAW") Bend, Oregon sawmill, the Redmond, Oregon remanufacturing plant and the
Redmond, Oregon plywood operations. The acquisition was accounted for using the
purchase method and the results of these operations have been included in the
financial statements since September 8, 1993.
Effective October 28, 1993, CP Inland acquired the majority of the remaining
assets of DAW and essentially all of the assets of W-I Forest Products Limited
Partnership ("W-I"), consisting of approximately 203,000 acres of timberland,
six sawmill facilities and a trucking operation. The acquisition was accounted
for using the purchase method. CP Inland paid approximately $238.0 million for
the timberlands, sawmills, trucking assets and working capital including fees to
lenders and investment bankers. The purchase price was allocated as follows:
$52.0 million to current assets, $213.0 million to noncurrent assets (primarily
timberland) and $27.0 million to liabilities assumed. The results of operations
relating to the acquired assets have been included in the financial statements
since October 28, 1993.
The pro forma financial results for the year ended December 31, 1993, had
Crown Pacific acquired DAW and W-I on January 1, 1993, are as follows
(unaudited):
<TABLE>
<S> <C>
Revenues......................................................... $ 430,000
Income before extraordinary item................................. $ 44,000
Net income....................................................... $ 44,000
</TABLE>
3. NOTES RECEIVABLE
In June 1995, the Company sold and exchanged 69,800 acres of non-strategic
timberlands in central Washington for $4.1 million cash, a $6.1 million
promissory note (the "Note") and 6,600 acres of timberland intermingled with the
Company's western Washington tree farm. The transactions resulted in a $3.7
million gain ($0.20 per Unit).
As of December 31, 1995, the uncollected balance of the Note totaled $5.0
million. The Note bears interest at 10%, is due in June 1996, and is secured by
the assets of the issuer of the Note, which include timberland and other
investments. In addition, the Note is supported by an unconditional bank
commitment to finance the payment of the Note in June 1996.
In the period ended March 31, 1996 the Partnership sold 14.6 MMBF of
standing timber located in northeastern Washington for $1 million cash and a $3
million promissory note. At March 31, 1996, the uncollected balance of the
promissory note was $3 million. The promissory note bears interest at 8%, is
secured by the related timber, and is required to be paid in full on December
31, 1996. In addition, all proceeds from the harvesting of the timber must be
first applied to the promissory note.
F-11
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods................................ $ 10,893 $ 12,557 $ 12,707
Work in process............................... 2,658 2,680 3,008
Logs.......................................... 31,328 27,169 23,737
Supplies...................................... 3,280 3,600 4,009
LIFO reserve.................................. (720) 741 1,015
--------- --------- -----------
$ 47,439 $ 46,747 $ 44,476
--------- --------- -----------
--------- --------- -----------
</TABLE>
Effective January 1, 1993 for CPLP, and effective January 1, 1994 for CP
Inland, the Company changed its method of accounting for the cost of log, lumber
and plywood inventories from the FIFO method to the LIFO method. Management
believes that the use of the LIFO method better matches current costs with
current revenues. The cumulative effect of this accounting change for prior
years is not determinable nor are the pro forma effects of retroactive
application of the LIFO method.
The accounting change decreased net income for the year ended December 31,
1993 and increased net income for the year ended December 31, 1994 by $1.6
million and $0.8 million, respectively.
5. TIMBER, TIMBERLANDS AND ROADS
Timber, timberlands and roads consisted of the following, net of the related
depletion and amortization:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Timberland, standing timber and roads....... $ 316,031 $ 313,259 307,710
Timber cutting rights....................... 9,280 6,804 20,295
--------- --------- -----------
$ 325,311 $ 320,063 328,005
--------- --------- -----------
--------- --------- -----------
</TABLE>
In the first quarter of 1995, the Partnership completed a periodic update of
its timber inventory system to reflect the estimated volume of timber it owned.
The update resulted in an increase in timber volumes which reduced the estimated
depletion rates and decreased the depletion cost for the year ended December 31,
1995 by $7.4 million ($0.41 per Unit). The change in estimate had no impact on
the Partnership's cash flow.
F-12
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment....................... $ 27,576 $ 40,005 $ 40,580
Buildings and leasehold improvements.......... 8,652 6,063 6,188
Aircraft...................................... 2,826 3,532 3,578
Furniture and fixtures........................ 1,178 1,566 1,578
--------- --------- -----------
40,232 51,166 51,924
Less: accumulated depreciation................ (12,631) (16,601) (18,076)
--------- --------- -----------
27,601 34,565 33,848
Construction in progress...................... 6,809 3,667 5,455
Land.......................................... 3,095 2,688 2,353
--------- --------- -----------
$ 37,505 $ 40,920 $ 41,656
--------- --------- -----------
--------- --------- -----------
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and profit sharing.................... $ 5,327 $ 4,906 $ 4,685
Harvest, and other taxes...................... 1,559 1,374 4,635
Workers compensation.......................... 955 1,030 1,334
Payable to affiliate (Note 13)................ 2,444 -- --
Other......................................... 3,063 3,159 2,853
--------- --------- -----------
$ 13,348 $ 10,469 $ 13,507
--------- --------- -----------
--------- --------- -----------
</TABLE>
The Company has a Profit Sharing and Employees Savings Benefit Plan covering
substantially all full-time, non-union employees with at least one year of
service. Contributions are determined annually at the discretion of the Managing
General Partner. The expense recorded was $1.7 million, $1.4 million, and $1.7
million for the years ended December 31, 1993, 1994 and 1995, respectively.
8. DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Senior Notes 9.78%.......................... $ 275,000 $ 275,000 $ 275,000
Senior Notes 9.60%.......................... -- 25,000 25,000
Bank acquisition line of credit 7.69%....... 25,000 26,000 40,000
--------- --------- -----------
$ 300,000 $ 326,000 $ 340,000
--------- --------- -----------
--------- --------- -----------
</TABLE>
The Operating Partnership has a three-year revolving credit facility with a
group of banks, which allows it to borrow up to $40.0 million for working
capital purposes and stand-by letters of credit. The
F-13
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
8. DEBT (CONTINUED)
credit facility bears a floating rate of interest, 7.61% at December 31, 1995,
and requires the Company to repay all outstanding indebtedness under the
facility for at least 30 consecutive days during any twelve-month period. The
line of credit is secured by the Operating Partnership's inventories and
receivables. At December 31, 1994 and 1995, the Company had $3.5 million and
$19.1 million outstanding under this facility, respectively. On January 2, 1996,
the Operating Partnership repaid $4.6 million of the borrowings outstanding at
December 31, 1995.
The Operating Partnership has a Bank Acquisition Facility with a group of
banks, which allows it to borrow up to $100 million for the acquisition of
additional timber or timberlands. The Acquisition Facility bears a floating rate
of interest, is unsecured and is a revolving facility for a three-year period.
At the end of the revolving period, December 31, 1997, the Operating Partnership
may elect to convert any outstanding borrowings under the facility to a
four-year term loan, requiring annual principal payments equal to 25% of the
outstanding principal balance on the conversion date. On January 2, 1996, the
Operating Partnership repaid $4.4 million of the borrowings outstanding at
December 31, 1995.
The Operating Partnership's Senior Notes are unsecured and require
semi-annual interest payments on June 1 and December 1 of each year, through
2009. The Senior Notes are redeemable prior to maturity subject to a premium on
redemption, which is based on interest rates of U.S. Treasury securities, plus
50 basis points, having a similar average maturity as the Senior Notes. The
Senior Note agreements require the Operating Partnership to make annual
principal payments of $37.5 million on December 1 of each year beginning in 2002
through the year 2009.
The Senior Note agreements and bank lines of credit contain certain
restrictive covenants, including limitations on harvest levels, land sales, cash
distributions and the amount of future indebtedness. The Operating Partnership
was in compliance with such covenants at December 31, 1995.
9. INCOME TAXES
The components of the Former Entities' tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994
--------- ---------
<S> <C> <C>
Current taxes payable.................................................... $ 1,501 $ 1,939
Deferred taxes........................................................... -- 575
--------- ---------
$ 1,501 $ 2,514
--------- ---------
--------- ---------
</TABLE>
10. FORMER ENTITIES -- MANDATORILY REDEEMABLE PREFERRED STOCK AND LIMITED
PARTNERSHIP INTERESTS
CROWN PACIFIC LIMITED PARTNERSHIP
CLASS D LIMITED PARTNERSHIP INTERESTS. During 1993, CPLP issued new Class D
limited partnership interests. The Class D interests included an aggregate
annual cumulative priority distribution subject to restrictions. CPLP had the
right to call the Class D interests on or after the third anniversary date of
the original Class D capital contribution for a price equal to par plus a 16%
internal rate of return including the annual priority distribution. The Class D
Limited Partnership interests were redeemed on December 22, 1994 as part of the
Company's public offering for the redemption price plus a premium of $3.0
million.
F-14
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
10. FORMER ENTITIES -- MANDATORILY REDEEMABLE PREFERRED STOCK AND LIMITED
PARTNERSHIP INTERESTS (CONTINUED)
CROWN PACIFIC INLAND LIMITED PARTNERSHIP
CLASS B PREFERRED LIMITED PARTNERSHIP INTERESTS. CP Inland Class B
Preferred represented limited partnership interests that entitled the holders to
an aggregate annual cumulative priority distribution of $2.2 million. Payment of
these priority distributions was subject to CP Inland income.
CP Inland had the right to call the Class B interests after October 28, 1995
for a price equal to par plus a 16% rate of return including the annual priority
distributions. In 1994, accretion was recorded on the Class B interests to
reflect them at redemption price. The Class B Preferred Partnership interests
were redeemed on December 22, 1994 as part of the Company's public offering for
the redemption price plus a premium of $1.3 million. The changes in the
mandatorily redeemable limited partnership interests were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994
---------- ---------
<S> <C> <C>
Balance at beginning of year.......................................... $ -- $ 52,325
Contributions......................................................... 51,143 --
Allocation of net income.............................................. 3,243 3,958
Distributions......................................................... (2,061) (2,946)
Accretion............................................................. -- 4,666
Redemption............................................................ -- (62,317)
Allocation of redemption in excess of cost............................ -- 4,314
---------- ---------
Balance at end of the year............................................ $ 52,325 $ --
---------- ---------
---------- ---------
</TABLE>
11. PARTNERS' AND SHAREHOLDERS' EQUITY AND DISTRIBUTIONS
PARTNERSHIP EQUITY
On December 22, 1994, the Partnership sold in an initial public offering
9,850,000 Units. Simultaneous to the public offering, 2,510,439 Units, 5,773,088
Subordinated Limited Partnership Units ("Subordinated Units") and 10,000 Special
Allocation Units ("SAUs") were issued to certain existing partners of CPLP and
CP Inland. At December 31, 1994 and 1995, the Partnership had outstanding
12,360,439 Units, 5,773,088 Subordinated Units, and 10,000 SAUs. All of the
management decisions related to the Partnership are made by the Managing General
Partner. Unitholders have voting rights for certain issues as outlined in the
Partnership Agreement.
ALLOCATIONS OF INCOME. Generally, income and losses are allocated 99% to
the holders of Units and Subordinated Units and 1% to the Managing General
Partner. However, in the event the SAUs receive distributions of cash, income
will be allocated to the holders of SAUs in an amount equal to the cash
distributions received.
CASH DISTRIBUTIONS. In accordance with the Partnership Agreement, the
Managing General Partner is authorized to make quarterly cash distributions from
Available Cash. Generally, cash distributions are paid in order of preference;
first to the holders of Units; second, to the extent cash remains, to holders of
Subordinated Units; and third, prior to the SAU Liquidation Date, to holders of
SAUs. The SAU Liquidation Date is generally defined as the earlier of the date
the SAU holders receive cumulative distributions of $80.0 million or December
31, 1997. For the year ended December 31, 1994, the Managing General Partner
established a $1.5 million SAU reserve. However, there were no SAU distributions
or allocations of income to the SAUs in 1994 or 1995.
F-15
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
11. PARTNERS' AND SHAREHOLDERS' EQUITY AND DISTRIBUTIONS (CONTINUED)
The Partnership Agreement also sets forth target distributions for the
General Partners to meet to increase their share of the incremental available
cash flow. When the annual distribution reaches $2.26 per Unit, the General
Partners receive 15% of the available cash flow rather than the base amount of
2%. The General Partners can receive a maximum of 50% of the available cash flow
if the annual distribution exceeds $3.62 per Unit.
The Subordinated Units are subordinated in right of distributions to the
holders of Units. Provided that certain targeted increases in cash distributions
are paid to the holders of Units and there are no arrearages in distributions on
the Units, the Subordinated Units will convert to Common Units, 50% in 1999 and
50% in 2000.
For the ten-day period ended December 31, 1994 and the year ended December
31, 1995, the Managing General Partner declared distributions totaling $0.055
per Unit and $2.04 per Unit, respectively.
Included in the Company's consolidated distributions to partners was $0.3
million paid to the Managing General Partner for its 1% share of the Operating
Partnership's 1995 distributions. The remaining 99% of the Operating
Partnership's distributions were eliminated in consolidation.
FORMER ENTITIES' EQUITY
Net income or loss was allocated to the various Former Entities' interests
pursuant to their respective partnership agreements. In addition to the specific
distributions made pursuant to the various Former Entities' partnership
agreements, all of the partnerships made tax distributions to their partners in
an amount equal to the estimated tax liability for each partner based on the
profitability of the respective partnership.
CROWN PACIFIC LIMITED PARTNERSHIP
CPLP's equity prior to December 22, 1994 consisted of a general partnership
interest, two classes of preferred limited partnership interests and two classes
of limited partnership interests. Class C Subordinated Preferred Limited
Partnership Interests, Class A Limited Partnership Interests and Class E Limited
Partnership Interests were all subordinate to Class B Preferred Limited
Partnership Interests. Class C Limited Partnership Interests were retired in
1993. Class B Preferred Limited Partnership Interests were redeemed as part of
the Offering at par plus accrued priority distributions. Both Class A and Class
E Limited Partnership Interests were exchanged as part of the Offering for
3,732,323 Units in the newly formed Partnership, $74.3 million in cash and 5,401
SAUs.
CROWN PACIFIC INLAND LIMITED PARTNERSHIP
CP Inland's partners' equity consisted of a general partnership interest and
the Class A nonredeemable limited partnership interests. The Class A Limited
Partnership Units and General Partner interest were exchanged on December 22,
1994 as part of the Offering for 4,551,204 Units in the newly formed
Partnership, plus $33.7 million in cash and 4,599 SAUs.
Both CPLP and CP Inland had issued warrants to purchase certain partnership
interests. All warrants were redeemed for $21.7 million as part of the Offering.
12. UNIT OPTION PLAN
Effective December 22, 1994, the Managing General Partner adopted the 1994
Unit Option Plan (the "Plan") for certain key employees of the Partnership and
Managing General Partner. Under the
F-16
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
12. UNIT OPTION PLAN (CONTINUED)
terms of the Plan, the Compensation Committee of the Managing General Partner
can grant annual options on or about January 1, 1995 through January 1, 1999.
Total options granted in any one year cannot exceed 1% of the total outstanding
Units and Subordinated Units.
The exercise price for each annual option grant shall be the market price of
the Units as of the grant date. Each option grant vests over a four-year period,
10% in year one, an additional 20% in year two, an additional 30% in year three,
and the final 40% in year four. Once the options vest, they are generally
exercisable for a ten-year period. For both of the years ended December 31, 1994
and 1995, 181,000 options were granted, with an exercise price of $21.50 per
Unit and $18.13 per Unit, respectively. No options were exercised in 1995. In
addition, 8,000 of the 1994 options were forfeited in 1995.
Effective December 22, 1994, the Plan provided for the granting of Front End
Options to two officers of the Managing General Partner. Under the terms of the
Front End Option grants, each officer received an option to purchase 181,335
Units on December 31, 1999, with an exercise price of $21.50 per Unit, and such
option vests only if all of the following conditions are met:
1) The Subordinated Units have converted to Units;
2) The officer continued his employment with the Managing General Partner
through at least December 31, 1999; and
3) The Partnership has made distributions to the holders of Units and
Subordinated Units at certain minimum levels through December 31, 1999.
Provided the above conditions are met, the Front End Options may be
exercised, for the period beginning on December 31, 1999 through December
31, 2004.
The Company plans to adopt SFAS No.123, "Accounting for Stock-Based
Compensation", in 1996. SFAS No. 123 was issued by the Financial Accounting
Standards Board in October 1995 and allows companies to choose whether to
account for stock-based compensation on a fair value method, or continue to
account for stock based compensation under the current method as prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Company
plans to continue to follow the provisions of APB Opinion No. 25. Therefore,
management of the Partnership believes that the impact of adoption will not have
a significant effect on the Company's financial position or results of
operations.
13. RELATED PARTIES
As part of the Partnership Agreement, the Partnership reimburses the General
Partners for the direct costs incurred to manage the Partnership. These cost
reimbursements totaled $2.9 million in 1995.
In connection with the CPL Stock Purchase Agreement dated July 1, 1991,
payments may be made to the shareholders/owners for increases in federal or
state income tax liabilities (including associated penalties and interest, if
any) resulting from the tax audits of CPL and a related entity, SSW Limited
Partnership, for periods prior to July 1991. Pursuant to this arrangement, a
shareholder/owner of CPL received a payment of $0.5 million in July 1994, $0.4
million of which was repaid in January 1995.
In 1993, in order to fund, in part, the acquisition of DAW, CPL concurrently
sold land to a director of CPL for $4.0 million. No gain or loss was recognized
on this concurrent sale as it was accounted for as a reduction in the purchase
price of the acquired assets.
F-17
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
13. RELATED PARTIES (CONTINUED)
Included in the Company's accrued expenses at December 31, 1994 was $2.4
million due to CPL for costs and expenses paid by CPL on behalf of the Company.
This amount was paid in 1995.
14. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1994 and 1995, the Company was committed to purchase
timber or logs from government and private sources. The commitments mature on
various dates through 2001. The estimated remaining commitments approximated
$72.4 million and $47.7 million at December 31, 1994 and 1995, respectively.
The Company has two log supply agreements that have generally fixed prices,
dependent on the species of logs delivered, the delivery point and size and
quality of logs. During 1994 and 1995, there were 43 MMBF and 21 MMBF,
respectively, of logs sold under these contracts. In addition, 22 MMBF of logs
are scheduled to be delivered during 1996 and 1997.
The Company becomes involved in litigation and other proceedings arising in
the normal course of its business. In the opinion of management, the Company's
liability, if any, under any pending litigation would not materially affect its
financial condition or results of operations.
15. SUBSEQUENT EVENT
In January 1996, the Board of Control of the Managing General Partner
declared the fourth quarter 1995 distribution of $0.51 per Unit. The
distribution will equal $9.3 million (including $0.1 million to the General
Partners) and will be paid on February 14, 1996 to Unitholders of record on
February 1, 1996.
16. EVENTS SUBSEQUENT TO MARCH 31, 1996 (UNAUDITED)
On May 15, 1996, the Partnership purchased approximately 207,000 acres of
timberland containing an estimated 1.5 billion board feet of merchantable timber
in Oregon and Washington (the "Purchase") for $205 million in cash from Cavenham
Forest Industries ("Cavenham"), through an agreement with Willamette Industries,
Inc.
The Purchase was financed with a bank credit facility (the "Acquisition
Debt") from a syndicate of financial institutions. The Acquisition Debt consists
of an acquisition term loan in the principal amount of $150 million and a bridge
term loan in the principal amount of $100 million. On the closing of the
Purchase the Partnership borrowed $210 million, including $5 million for closing
and financing costs and an additional $40 million to repay outstanding long-term
bank borrowings under its previously existing bank acquisition facility, which
was terminated at closing. The acquisition term loan requires principal payments
in varying amounts beginning on September 30, 1998, and matures on June 30,
2002. The Acquisition Debt agreements require that the Partnership raise at
least $100 million through the sale of additional Common Units, net of related
issuance costs, by no later than June 30, 1997, which must be used to first pay
the bridge term loan.
In addition to the Acquisition Debt, the Partnership renegotiated its
revolving working capital facility (the "Line of Credit"), which is now a 6 year
facility and allows the Partnership to borrow up to $40 million for working
capital and general corporate purposes. The Line of Credit is secured by the
inventory and receivables of the Partnership and requires the Partnership to
repay amounts drawn under the Line of Credit for 30 consecutive days not less
often than once every twelve months.
Both the Acquisition Debt and the Line of Credit bear a floating rate of
interest at either (i) one, two, three or six months LIBOR, plus 2.5% or (ii)the
higher of Bank of America's reference rate or the
F-18
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 ARE
UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000), EXCEPT PER UNIT AMOUNTS)
16. EVENTS SUBSEQUENT TO MARCH 31, 1996 (UNAUDITED) (CONTINUED)
federal funds rate plus 0.50%, plus in either case, 1.5%. If the Partnership has
not raised at least $125 million through the sale of additional Common Units by
December 31, 1996, the interest rate will increase by 1.0%.
On April 16, 1996, the Board of Control of the Managing General Partner
authorized the Partnership to make a distribution of $0.524 per Unit, the First
Target Distribution as defined by the Partnership Agreement. This represents an
increase of $0.014 per Unit from the fourth quarter 1995 distribution of $0.51
per Unit. The distribution totaled approximately $9.6 million (including $0.1
million to the General Partners) and was paid on May 14, 1996 to Unitholders of
record on May 3, 1996.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Crown Pacific, Ltd.
In our opinion, the accompanying consolidated balance sheet presents fairly,
in all material respects, the financial position of Crown Pacific, Ltd. and its
subsidiary at December 31, 1995 in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this statement in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Portland, Oregon
February 27, 1996
F-20
<PAGE>
CROWN PACIFIC, LTD.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................................... $ 69 $ 624
Accounts receivable............................................................................... 185 208
Interest receivable............................................................................... 2,860 2,865
Due from affiliate................................................................................ 106 157
------------ -----------
Total current assets............................................................................ 3,220 3,854
Restricted cash..................................................................................... 220,000 220,000
Timber and timberlands, net......................................................................... 9,154 9,154
Investment in limited partnership................................................................... -- --
Other assets........................................................................................ 250 251
------------ -----------
$232,624 $233,259
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................................. $ 5 $ 18
Accrued expenses.................................................................................. 145 135
Accrued interest.................................................................................. 2,853 2,853
Income taxes payable.............................................................................. 406 705
------------ -----------
Total current liabilities....................................................................... 3,409 3,711
Deferred income taxes............................................................................... 6,235 6,506
Long-term debt...................................................................................... 220,000 220,000
------------ -----------
229,644 230,217
------------ -----------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, 5,000 shares authorized,
1,749.33 shares issued and outstanding........................................................... 20,381 20,381
Accumulated deficit............................................................................... (17,401) (17,339)
------------ -----------
2,980 3,042
------------ -----------
$232,624 $233,259
------------ -----------
------------ -----------
</TABLE>
The acompanying notes are an integral part of this statement
F-21
<PAGE>
CROWN PACIFIC, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 ARE UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000) UNLESS OTHERWISE STATED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Crown Pacific, Ltd. ("CPL" or "the Company") was incorporated in the state
of Oregon on January 28, 1988. The Company periodically invests in and divests
itself of business operations. Accordingly, its results of operations are not
necessarily comparable from year to year. In 1994, the majority of the Company's
operations consisted of the operation of a remanufacturing facility and the
ownership of a significant investment in a limited partnership. On December 22,
1994, the operations of the Crown Pacific affiliated group were reorganized. The
Company exchanged all of its interest in Crown Pacific Limited Partnership
("CPLP") for cash of $17.1 million, certain timberlands of CPLP with a book
value of $9.1 million, and 2,711,318 subordinated limited partnership units of
Crown Pacific Partners, L.P. (the "MLP"). The MLP was a newly formed limited
partnership which completed an initial public offering of limited partnership
units on December 22, 1994.
Also on December 22, 1994, the Company exchanged all of the net assets
relating to its remanufacturing operations with CPLP in liquidation of its $2.5
million note payable to CPLP. As a result of these transactions, the Company's
primary operations after December 22, 1994 consist only of a limited and general
partnership interest aggregating approximately 15% of the MLP (see Note 3). The
MLP owns and operates timberlands and related manufacturing facilities in
Oregon, Idaho, Washington and Montana.
PRINCIPLES OF CONSOLIDATION
The consolidated balance sheet includes the accounts of the Company and its
wholly owned subsidiary, SVE II, Inc. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents primarily represent funds invested in overnight
repurchase agreements. The Company considers all highly liquid short-term
investments with original maturities of less than three months to be cash
equivalents.
INCOME TAXES
Income taxes are calculated in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". This statement
requires that the balance sheet amounts for deferred income taxes be computed
based upon the tax effect of aggregate temporary differences arising prior to
year end and reversing subsequent to year end. Such effects have been calculated
based upon the tax rates currently enacted. The Company's significant temporary
differences include the difference in basis of its investment in limited
partnership and its timberlands (see Notes 3 and 5).
FINANCIAL INSTRUMENTS
All of the Company's material financial instruments were recognized in its
balance sheet at December 31, 1995 and March 31, 1996. The carrying value
reflected in the balance sheet approximates fair market value for the Company's
financial assets and liabilities except for the Company's investment in the MLP.
Descriptions of the methods and assumptions used to reach this conclusion are as
follows:
- Restricted cash and $220 million of instalment notes -- The interest rate
related to the restricted cash and each of the instalment notes represents
a rate tied to current credit markets (see Notes 2 and 4).
- Investment in the MLP -- The carrying value of the Company's investment in
the MLP is significantly below its fair value (see Note 3).
F-22
<PAGE>
CROWN PACIFIC, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 ARE UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000) UNLESS OTHERWISE STATED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements. Actual results could differ from these estimates.
2. RESTRICTED CASH
Effective July 7, 1989, CPL acquired approximately 194,000 acres of timber
and timberlands in the state of Washington for an aggregate purchase price of
$227.8 million. On December 11, 1992, the remaining acquired assets were
contributed to CPLP. To accomplish the Washington property acquisition, CPL
issued twenty-two $10 million instalment notes to the seller. The terms of the
acquisition require that the instalment notes be backed by irrevocable standby
letters of credit. The deposited funds are restricted such that they can only be
used to repay the instalment notes. The instalment notes mature on October 20,
2002 but can be extended every three years thereafter (until July 13, 2019) as
long as the bank agrees to extend the letters of credit and the seller agrees to
extend the notes.
As a result of the form of this transaction, the Company has included
noncurrent restricted cash and long-term debt of $220 million on its December
31, 1995 and March 31, 1996 consolidated balance sheet. The corresponding
accrued interest receivable and accrued interest payable of $2.9 million has
been included in current assets and current liabilities.
3. INVESTMENT IN LIMITED PARTNERSHIP
As a result of several investments in CPLP made by the Company, its Class E
limited partnership interest represented approximately 37% of CPLP before
December 22, 1994 (excluding the Class B and D interests of CPLP). CPL also was
the sole general partner of CPLP, with an approximate 10.5% ownership interest
(excluding the Class B and D interests of CPLP) before December 22, 1994. The
common shareholders of the Company (other than CPLP) were also limited partners
of CPLP.
The Company had accounted for its investment in CPLP using the equity method
and will continue to account for its investment in the MLP under the equity
method because the shareholders of the Company have influence on the operations
of the MLP and because the Company is one of the general partners of the MLP.
Distributions received, on the limited partnership interest, in excess of the
investment balance are recorded as income as there is no financial obligation of
a limited partner to the MLP. After recognition of the equity in the earnings of
the limited partnership, as well as the transactions of December 22, 1994 (see
table below), the Company's remaining investment in limited partnership is
significantly less than the fair value of the MLP units owned by the Company.
This difference, at December 31, 1995 and March 31, 1996, is estimated to be
approximately $49.2 million and $55.9 million, respectively.
CPL's underlying equity in the net assets of the MLP exceeded its carrying
value of $0 by approximately $15.9 million at December 31, 1995 and $15.1
million at March 31, 1996. These differences are primarily caused by the
Company's contribution in 1992 of net liabilities to CPLP for which it received
a Class E interest in CPLP. Because of common ownership of CPLP and the Company,
any assets contributed to the partnership were transferred to CPLP at book
value. CPLP issued Class E interests to CPL because the fair value of the assets
contributed exceeded the book value. The contribution of net liabilities to CPLP
in 1992 was effectively accounted for as a distribution to CPL from CPLP.
F-23
<PAGE>
CROWN PACIFIC, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 ARE UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000) UNLESS OTHERWISE STATED)
3. INVESTMENT IN LIMITED PARTNERSHIP (CONTINUED)
As the Company's operations have been reduced to its ownership interest in
the MLP, the Company is considered to be economically dependent on the MLP.
The transactions with respect to the Company's investment in the limited
partnership for the periods ended December 31, 1995 and March 31, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Investment in CPLP at beginning of period........................................................... $ 1,046 --
Equity in the MLP's income.......................................................................... 2,505 617
Distributions received.............................................................................. (4,297) (1,383)
Limited partnership distributions received in excess of investment.................................. 746 766
------------ -----------
Investment in limited partnership at end of period.................................................. $ -- $ --
------------ -----------
------------ -----------
</TABLE>
Summary financial information for the MLP is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Balance sheet data:
Current assets.................................................................................... $109,980 $114,353
Timberlands, property, plant and equipment........................................................ 360,983 369,661
Other assets...................................................................................... 5,542 6,301
------------ -----------
$476,505 $490,315
------------ -----------
------------ -----------
Current liabilities............................................................................... $ 43,243 $ 48,328
Long-term debt and other noncurrent liabilities................................................... 326,206 340,206
Partners' equity.................................................................................. 107,056 101,781
------------ -----------
$476,505 $490,315
------------ -----------
------------ -----------
</TABLE>
Summary financial information for the MLP for the periods ended December 31,
1995 and March 31, 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Income statement data:
Revenues.......................................................................................... $383,383 $ 84,555
Net income........................................................................................ 17,278 4,164
</TABLE>
F-24
<PAGE>
CROWN PACIFIC, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 ARE UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000) UNLESS OTHERWISE STATED)
4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Instalment notes payable, with interest at a variable rate approximating 5.9% at December 31, 1995,
backed by irrevocable standby letters of credit (see Note 2)....................................... $220,000 $220,000
Less current portion................................................................................ -- --
------------ -----------
$220,000 $220,000
------------ -----------
------------ -----------
</TABLE>
5. INCOME TAXES
Deferred tax liabilities (assets) consist of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Financial reporting basis of the investment in limited partnership in excess of tax basis....... $ 7,359 $ 7,650
Tax basis of timberlands in excess of financial reporting basis................................. (1,124) (1,144)
------------ -----------
Net deferred tax liability...................................................................... $ 6,235 $ 6,506
------------ -----------
------------ -----------
</TABLE>
6. SHAREHOLDERS' EQUITY
The Company and its shareholders have entered into a buy-sell agreement
whereby the Company shall have the option to purchase any common shares, for
which a common shareholder has received a bona fide offer, at the same terms and
price as the outside offer for the shares. If the Company elects not to purchase
such shares, then the other common shareholders have the right to purchase the
shares for the terms of the outside offer. During 1995 and the three months
ended March 31, 1996, no shares were repurchased by the Company.
During the year ended December 31, 1995 and three months ended March 31,
1996, the Company declared and paid dividends of $4.4 million and $0.8 million,
respectively.
7. RELATED PARTIES
As of December 31, 1995 and March 31, 1996, the MLP and other affiliated
entities owed the Company $.1 million for costs which the Company paid on their
behalf. The amount is included in amounts due from affiliates in the
accompanying consolidated balance sheet.
In 1991, an officer of the Company borrowed $0.3 million in exchange for a
note receivable which bears interest at 8.43%, is payable annually, and is due
in 2001. This note receivable is included in other assets in the accompanying
consolidated balance sheet.
In connection with the Company's Stock Purchase Agreement dated July 1,
1991, payments may be made to the shareholders/owners for increases in federal
or state income tax liabilities (including associated penalties and interest, if
any) resulting from the tax audits of the Company and a related entity, SSW
Limited Partnership, for periods prior to July 1991. Pursuant to this
arrangement, a
F-25
<PAGE>
CROWN PACIFIC, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 ARE UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS (000) UNLESS OTHERWISE STATED)
7. RELATED PARTIES (CONTINUED)
shareholder/owner received a payment of $.5 million in July 1994. During the
year ended December 31, 1995, $.4 million was repaid, offset by an additional
$.1 million incurred in expenses by CPL, related to these tax audits. Included
in accounts receivable in the accompanying consolidated balance sheet at
December 31, 1995 and March 31, 1996 is the remaining $.2 million.
8. COMMITMENTS AND CONTINGENCIES
The Company becomes involved in litigation and other proceedings arising in
the normal course of its business. In the opinion of management, the Company's
liability, if any, under any pending litigation would not materially affect its
financial condition or operations.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Partners of
Crown Pacific Management Limited Partnership
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Crown Pacific Management Limited
Partnership at December 31, 1995 in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Partnership's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this statement
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Portland, Oregon
May 30, 1996
F-27
<PAGE>
CROWN PACIFIC MANAGEMENT LIMITED PARTNERSHIP
BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................................... $ 54 $ 50
Due from affiliates............................................................................... 140 112
Prepaid expenses.................................................................................. 65 45
------ -----------
$ 259 $ 207
------ -----------
------ -----------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................................................. $ 307 $ 281
------ -----------
Investment in limited partnerships.................................................................. 318 423
------ -----------
Partners' deficit................................................................................... (366) (497)
------ -----------
$ 259 $ 207
------ -----------
------ -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-28
<PAGE>
CROWN PACIFIC MANAGEMENT LIMITED PARTNERSHIP
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 ARE UNAUDITED)
NOTES TO BALANCE SHEET
(IN THOUSANDS)
1. THE PARTNERSHIP
Crown Pacific Management Limited Partnership (the "Partnership") is a
Delaware limited partnership that was formed August 12, 1994 to become the
managing general partner of Crown Pacific Partners, L.P. (the "MLP"). The MLP is
a limited partnership that owns and operates timberlands and related
manufacturing facilities in Oregon, Idaho, Washington and Montana. The
Partnership manages the businesses of the MLP and owns a 0.99% general partner
interest in the MLP. The Partnership also owns a 1% interest in Crown Pacific
Limited Partnership (the "Operating Partnership"), a subsidiary of the MLP. The
operations of the Operating Partnership represent the majority of the MLP's
operations. The ownership interests in these partnerships represent the extent
of the Partnership's operations and therefore the Partnership is considered to
be economically dependent on the MLP as of December 31, 1995 and March 31, 1996.
The general partners of the Partnership are Fremont Timber, Inc. and HS Corp. of
Oregon.
2. INVESTMENT IN LIMITED PARTNERSHIPS
The Partnership accounts for its investment in limited partnerships using
the equity method because the partners of the Partnership (or their affiliates)
have influence on the operations of the MLP and the Operating Partnership and
because the Partnership is one of the general partners of the MLP and the sole
general partner of the Operating Partnership. Distributions received in excess
of the investment balance are recorded as a liability as there may be a
financial obligation as general partner of the MLP and the Operating Partnership
in the event of financial difficulty.
The recorded value of the Partnership's investment in limited partnerships
is significantly less than the fair value of the equivalent MLP units owned by
the Partnership in both the MLP and Operating Partnership. This difference is
estimated to be approximately $6.9 million and $8.0 million at December 31, 1995
and March 31, 1996, respectively. The transactions with respect to the
Partnership's investment in the limited partnerships for the periods ended
December 31, 1995 and March 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Investment in MLP and Operating Partnership at beginning of period............................. $ (70) $ (318)
Equity in the income of the MLP and Operating Partnership...................................... 332 81
Distributions received......................................................................... (580) (186)
----------------- --------------
Investment in MLP and Operating Partnership at end of period................................... $ (318) $ (423)
----------------- --------------
----------------- --------------
</TABLE>
F-29
<PAGE>
CROWN PACIFIC MANAGEMENT LIMITED PARTNERSHIP
(ALL AMOUNTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 ARE UNAUDITED)
NOTES TO BALANCE SHEET (CONTINUED)
(IN THOUSANDS)
2. INVESTMENT IN LIMITED PARTNERSHIPS (CONTINUED)
Summary financial information for the MLP is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Balance sheet data:
Current assets............................................................................... $109,980 $114,353
Timberlands, property, plant and equipment................................................... 360,983 369,661
Other assets................................................................................. 5,542 6,301
----------------- --------------
$476,505 $490,315
----------------- --------------
----------------- --------------
Current liabilities.......................................................................... $ 43,243 $ 48,328
Long-term debt and other noncurrent liabilities.............................................. 326,206 340,206
Partners' equity............................................................................. 107,056 101,781
----------------- --------------
$476,505 $490,315
----------------- --------------
----------------- --------------
</TABLE>
Income statement data is as follows:
<TABLE>
<CAPTION>
YEAR ENDED 3 MONTHS ENDED
DECEMBER 31, MARCH 31,
1995 1996
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenues....................................................................................... $383,383 $ 84,555
Net income..................................................................................... 17,278 4,164
</TABLE>
F-30
<PAGE>
APPENDIX A
SECOND AMENDED AND RESTATED AGREEMENT
OF
LIMITED PARTNERSHIP
OF
CROWN PACIFIC PARTNERS, L. P.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE I -- ORGANIZATIONAL MATTERS........................................................................ A-1
1.1 Formation....................................................................................... A-1
1.2 Name............................................................................................ A-1
1.3 Registered Office; Principal Office............................................................. A-1
1.4 Power of Attorney............................................................................... A-1
1.5 Term............................................................................................ A-2
1.6 Possible Restrictions on Transfer............................................................... A-2
ARTICLE II -- DEFINITIONS.................................................................................. A-3
"Acquisition"................................................................................... A-3
"Additional Limited Partner".................................................................... A-3
"Adjusted Capital Account"...................................................................... A-3
"Adjusted Property"............................................................................. A-3
"Affiliate"..................................................................................... A-4
"Agreed Allocation"............................................................................. A-4
"Agreed Value".................................................................................. A-4
"Agreement"..................................................................................... A-4
"Assignee"...................................................................................... A-4
"Associate"..................................................................................... A-4
"Audit Committee"............................................................................... A-4
"Available Cash"................................................................................ A-4
"Book-Tax Disparity"............................................................................ A-5
"Business Day".................................................................................. A-5
"Capital Account"............................................................................... A-5
"Capital Additions and Improvements"............................................................ A-6
"Capital Contribution".......................................................................... A-6
"Capital Interests"............................................................................. A-6
"Carrying Value"................................................................................ A-6
"Cash from Interim Capital Transactions"........................................................ A-6
"Cash from Operations".......................................................................... A-6
"Cause"......................................................................................... A-7
"Certificate"................................................................................... A-7
"Certificate of Limited Partnership"............................................................ A-7
"Citizenship Certification"..................................................................... A-7
"Claim"......................................................................................... A-7
"Closing Date".................................................................................. A-7
"Closing Price"................................................................................. A-7
"Code".......................................................................................... A-8
"Commission".................................................................................... A-8
"Common Unit"................................................................................... A-8
"Common Unit Arrearage"......................................................................... A-8
"Contributed Property".......................................................................... A-8
"Cumulative Common Unit Arrearage".............................................................. A-8
"Current Market Price".......................................................................... A-8
"Delaware Act".................................................................................. A-8
"Departing Partner"............................................................................. A-8
"Discretionary Allocation"...................................................................... A-8
"Economic Risk of Loss"......................................................................... A-8
"Eligible Citizen".............................................................................. A-8
"Event of Withdrawal"........................................................................... A-8
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
"Fifth Target Distribution"..................................................................... A-8
"First Common Unit Liquidation Amount".......................................................... A-8
"First Conversion Date"......................................................................... A-8
"First Target Distribution"..................................................................... A-8
"Fourth Common Unit Liquidation Amount"......................................................... A-9
"Fourth Target Distribution".................................................................... A-9
"Fremont"....................................................................................... A-9
"General Partners".............................................................................. A-9
"Group"......................................................................................... A-9
"Holder"........................................................................................ A-9
"Incentive Distribution"........................................................................ A-9
"Indemnified Persons"........................................................................... A-9
"Indemnitee".................................................................................... A-9
"Initial Closing Date".......................................................................... A-9
"Initial Limited Partners"...................................................................... A-9
"Initial Unit Price"............................................................................ A-9
"Interest"...................................................................................... A-9
"Interim Capital Transactions".................................................................. A-9
"Issue Price"................................................................................... A-9
"Limited Partner"............................................................................... A-10
"Limited Partner Equity Value".................................................................. A-10
"Liquidation Date".............................................................................. A-10
"Liquidator".................................................................................... A-10
"Maintenance Capital Expenditures".............................................................. A-10
"Managing General Partner"...................................................................... A-10
"Merger Agreement".............................................................................. A-10
"Minimum Quarterly Distribution"................................................................ A-10
"National Securities Exchange".................................................................. A-10
"Net Agreed Value".............................................................................. A-10
"Net Income".................................................................................... A-11
"Net Loss"...................................................................................... A-11
"Net Termination Gain".......................................................................... A-11
"Net Termination Loss".......................................................................... A-11
"Non-citizen Assignee".......................................................................... A-11
"Nonrecourse Built-in Gain"..................................................................... A-11
"Nonrecourse Deductions"........................................................................ A-11
"Nonrecourse Liability"......................................................................... A-11
"Notice of Election to Purchase"................................................................ A-11
"Operating Capacity"............................................................................ A-11
"Operating Partnership"......................................................................... A-11
"Operating Partnership Agreement"............................................................... A-12
"Opinion of Counsel"............................................................................ A-12
"Option Closing Date"........................................................................... A-12
"Outstanding"................................................................................... A-12
"Overallotment Option".......................................................................... A-12
"Participating Investor"........................................................................ A-12
"Partners"...................................................................................... A-12
"Partner Nonrecourse Debt"...................................................................... A-12
"Partner Nonrecourse Debt Minimum Gain"......................................................... A-12
"Partner Nonrecourse Deductions"................................................................ A-12
"Partnership"................................................................................... A-12
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
"Partnership Interest".......................................................................... A-12
"Partnership Minimum Gain"...................................................................... A-12
"Partnership Securities"........................................................................ A-12
"Per Unit Capital Amount"....................................................................... A-12
"Percentage Interest"........................................................................... A-13
"Person"........................................................................................ A-13
"Prior Agreement"............................................................................... A-13
"Public Offering"............................................................................... A-13
"Purchase Date"................................................................................. A-13
"Quarter"....................................................................................... A-13
"Recapture Income".............................................................................. A-13
"Record Date"................................................................................... A-13
"Record Holder"................................................................................. A-13
"Redeemable Units".............................................................................. A-13
"Registration Statement"........................................................................ A-13
"Required Allocation"........................................................................... A-13
"Residual Gain"................................................................................. A-14
"Residual Loss"................................................................................. A-14
"Restricted Activities"......................................................................... A-14
"Second Common Unit Liquidation Amount"......................................................... A-14
"Second Conversion Date"........................................................................ A-14
"Second Target Distribution".................................................................... A-14
"Securities Act"................................................................................ A-14
"Sequoia"....................................................................................... A-14
"Special Approval".............................................................................. A-14
"Special General Partner"....................................................................... A-14
"Subordinated Unit"............................................................................. A-14
"Subordination Period".......................................................................... A-14
"Subsidiary".................................................................................... A-15
"Substitute Limited Partner".................................................................... A-15
"Surviving Business Entity"..................................................................... A-15
"Target Distribution"........................................................................... A-15
"Third Common Unit Liquidation Amount".......................................................... A-15
"Third Target Distribution"..................................................................... A-15
"Trading Day"................................................................................... A-15
"Transfer"...................................................................................... A-15
"Transfer Agent"................................................................................ A-15
"Transfer Application".......................................................................... A-15
"Underwriter"................................................................................... A-15
"Underwriting Agreement"........................................................................ A-15
"Unit".......................................................................................... A-15
"Unpaid MQD".................................................................................... A-15
"Unpaid Fifth Target Distribution".............................................................. A-16
"Unpaid Fourth Target Distribution"............................................................. A-16
"Unpaid Third Target Distribution".............................................................. A-16
"Unrealized Gain"............................................................................... A-16
"Unrealized Loss"............................................................................... A-16
"Unrecovered Initial Unit Price"................................................................ A-17
"Withdrawal Opinion of Counsel"................................................................. A-17
"Working Capital Reserve"....................................................................... A-17
</TABLE>
A-iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE III -- PURPOSE..................................................................................... A-17
3.1 Purpose and Business............................................................................ A-17
3.2 Powers.......................................................................................... A-17
ARTICLE IV -- CAPITAL CONTRIBUTIONS........................................................................ A-18
4.1 Initial Contributions........................................................................... A-18
4.2 Contributions by Additional Limited Partners.................................................... A-18
4.3 Issuances of Additional Units and Other Securities.............................................. A-18
4.4 Limited Preemptive Rights....................................................................... A-19
4.5 Capital Accounts................................................................................ A-20
4.6 Interest........................................................................................ A-22
4.7 No Withdrawal................................................................................... A-22
4.8 Loans from Partners............................................................................. A-22
4.9 No Fractional Units............................................................................. A-22
4.10 Splits and Combinations......................................................................... A-22
ARTICLE V -- ALLOCATIONS AND DISTRIBUTIONS................................................................. A-23
5.1 Allocations for Capital Account Purposes........................................................ A-23
(a) Net Income.................................................................................. A-23
(b) Net Losses.................................................................................. A-23
(c) Net Termination Gains and Losses............................................................ A-23
(d) Agreed Allocations.......................................................................... A-27
(i) Priority Allocations........................................................................ A-27
(ii) Nonrecourse Liabilities.................................................................... A-28
(iii) Economic Uniformity....................................................................... A-28
(iv) Discretionary Allocation................................................................... A-28
(e) Required Allocations........................................................................ A-29
(i) Partnership Minimum Gain Chargeback......................................................... A-29
(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain........................................ A-29
(iii) Qualified Income Offset................................................................... A-29
(iv) Gross Income Allocations................................................................... A-29
(v) Nonrecourse Deductions...................................................................... A-29
(vi) Partner Nonrecourse Deductions............................................................. A-30
5.2 Allocations for Tax Purposes.................................................................... A-30
5.3 Requirement and Characterization of Distributions............................................... A-31
5.4 Distributions of Cash from Operations........................................................... A-32
(a) For the Calendar Year Ended December 31, 1996............................................... A-32
(b) For the Calendar Year Ended December 31, 1997............................................... A-32
(c) For the Calendar Year Ended December 31, 1998 and for the Remainder of
the Subordination Period................................................................ A-33
(d) After the Subordination Period.............................................................. A-34
5.5 Distributions of Cash from Interim Capital Transactions......................................... A-35
5.6 Adjustment of Minimum Quarterly Distribution and Target Distributions........................... A-35
5.7 Special Provisions Relating to the Subordinated Units........................................... A-35
ARTICLE VI -- MANAGEMENT AND OPERATION OF BUSINESS......................................................... A-36
6.1 Management...................................................................................... A-36
6.2 Certificate of Limited Partnership.............................................................. A-38
6.3 Restrictions on General Partners' Authority..................................................... A-39
6.4 Reimbursement of the General Partners........................................................... A-40
6.5 Outside Activities.............................................................................. A-40
6.6 Loans from the General Partners; Contracts with Affiliates...................................... A-41
6.7 Indemnification................................................................................. A-43
</TABLE>
A-iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
6.8 Liability of Indemnitees........................................................................ A-44
6.9 Resolution of Conflicts of Interest............................................................. A-44
6.10 Other Matters Concerning the General Partners................................................... A-46
6.11 Title to Partnership Assets..................................................................... A-46
6.12 Purchase or Sale of Units....................................................................... A-47
6.13 Registration Rights of the General Partners, Their Affiliates and the Participating Investors... A-47
6.14 Reliance by Third Parties....................................................................... A-49
ARTICLE VII -- RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.................................................. A-49
7.1 Limitation of Liability......................................................................... A-49
7.2 Management of Business.......................................................................... A-49
7.3 Outside Activities.............................................................................. A-49
7.4 Return of Capital............................................................................... A-50
7.5 Rights of Limited Partners Relating to the Partnership.......................................... A-50
ARTICLE VIII -- BOOKS, RECORDS, ACCOUNTING AND REPORTS..................................................... A-50
8.1 Records and Accounting.......................................................................... A-50
8.2 Fiscal Year..................................................................................... A-51
8.3 Reports......................................................................................... A-51
ARTICLE IX -- TAX MATTERS.................................................................................. A-51
9.1 Preparation of Tax Returns...................................................................... A-51
9.2 Tax Elections................................................................................... A-51
9.3 Tax Controversies............................................................................... A-51
9.4 Organizational Expenses......................................................................... A-52
9.5 Withholding..................................................................................... A-52
9.6 Entity-Level Taxation........................................................................... A-52
9.7 Entity-Level Arrearage Collections.............................................................. A-52
9.8 Opinions of Counsel............................................................................. A-53
ARTICLE X -- CERTIFICATES.................................................................................. A-53
10.1 Certificates.................................................................................... A-53
10.2 Registration, Registration of Transfer and Exchange............................................. A-53
10.3 Mutilated, Destroyed, Lost or Stolen Certificates............................................... A-54
10.4 Record Holder................................................................................... A-54
ARTICLE XI -- TRANSFER OF INTERESTS........................................................................ A-55
11.1 Transfer........................................................................................ A-55
11.2 Transfer of General Partners' Partnership Interest.............................................. A-55
11.3 Transfer of Units............................................................................... A-55
11.4 Restrictions on Transfers....................................................................... A-56
11.5 Citizenship Certificates; Non-citizen Assignees................................................. A-56
11.6 Redemption of Interests......................................................................... A-57
ARTICLE XII -- ADMISSION OF PARTNERS....................................................................... A-58
12.1 Admission of Initial Limited Partners........................................................... A-58
12.2 Admission of Substitute Limited Partners........................................................ A-58
12.3 Admission of Successor General Partners......................................................... A-58
12.4 Admission of Additional Limited Partners........................................................ A-58
12.5 Amendment of Agreement and Certificate of Limited Partnership................................... A-59
ARTICLE XIII -- WITHDRAWAL OR REMOVAL OF PARTNERS.......................................................... A-59
13.1 Withdrawal of the Managing General Partner...................................................... A-59
13.2 Removal of the Managing General Partner......................................................... A-60
13.3 Interest of Departing Partner and Successor General Partners.................................... A-60
</TABLE>
A-v
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
13.4 Withdrawal or Removal of Special General Partner................................................ A-62
13.5 Withdrawal of Limited Partners.................................................................. A-63
ARTICLE XIV -- DISSOLUTION AND LIQUIDATION................................................................. A-63
14.1 Dissolution..................................................................................... A-63
14.2 Continuation of the Business of the Partnership after Dissolution............................... A-63
14.3 Liquidation..................................................................................... A-64
14.4 Distributions in Kind........................................................................... A-65
14.5 Cancellation of Certificate of Limited Partnership.............................................. A-65
14.6 Reasonable Time for Winding Up.................................................................. A-65
14.7 Return of Capital............................................................................... A-65
14.8 Capital Account Restoration..................................................................... A-65
14.9 Waiver of Partition............................................................................. A-65
ARTICLE XV -- AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE....................................
A-66
15.1 Amendment to be Adopted Solely by Managing General Partner...................................... A-66
15.2 Amendment Procedures............................................................................ A-67
15.3 Amendment Requirements.......................................................................... A-67
15.4 Meetings........................................................................................ A-68
15.5 Notice of a Meeting............................................................................. A-68
15.6 Record Date..................................................................................... A-68
15.7 Adjournment..................................................................................... A-68
15.8 Waiver of Notice; Approval of Meeting; Approval of Minutes...................................... A-68
15.9 Quorum.......................................................................................... A-69
15.10 Conduct of Meeting.............................................................................. A-69
15.11 Action Without a Meeting........................................................................ A-69
15.12 Voting and Other Rights......................................................................... A-70
ARTICLE XVI -- MERGER...................................................................................... A-70
16.1 Authority....................................................................................... A-70
16.2 Procedure for Merger or Consolidation........................................................... A-70
16.3 Approval by Limited Partners of Merger or Consolidation......................................... A-71
16.4 Certificate of Merger........................................................................... A-71
16.5 Effect of Merger................................................................................ A-71
ARTICLE XVII -- RIGHT TO ACQUIRE UNITS..................................................................... A-72
17.1 Right to Acquire Units.......................................................................... A-72
ARTICLE XVIII -- GENERAL PROVISIONS........................................................................ A-73
18.1 Addresses and Notices........................................................................... A-73
18.2 References...................................................................................... A-74
18.3 Pronouns and Plurals............................................................................ A-74
18.4 Further Action.................................................................................. A-74
18.5 Binding Effect.................................................................................. A-74
18.6 Integration..................................................................................... A-74
18.7 Creditors....................................................................................... A-74
18.8 Waiver.......................................................................................... A-74
18.9 Counterparts.................................................................................... A-74
18.10 Applicable Law.................................................................................. A-74
18.11 Invalidity of Provisions........................................................................ A-74
Exhibit A -- Form of Certificate Evidencing Common Units................................................... A-76
</TABLE>
A-vi
<PAGE>
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
CROWN PACIFIC PARTNERS, L.P.
THIS SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CROWN
PACIFIC PARTNERS, L.P., effective as of , 1996, is entered into by and
among CROWN PACIFIC MANAGEMENT LIMITED PARTNERSHIP, a Delaware limited
partnership, as the Managing General Partner, CROWN PACIFIC, LTD., an Oregon
corporation, as the Special General Partner, and those Persons who are or become
Partners in the Partnership or parties hereto as provided herein. In
consideration of the covenants, conditions and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
ORGANIZATIONAL MATTERS
1.1 FORMATION. The General Partners and the Limited Partners have
previously formed the Partnership as a limited partnership pursuant to the
provisions of the Delaware Act. Except as expressly provided to the contrary in
this Agreement, the rights and obligations of the Partners and the
administration, dissolution and termination of the Partnership shall be governed
by the Delaware Act. All Partnership Interests shall constitute personal
property of the owner thereof for all purposes.
1.2 NAME. The name of the Partnership shall be "Crown Pacific Partners,
L.P." The Partnership's business may be conducted under any other name or names
deemed necessary or appropriate by the Managing General Partner, including,
without limitation, the name of the Managing General Partner. The words "Limited
Partnership," "L.P.," "Ltd." or similar words or letters shall be included in
the Partnership's name where necessary for the purposes of complying with the
laws of any jurisdiction that so requires. The Managing General Partner in its
sole discretion may change the name of the Partnership at any time and from time
to time and shall notify the Limited Partners of such change in the next regular
communication to the Limited Partners.
1.3 REGISTERED OFFICE; PRINCIPAL OFFICE. Unless and until changed by the
Managing General Partner, the registered office of the Partnership in the State
of Delaware shall be located at The Corporation Trust Center, 1209 Orange
Street, New Castle County, Wilmington, Delaware 19801, and the registered agent
for service of process on the Partnership in the State of Delaware at such
registered office shall be The Corporation Trust Company. The principal office
of the Partnership shall be located at, and the address of the General Partners
shall be, 121 S.W. Morrison Street, Portland, Oregon 97204, or such other place
as the Managing General Partner may from time to time designate by notice to the
Limited Partners. The Partnership may maintain offices at such other place or
places within or outside the State of Delaware as the Managing General Partner
deems necessary or appropriate.
1.4 POWER OF ATTORNEY. (a) Each Limited Partner and each Assignee hereby
constitutes and appoints each of the Managing General Partner and, if a
Liquidator shall have been selected pursuant to Section 14.3, the Liquidator
severally (and any successor to either thereof by merger, transfer, assignment,
election or otherwise) and each of their authorized officers and
attorneys-in-fact (including without limitation the general partners of the
Managing General Partner), with full power of substitution, as his true and
lawful agent and attorney-in-fact, with full power and authority in his name,
place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including, without limitation, this Agreement and the
Certificate of Limited Partnership and all amendments or restatements
thereof) that the Managing General Partner or the Liquidator deems necessary
or appropriate to form, qualify or continue the existence or qualification
of the Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) in the State of Delaware and in
A-1
<PAGE>
all other jurisdictions in which the Partnership may conduct business or own
property; (B) all certificates, documents and other instruments that the
Managing General Partner or the Liquidator deems necessary or appropriate to
reflect, in accordance with its terms, any amendment, change, modification
or restatement of this Agreement; (C) all certificates, documents and other
instruments (including, without limitation, conveyances and a certificate of
cancellation) that the Managing General Partner or the Liquidator deems
necessary or appropriate to reflect the dissolution and liquidation of the
Partnership pursuant to the terms of this Agreement; (D) all certificates,
documents and other instruments relating to the admission, withdrawal,
removal or substitution of any Partner pursuant to, or other events
described in, Article XI, XII, XIII or XIV or the Capital Contribution of
any Partner; (E) all certificates, documents and other instruments relating
to the determination of the rights, preferences and privileges of any class
or series of Units or other Partnership Securities issued pursuant to
Section 4.3; and (F) all certificates, documents and other instruments
(including, without limitation, agreements and a certificate of merger)
relating to a merger or consolidation of the Partnership pursuant to Article
XVI; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the sole discretion of the Managing
General Partner or the Liquidator, to make, evidence, give, confirm or
ratify any vote, consent, approval, agreement or other action that is made
or given by the Partners hereunder or is consistent with the terms of this
Agreement or is necessary or appropriate, in the sole discretion of the
Managing General Partner or the Liquidator, to effectuate the terms or
intent of this Agreement; PROVIDED, that when required by Section 15.3 or
any other provision of this Agreement that establishes a percentage of the
Limited Partners or of the Limited Partners of any class or series required
to take any action, the Managing General Partner or the Liquidator may
exercise the power of attorney made in this Section 1.4(a)(ii) only after
the necessary vote, consent or approval of the Limited Partners or of the
Limited Partners of such class or series, as applicable.
Nothing contained in this Section 1.4(a) shall be construed as authorizing
the Managing General Partner to amend this Agreement except in accordance with
Article XV or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, and it shall survive and not be affected by
the subsequent death, incompetency, disability, incapacity, dissolution,
bankruptcy or termination of any Limited Partner or Assignee and the transfer of
all or any portion of such Limited Partner's or Assignee's Partnership Interest
and shall extend to such Limited Partner's or Assignee's heirs, successors,
assigns and personal representatives. Each such Limited Partner or Assignee
hereby agrees to be bound by any representation made by the Managing General
Partner or the Liquidator acting in good faith pursuant to such power of
attorney; and each such Limited Partner or Assignee hereby waives any and all
defenses that may be available to contest, negate or disaffirm the action of the
Managing General Partner or the Liquidator taken in good faith under such power
of attorney. Each Limited Partner or Assignee shall execute and deliver to the
Managing General Partner or the Liquidator, within 15 days after receipt of the
Managing General Partner's or the Liquidator's request therefor, such further
designation, powers of attorney and other instruments as the Managing General
Partner or the Liquidator deems necessary to effectuate this Agreement and the
purposes of the Partnership.
1.5 TERM. The Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until the close of Partnership business on December 31, 2084, or until
the earlier dissolution of the Partnership in accordance with the provisions of
Article XIV.
1.6 POSSIBLE RESTRICTIONS ON TRANSFER. Notwithstanding anything to the
contrary contained in this Agreement, in the event of (a) the enactment (or
imminent enactment) of any legislation, (b) the publication of any temporary or
final regulation by the Treasury Department, (c) any ruling by the
A-2
<PAGE>
Internal Revenue Service or (d) any judicial decision, that, in any such case,
in the Opinion of Counsel, would result in the taxation of the Partnership as an
association taxable as a corporation or would otherwise result in the
Partnership's being taxed as an entity for federal income tax purposes, then the
Managing General Partner may impose such restrictions on the transfer of Units
or Partnership Interests as may be required, in the Opinion of Counsel, to
prevent the Partnership from being taxed as an association taxable as a
corporation or otherwise as an entity for federal income tax purposes,
including, without limitation, making such amendments to this Agreement as the
Managing General Partner in its sole discretion may determine to be necessary or
appropriate to impose such restrictions, PROVIDED that any such amendment to
this Agreement that would result in the delisting or suspension of trading of
any class of Units on any National Securities Exchange on which such class of
Units is then traded must be approved by the holders of at least two-thirds of
the Outstanding Units of such class (excluding the vote in respect of Units held
by the General Partners and their Affiliates).
ARTICLE II
DEFINITIONS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"ACQUISITION" means any transaction in which the Partnership or the
Operating Partnership acquires (through an asset acquisition, merger, stock
acquisition or other form of investment) control over all or a portion of the
assets, properties or business of another Person for the purpose of increasing
the Operating Capacity of the Partnership and the Operating Partnership, taken
as a whole, from the Operating Capacity of the Partnership and the Operating
Partnership, taken as a whole, existing immediately prior to such transaction.
"ADDITIONAL LIMITED PARTNER" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 12.4 and who is shown as such on the books
and records of the Partnership.
"ADJUSTED CAPITAL ACCOUNT" means the Capital Account maintained for each
Partner as of the end of each taxable year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set by
Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704- 2(g) and 1.704-2(i)(5)) and
(b) decreased by (i) the amount of all losses and deductions that, as of the end
of such taxable year, are reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions
that, as of the end of such taxable year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of this Agreement
to the extent they exceed offsetting increases to such Partner's Capital Account
that are reasonably expected to occur during (or prior to) the year in which
such distributions are reasonably expected to be made (other than increases as a
result of a minimum gain chargeback pursuant to Section 5.1(e)(i) or
5.1(e)(ii)). The foregoing definition of Adjusted Capital Account is intended to
comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith. The "Adjusted Capital Account"
in respect of a Common Unit, a Subordinated Unit or any other specified interest
in the Partnership shall be the amount which such Adjusted Capital Account would
be if such Common Unit, Subordinated Unit or other interest in the Partnership
were the only interest in the Partnership held by a Partner from and after the
date on which such Unit or other interest was first issued.
"ADJUSTED PROPERTY" means any property the Carrying Value of which has been
adjusted pursuant to Section 4.5(b)(vii) or 4.5(b)(viii). Once an Adjusted
Property is deemed distributed by, and recontributed to, the Partnership for
federal income tax purposes upon a termination thereof pursuant to Section 708
of the Code, such property shall thereafter constitute a Contributed Property
until the Carrying Value of such property is subsequently adjusted pursuant to
Section 4.5(b)(vii) or 4.5(b)(viii).
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"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"AGREED ALLOCATION" means any allocation of an item of income, gain, loss or
deduction pursuant to the provisions of Section 5.1 other than a Required
Allocation.
"AGREED VALUE" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the Managing General Partner using such reasonable method of valuation as it
may adopt; PROVIDED, HOWEVER, that the Agreed Value of any property deemed
contributed to the Partnership for federal income tax purposes upon termination
and reconstitution thereof pursuant to Section 708 of the Code shall be
determined in accordance with Section 4.5(c)(i). Subject to Section 4.5(c)(i),
the Managing General Partner shall, in its sole discretion, use such method as
it deems reasonable and appropriate to allocate the aggregate Agreed Value of
Contributed Properties contributed to the Partnership in a single or integrated
transaction among each separate property on a basis proportional to the fair
market value of each Contributed Property.
"AGREEMENT" means this Second Amended and Restated Agreement of Limited
Partnership of Crown Pacific Partners, L.P., as it may be amended, supplemented
or restated from time to time.
"ASSIGNEE" means a Non-citizen Assignee or a Person to whom one or more
Units have been transferred in a manner permitted under this Agreement and who
has executed and delivered a Transfer Application as required by this Agreement,
but who has not become a Substitute Limited Partner.
"ASSOCIATE" means, when used to indicate a relationship with any Person, (i)
a corporation or organization of which such Person is an officer or partner or
is, directly or indirectly, the owner of 10% or more of any class of voting
securities; (ii) any trust or other estate in which such Person has at least a
20% beneficial interest or as to which such Person serves as trustee or in a
similar fiduciary capacity; and (iii) any relative or spouse of such Person, or
any relative of such spouse, who has the same residence as such Person or who is
a director or officer of such Person.
"AUDIT COMMITTEE" means a subcommittee of the partnership board of the
Managing General Partner composed entirely of two or more individuals who are
neither Affiliates, officers nor employees of the Managing General Partner, the
Special General Partner or any of their respective Affiliates.
"AVAILABLE CASH" means, with respect to any Quarter and without duplication:
(a) the sum of:
(i) all cash receipts of the Partnership during such Quarter from all
sources (including, without limitation, distributions of cash received from
the Operating Partnership and cash proceeds from Interim Capital
Transactions) plus, in the case of the Quarter during which the Initial
Closing Date occurs, the cash balance of the Partnership as of the close of
business on the Initial Closing Date;
(ii) any reduction with respect to such Quarter in a cash reserve
previously established pursuant to clause (b)(ii) below (either by reversal
or utilization) from the level of such reserve at the end of the prior
Quarter; and
(iii) any utilization with respect to such Quarter of the Working Capital
Reserve;
(b) LESS the sum of:
(i) all cash disbursements of the Partnership during such Quarter,
including, without limitation, disbursements for operating expenses, taxes,
if any, debt service (including, without limitation, the payment of
principal, premium and interest), redemption of Partnership Interests
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or other Partnership Securities, capital expenditures, contributions, if
any, to the Operating Partnership and cash distributions to Partners (but
only to the extent that such cash distributions to Partners exceed Available
Cash for the immediately preceding Quarter); and
(ii) any cash reserves established with respect to such Quarter, and any
increase with respect to such Quarter in a cash reserve established pursuant
to this clause (b)(ii) from the level of such reserve at the end of the
prior Quarter, in such amounts as the Managing General Partner determines in
its reasonable discretion to be necessary or appropriate (A) to provide for
the proper conduct of the business of the Partnership or the Operating
Partnership (including, without limitation, reserves for future capital
expenditures), (B) to provide funds for distributions with respect to Units
and any general partner interests in the Partnership in respect of any one
or more of the next four Quarters or (C) because the distribution of such
amounts would be prohibited by applicable law or by any loan agreement,
security agreement, mortgage, debt instrument or other agreement or
obligation to which the Partnership or the Operating Partnership is a party
or by which any of them is bound or its assets are subject;
PROVIDED, HOWEVER, that for purposes of determining Available Cash for
the Quarter during which the Initial Closing Date occurs, such Quarter
shall be deemed to commence on the Initial Closing Date.
Notwithstanding the foregoing, "Available Cash" with respect to any
Quarter (A) shall not include any cash receipts or reductions in reserves
or take into account any disbursements made or reserves established in
each case after the Liquidation Date and (B) shall include any cash
proceeds from Interim Capital Transactions and distributions of cash (to
the extent such distributions are attributable to transactions and
operations during such Quarter) received by the Partnership from the
Operating Partnership, in each case after the end of such Quarter but on
or before the date on which the Partnership makes its distribution of
Available Cash in respect of such Quarter pursuant to Section 5.3(a).
Taxes paid by the Partnership on behalf of, or amounts withheld with
respect to, all or less than all of the Partners shall not be considered
cash disbursements of the Partnership that reduce Available Cash, but the
payment or withholding thereof shall be deemed to be a distribution of
Available Cash to such Partners. Alternatively, in the discretion of the
Managing General Partner, such taxes (if pertaining to all Partners) may
be considered to be cash disbursements of the Partnership which reduce
Available Cash, but the payment or withholding thereof shall not be
deemed to be a distribution of Available Cash to such Partners.
"BOOK-TAX DISPARITY" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to Section
4.5 and the hypothetical balance of such Partner's Capital Account computed as
if it had been maintained strictly in accordance with federal income tax
accounting principles.
"BUSINESS DAY" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States or the states
of New York or Oregon shall not be regarded as a Business Day.
"CAPITAL ACCOUNT" means the capital account maintained for a Partner
pursuant to Section 4.5. The "Capital Account" in respect of a Common Unit, a
Subordinated Unit or any other specified interest in the Partnership shall be
the amount which such Capital Account would be if such Common Unit, Subordinated
Unit or other interest in the Partnership were the only interest in the
Partnership held by a Partner from and after the date on which such Unit or
other interest was first issued.
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"CAPITAL ADDITIONS AND IMPROVEMENTS" means (a) additions or improvements to
the capital assets owned by the Partnership or the Operating Partnership or (b)
the acquisition of existing or the construction of new capital assets
(including, without limitation, timberlands and timber processing and
manufacturing facilities and related assets), made to increase the Operating
Capacity of the Partnership and the Operating Partnership, taken as a whole,
from the Operating Capacity of the Partnership and the Operating Partnership,
taken as a whole, existing immediately prior to such addition, improvement,
acquisition or construction.
"CAPITAL CONTRIBUTION" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes or has contributed to
the Partnership pursuant to Section 4.1, 4.2, 4.3, 4.5(c)(i), 13.3(c) or 14.8.
"CAPITAL INTERESTS" means, with respect to any corporation, any and all
shares, participations, rights or other equivalent interests in the capital of
the corporation, and with respect to any partnership, any and all partnership
interests (whether general or limited) and any other interests or participations
that confer on a Person the right to receive a share of the profits and losses
of, or distributions of assets of, such partnership.
"CARRYING VALUE" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' Capital
Accounts in respect of such Contributed Property, and (b) with respect to any
other Partnership property, the adjusted basis of such property for federal
income tax purposes. The Carrying Value of any property shall be adjusted from
time to time in accordance with Sections 4.5(b)(vii) and 4.5(b)(viii) and to
reflect changes, additions or other adjustments to the Carrying Value for
dispositions and acquisitions of Partnership properties, as deemed appropriate
by the Managing General Partner.
"CASH FROM INTERIM CAPITAL TRANSACTIONS" means, at any date, such amounts of
Available Cash as are deemed to be Cash from Interim Capital Transactions
pursuant to Section 5.3.
"CASH FROM OPERATIONS" means, at the close of any Quarter but prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of all cash receipts of the Partnership and the Operating
Partnership during the period since the Initial Closing Date through such date
(including, without limitation, the cash balance of the Partnership as of the
close of business on the Initial Closing Date, but excluding any cash proceeds
from any Interim Capital Transactions (except to the extent specified in Section
5.3),
(b) LESS the sum of:
(i) all cash operating expenditures of the Partnership and the Operating
Partnership during such period, including, without limitation, taxes, if
any, and amounts owed to the General Partners as reimbursement pursuant to
Section 6.4,
(ii) all cash debt service payments of the Partnership and the Operating
Partnership during such period (other than payments or prepayments of
principal and premium (A) required by reason of loan agreements (including,
without limitation, covenants and default provisions therein) or by lenders,
in each case in connection with sales or other dispositions of assets or (B)
made in connection with refinancings or refundings of indebtedness with the
proceeds from new indebtedness or from the sale of equity interests,
PROVIDED, that any payment or prepayment of principal and premium, whether
or not then due, shall be deemed, at the election and in the discretion of
the Managing General Partner, to be refunded or refinanced by any
indebtedness incurred or to be incurred by the Partnership or the Operating
Partnership simultaneously with or within 180 days prior to or after such
payment or prepayment to the extent of the principal amount of such
indebtedness so incurred),
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(iii) all cash capital expenditures of the Partnership and the Operating
Partnership during such period, including, without limitation, cash capital
expenditures made in respect of Maintenance Capital Expenditures, but
excluding (A) cash capital expenditures made in respect of Acquisitions and
Capital Additions and Improvements and (B) cash expenditures made in payment
of transaction expenses relating to Interim Capital Transactions,
(iv) any cash reserves of the Partnership or the Operating Partnership
outstanding as of such date that the Managing General Partner deems in its
reasonable discretion to be necessary or appropriate to provide for the
future cash payment of items of the type referred to in clauses (i) through
(iii) of this sentence, and
(v) any other cash reserves of the Partnership or the Operating
Partnership outstanding as of such date that the Managing General Partner
deems in its reasonable discretion to be necessary or appropriate to provide
funds for distributions with respect to Units and any general partner
interests in the Partnership in respect of any one or more of the next four
Quarters,
all as determined on a consolidated basis and after taking into account
the Managing General Partner's interest therein attributable to its
general partner interest in the Operating Partnership. Where cash capital
expenditures are made in part in respect of Acquisitions or Capital
Additions and Improvements and in part for other purposes, the Managing
General Partner's good faith allocation thereof between the portion made
for Acquisitions or Capital Additions and Improvements and the portion
made for other purposes shall be conclusive. Taxes paid by the
Partnership on behalf of, or amounts withheld with respect to, all or
less than all of the Partners shall not be considered cash operating
expenditures of the Partnership that reduce Cash from Operations, but the
payment or withholding thereof shall be deemed to be a distribution of
Available Cash to such Partners. Alternatively, in the discretion of the
Managing General Partner, such taxes (if pertaining to all Partners) may
be considered to be cash operating expenditures of the Partnership which
reduce Cash from Operations, but the payment or withholding thereof shall
not be deemed to be a distribution of Available Cash to such Partners.
"CAUSE" means a court of competent jurisdiction has entered a final, non-
appealable judgment finding a General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as a general partner
of the Partnership.
"CERTIFICATE" means a certificate, substantially in the form of Exhibit A to
this Agreement or in such other form as may be adopted by the Managing General
Partner in its sole discretion, issued by the Partnership evidencing ownership
of one or more Common Units, or a certificate, in such form as may be adopted by
the Managing General Partner in its sole discretion, issued by the Partnership
evidencing ownership of one or more other Units.
"CERTIFICATE OF LIMITED PARTNERSHIP" means the Certificate of Limited
Partnership filed with the Secretary of State of the State of Delaware as
referenced in Section 6.2, as such Certificate of Limited Partnership may be
amended, supplemented or restated from time to time.
"CITIZENSHIP CERTIFICATION" means a properly completed certificate in such
form as may be specified by the Managing General Partner by which an Assignee or
a Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"CLAIM" has the meaning assigned to such term in Section 6.13(c).
"CLOSING DATE" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"CLOSING PRICE" has the meaning assigned to such term in Section 17.1(a).
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"CODE" means the Internal Revenue Code of 1986, as amended and in effect
from time to time, as interpreted by the applicable regulations thereunder. Any
reference herein to a specific section or sections of the Code shall be deemed
to include a reference to any corresponding provision of future law.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON UNIT" means a Unit representing a fractional part of the Partnership
Interests of all Limited Partners and Assignees and having the rights and
obligations specified with respect to Common Units in this Agreement.
"COMMON UNIT ARREARAGE" means, as to any Quarter within the Subordination
Period, the excess, if any, of (a) the Minimum Quarterly Distribution over (b)
the sum of all Available Cash distributed with respect to a Common Unit in
respect of such Quarter pursuant to Section 5.4(a)(i), 5.4(b)(i) or 5.4(c)(i).
"CONTRIBUTED PROPERTY" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of the Code). Once the Carrying
Value of a Contributed Property is adjusted pursuant to Section 4.5(b)(vii) or
4.5(b)(viii), such property shall no longer constitute a Contributed Property,
but shall be deemed an Adjusted Property.
"CUMULATIVE COMMON UNIT ARREARAGE" means, as of the end of any Quarter, the
excess, if any, of (a) the sum resulting from adding together the Common Unit
Arrearage for each of the Quarters ending on or before the last day of such
Quarter over (b) the sum of any distributions theretofore made pursuant to
Section 5.4(a)(ii), 5.4(b)(ii), 5.4(c)(ii) or 5.5(b) with respect to a Common
Unit (including any distributions to be made in respect of the last of such
Quarters).
"CURRENT MARKET PRICE" has the meaning assigned to such term in Section
17.1(a).
"DELAWARE ACT" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. Section 17-101, et seq., as amended, supplemented or restated from time
to time, and any successor to such statute.
"DEPARTING PARTNER" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 13.1, 13.2 or 13.4.
"DISCRETIONARY ALLOCATION" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 5.1(d)(iv).
"ECONOMIC RISK OF LOSS" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"ELIGIBLE CITIZEN" means a Person qualified to own interests in real
property in jurisdictions in which the Partnership or the Operating Partnership
does business or proposes to do business from time to time, and whose status as
a Limited Partner or Assignee does not or would not subject the Partnership or
the Operating Partnership to a substantial risk of cancellation or forfeiture of
any of its properties or any interest therein.
"EVENT OF WITHDRAWAL" has the meaning assigned to such term in Section
13.1(a).
"FIFTH TARGET DISTRIBUTION" means $0.904 per Unit, subject to adjustment in
accordance with Sections 5.6 and 9.6.
"FIRST COMMON UNIT LIQUIDATION AMOUNT" has the meaning assigned to such term
in Section 5.1(c)(i)(A)(2).
"FIRST CONVERSION DATE" has the meaning assigned to such term in Section
5.7(b)(i).
"FIRST TARGET DISTRIBUTION" means $0.524 per Unit, subject to adjustment in
accordance with Sections 5.6 and 9.6.
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"FOURTH COMMON UNIT LIQUIDATION AMOUNT" has the meaning assigned to such
term in Section 5.1(c)(i)(A)(6).
"FOURTH TARGET DISTRIBUTION" means $0.679 per Unit, subject to adjustment in
accordance with Sections 5.6 and 9.6.
"FREMONT" means Fremont Investors, Inc., a Nevada corporation.
"GENERAL PARTNERS" means the Managing General Partner and the Special
General Partner, and their successors as managing general partner and special
general partner, respectively, of the Partnership.
"GROUP" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation made
to 10 or more Persons) or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, Partnership Interests.
"HOLDER" has the meaning assigned to such term in Section 6.13(a).
"INCENTIVE DISTRIBUTION" means any amount of cash distributed to the
Managing General Partner, in its capacity as Managing General Partner of the
Partnership, pursuant to Sections 5.4(c)(vii), (viii) and (ix) and 5.4(d)(iii),
(iv) and (v) which exceeds an amount equal to .99% of the aggregate amount of
cash then being distributed pursuant to such provisions.
"INDEMNIFIED PERSONS" has the meaning assigned to such term in Section
6.13(c).
"INDEMNITEE" means each General Partner, any Departing Partner, any general
partner of a General Partner or a Departing Partner, any Person who is or was an
officer, director, employee, agent or trustee of a General Partner, a Departing
Partner or a general partner of a General Partner or a Departing Partner, any
Person who is or was an Affiliate of a General Partner, a Departing Partner or a
general partner of a General Partner or a Departing Partner and any Person who
is or was serving at the request of a General Partner or a Departing Partner as
an officer, director, employee, agent, trustee or partner of another Person.
"INITIAL CLOSING DATE" means December 22, 1994.
"INITIAL LIMITED PARTNERS" means the Persons admitted to the Partnership as
Limited Partners on the Initial Closing Date.
"INITIAL UNIT PRICE" means $21.50.
"INTEREST" has the meaning assigned to such term in Section 13.3(a).
"INTERIM CAPITAL TRANSACTIONS" means (a) borrowings, refinancings or
refundings of indebtedness and sales of debt securities (other than for working
capital purposes and other than for items purchased on open account in the
ordinary course of business) by the Partnership or the Operating Partnership,
(b) sales of equity interests by the Partnership or the Operating Partnership
and (c) sales or other voluntary or involuntary dispositions of any assets of
the Partnership or the Operating Partnership (other than (x) sales or other
dispositions of inventory, accounts receivable and other assets in the ordinary
course of business, including the exchange of timber or real property for other
timber or real property, to the extent that the timber or real property received
in exchange is of equal or greater value, or the sale of timber or real
property, to the extent the proceeds from which are invested within 180 days in
other timber or real property and (y) sales or other dispositions of assets as a
part of normal retirements or replacements), in each case prior to the
Liquidation Date.
"ISSUE PRICE" means the amount of cash or the Agreed Value of any property
contributed to the Partnership in exchange for a Unit.
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"LIMITED PARTNER" means, unless the context otherwise requires, (a) subject
to the provisions of Section 5.7, each Initial Limited Partner, each Substitute
Limited Partner, each Additional Limited Partner and any Departing Partner upon
the change of its status from Managing General Partner to Limited Partner
pursuant to Section 13.3 and (b) solely for purposes of Articles IV, V and VI
and Sections 14.3 and 14.4, each Assignee.
"LIMITED PARTNER EQUITY VALUE" means, as of any date of determination, an
amount equal to the product obtained by multiplying (i) the total number of
Common Units and Subordinated Units Outstanding (immediately prior to an
issuance of Units or distribution of cash or Partnership property), by (ii) (A)
in the case of a valuation required by Section 4.5(b)(vii) (other than
valuations caused by sales of a DE MINIMIS quantity of Units), the Issue Price
or (B) in the case of a valuation required by Section 4.5(b)(viii) (or a
valuation required by Section 4.5(b)(vii) caused by sales of a DE MINIMIS
quantity of Units), the Closing Price.
"LIQUIDATION DATE" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 14.2, the date on which the applicable time period
during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"LIQUIDATOR" means the Managing General Partner or other Person approved
pursuant to Section 14.3 who performs the functions described therein.
"MAINTENANCE CAPITAL EXPENDITURES" means cash capital expenditures made to
maintain, up to the level thereof that existed at the time of such expenditure,
the Operating Capacity of the capital assets of the Partnership and the
Operating Partnership, taken as a whole, as such assets existed at the time of
such expenditure and shall, therefore, not include cash capital expenditures
made in respect of Acquisitions and Capital Additions and Improvements. Where
cash capital expenditures are made in part to maintain the Operating Capacity
level referred to in the immediately preceding sentence and in part for other
purposes, the Managing General Partner's good faith allocation thereof between
the portion used to maintain such Operating Capacity level and the portion used
for other purposes shall be conclusive.
"MANAGING GENERAL PARTNER" means Crown Pacific Management Limited
Partnership, a Delaware limited partnership, and its successors as managing
general partner of the Partnership.
"MERGER AGREEMENT" has the meaning assigned to such term in Section 16.1.
"MINIMUM QUARTERLY DISTRIBUTION" means $0.51 per Unit per Quarter (or, with
respect to the period commencing on the Initial Closing Date and ending on
December 31, 1994, the product of $0.51 multiplied by a fraction of which the
numerator is the number of days in such period (inclusive of the Initial Closing
Date and December 31, 1994) and of which the denominator is 92), subject to
adjustment in accordance with Sections 5.6 and 9.6.
"NATIONAL SECURITIES EXCHANGE" means an exchange registered with the
Securities and Exchange Commission under Section 6(a) of the Securities Exchange
Act of 1934, as amended, supplemented or restated from time to time, and any
successor to such statute or the Nasdaq Stock Market or any successor thereto.
"NET AGREED VALUE" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 4.5(b)(viii)) at the time such property is
distributed, reduced by any
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indebtedness either assumed by such Partner or Assignee upon such distribution
or to which such property is subject at the time of distribution, in either
case, as determined under Section 752 of the Code.
"NET INCOME" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Income shall be determined in accordance with Section 4.5(b) and shall
not include any items specially allocated under Section 5.1(d) or 5.1(e).
"NET LOSS" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Loss shall be determined in accordance with Section 4.5(b) and shall not
include any items specially allocated under Section 5.1(d) or 5.1(e).
"NET TERMINATION GAIN" means, for any taxable year, the sum, if positive, of
all items of income, gain, loss or deduction recognized by the Partnership
(including, without limitation, such amounts recognized through the Operating
Partnership) after the Liquidation Date. The items included in the determination
of Net Termination Gain shall be determined in accordance with Section 4.5(b)
and shall not include any items of income, gain or loss specially allocated
under Section 5.1(d) or 5.1(e).
"NET TERMINATION LOSS" means, for any taxable year, the sum, if negative, of
all items of income, gain, loss or deduction recognized by the Partnership
(including, without limitation, such amounts recognized through the Operating
Partnership) after the Liquidation Date. The items included in the determination
of Net Termination Loss shall be determined in accordance with Section 4.5(b)
and shall not include any items of income, gain or loss specially allocated
under Section 5.1(d) or 5.1(e).
"NON-CITIZEN ASSIGNEE" means a Person who the Managing General Partner has
determined in its sole discretion does not constitute an Eligible Citizen and as
to whose Partnership Interest the Managing General Partner has become the
Substitute Limited Partner, pursuant to Section 11.5.
"NONRECOURSE BUILT-IN GAIN" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or pledge securing a
Nonrecourse Liability, the amount of any taxable gain that would be allocated to
the Partners pursuant to Sections 5.2(b)(i)(A), 5.2(b)(ii)(A) or 5.2(b)(iii) if
such properties were disposed of in a taxable transaction in full satisfaction
of such liabilities and for no other consideration.
"NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in accordance
with the principles of Treasury Regulation Section 1.704-2(b), are attributable
to a Nonrecourse Liability.
"NONRECOURSE LIABILITY" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"NOTICE OF ELECTION TO PURCHASE" has the meaning assigned to such term in
Section 17.1(b).
"OPERATING CAPACITY" means the operating capacity and resources (including
without limitation the capacity to grow timber or process logs) of the
Partnership and the Operating Partnership, taken as a whole.
"OPERATING PARTNERSHIP" means, individually and collectively, Crown Pacific
Limited Partnership, a Delaware limited partnership, and Yellowstone Trucking
Limited Partnership, a Delaware limited partnership.
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"OPERATING PARTNERSHIP AGREEMENT" means, individually and collectively, the
Agreements of Limited Partnership of the Operating Partnership, as it or they
may be amended, supplemented or restated from time to time.
"OPINION OF COUNSEL" means a written opinion of counsel (who may be regular
counsel to the Partnership or either of the General Partners) acceptable to the
Managing General Partner.
"OPTION CLOSING DATE" means the date on which the Common Units comprising
the Overallotment Option are sold by the Partnership to the Underwriters
pursuant to the Underwriting Agreement.
"OUTSTANDING" means, with respect to the Units or other Partnership
Securities, all Units or other Partnership Securities that are issued by the
Partnership and reflected as outstanding on the Partnership's books and records
as of the date of determination; PROVIDED THAT,if at any time any Person or
Group (other than the General Partners and their Affiliates, including, without
limitation, Fremont) owns beneficially 20% or more of all Common Units, such
Common Units so owned shall not be voted on any matter and shall not be
considered to be Outstanding when sending notices of a meeting of Limited
Partners (unless otherwise required by law), calculating required votes,
determining the presence of a quorum or for other similar purposes under this
Agreement, except that (i) such Common Units shall be considered to be
Outstanding for purposes of Section 13.1(b)(iv) (such Common Units shall not,
however, be treated as a separate class of Partnership Securities for purposes
of this Agreement) and (ii) Common Units beneficially owned by any Person who
acquires, directly or indirectly, 20% or more of the Common Units from Fremont,
Fremont's Affiliates or subsequent transferees of the Units owned by Fremont or
its Affiliates on the Initial Closing Date shall not be subject to such voting
restrictions and shall be considered Outstanding for all purposes (except to the
extent otherwise expressly set forth in this Agreement).
"OVERALLOTMENT OPTION" means the overallotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"PARTICIPATING INVESTOR" has the meaning set forth in the Prior Agreement.
"PARTNERS" means the General Partners and the Limited Partners.
"PARTNER NONRECOURSE DEBT" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"PARTNER NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"PARTNERSHIP" means Crown Pacific Partners, L.P., a Delaware limited
partnership established by the Certificate of Limited Partnership, and any
successors thereto.
"PARTNERSHIP INTEREST" means an interest in the Partnership, which shall
include general partner interests, Common Units, Subordinated Units or other
Partnership Securities, or a combination thereof or interest therein, as the
case may be.
"PARTNERSHIP MINIMUM GAIN" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"PARTNERSHIP SECURITIES" has the meaning assigned to such term in Section
4.3(a).
"PER UNIT CAPITAL AMOUNT" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partners or any Affiliates of the General Partners
who hold Units.
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"PERCENTAGE INTEREST" means as of the date of such determination (a) as to
the Managing General Partner (in its capacity as Managing General Partner
without reference to any limited partner interests held by it), .99%, (b) as to
the Special General Partner (in its capacity as Special General Partner without
reference to any limited partner interests held by it), .01%, (c) as to any
Limited Partner or Assignee holding Units, the product of (i) 99% multiplied by
(ii) the quotient of the number of Units held by such Limited Partner or
Assignee divided by the total number of all Units then Outstanding; PROVIDED,
HOWEVER, that following any issuance of additional Partnership Securities by the
Partnership in accordance with Section 4.3, proper adjustment shall be made to
the Percentage Interest represented by each Unit to reflect such issuance, and
(d) as to the holders of additional Partnership Securities issued by the
Partnership in accordance with Section 4.3, the percentage established as a part
of such issuance.
"PERSON" means an individual or a corporation, limited liability company,
partnership, trust, unincorporated organization, association or other entity.
"PRIOR AGREEMENT" has the meaning set forth in Section 5.1(d)(i)(A).
"PUBLIC OFFERING" means the public offering and sale of Common Units to the
public pursuant to the Registration Statement.
"PURCHASE DATE" means the date determined by the Managing General Partner as
the date for purchase of all Outstanding Units (other than Units owned by the
General Partners and their Affiliates) pursuant to Article XVII.
"QUARTER" means, unless the context requires otherwise, a three month period
of time ending on March 31, June 30, September 30, or December 31; PROVIDED,
HOWEVER, that the Managing General Partner, in its sole discretion, may amend
such period as it deems necessary or appropriate in connection with a change in
the fiscal year of the Partnership.
"RECAPTURE INCOME" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the Code)
upon the disposition of any property or asset of the Partnership, which gain is
characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"RECORD DATE" means the date established by the Managing General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution.
"RECORD HOLDER" means the Person in whose name a Unit is registered on the
books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to a holder of a general partner interest, the
Person in whose name such general partner interest is registered on the books of
the Managing General Partner as of the opening of business on such Business Day.
"REDEEMABLE UNITS" means any Units for which a redemption notice has been
given, and has not been withdrawn, under Section 11.6.
"REGISTRATION STATEMENT" means the Registration Statement on Form S-3
(Registration No. 333-05099), as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of additional Common
Units.
"REQUIRED ALLOCATION" means any allocation (or limitation imposed on any
allocation) of an item of income, gain, deduction or loss pursuant to (a)
Section 5.1(a)(i) or 5.1(e) or (b) any allocation by reason of the "provided"
clause in Section 5.1(b)(i), such allocations (or limitations thereon) being
directly or indirectly required by the Treasury regulations promulgated under
Section 704(b) of the Code.
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"RESIDUAL GAIN" or "RESIDUAL LOSS" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Sections 5.2(b)(i)(A) or 5.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"RESTRICTED ACTIVITIES" means the (i) acquisition, exchange, operation or
sale of timber-producing real property or rights to harvest timber a principal
purpose of which is producing logs and other forest products, (ii) harvesting of
timber other than harvesting which is incidental to the ownership or operation
of real property not owned or operated for a principal purpose of producing logs
or other forest products, (iii) sale, exchange or purchase of logs other than
sales, exchanges or purchases which are incidental to the ownership or operation
of real property not owned or operated for a principal purpose of producing logs
or other forest products, (iv) acquisition or sale of any facilities used to
convert logs into lumber, plywood or other wood products, (v) conversion of logs
into lumber, plywood or other wood products, (vi) marketing and sale of lumber,
plywood or other wood products, (vii) import or export of logs, lumber, plywood
or other wood products to or from the United States, (viii) manufacture,
marketing or sale of manufactured, engineered or substitute wood products to the
extent such products compete with products produced by the Partnership or the
Operating Partnership and (ix) any and all other activities relating to the
United States forest products industry to the extent such activities compete
with the operations of the Partnership or the Operating Partnership; PROVIDED,
HOWEVER, that Restricted Activities shall not include (a) the sale, lease,
exchange, transfer or other disposition by the Special General Partner of (1)
any timber-producing real property owned by the Special General Partner on
Initial Closing Date, and (2) any timber-producing real property subsequently
acquired by the Special General Partner in exchange for or utilizing the
proceeds from the sale of the property described in the foregoing clause (1) or
(b) the harvesting of timber by the Special General Partner from any real
property described in the foregoing clause (a), so long as the resulting logs
are sold to the Operating Partnership on terms and conditions permitted under
this Agreement.
"SECOND COMMON UNIT LIQUIDATION AMOUNT" has the meaning assigned to such
term in section 5.1(c)(i)(A)(4).
"SECOND CONVERSION DATE" has the meaning assigned to such term in Section
5.7(b)(ii).
"SECOND TARGET DISTRIBUTION" means $0.538 per Unit, subject to adjustment in
accordance with Sections 5.6 and 9.6.
"SECURITIES ACT" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"SEQUOIA" means Sequoia Ventures Inc., a Delaware corporation.
"SPECIAL APPROVAL" means approval by the Audit Committee.
"SPECIAL GENERAL PARTNER" means Crown Pacific, Ltd., an Oregon corporation,
and its successors as special general partner of the Partnership.
"SUBORDINATED UNIT" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Subordinated Units in this
Agreement.
"SUBORDINATION PERIOD" means the period commencing on the Initial Closing
Date and ending on the first to occur of the following dates: (i) the Second
Conversion Date and (ii) the date on which the Managing General Partner is
removed as General Partner of the Partnership upon the requisite vote by Limited
Partners under circumstances where Cause does not exist.
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"SUBSIDIARY" means, with respect to any Person, (i) a corporation of which
more than 50% of the voting power of shares of Capital Interests entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors or other governing body of such corporation is owned, directly or
indirectly, by such Person, by one or more Subsidiaries of such Person, or a
combination thereof, (ii) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of determination, a
general or limited partner, but only if more than 50% of the Capital Interests
of such partnership (considering all of the Capital Interests of the partnership
as a single class) is owned or controlled, directly or indirectly, by such
Person, by one or more Subsidiaries of such Person, or a combination thereof, or
(iii) any other Person (other than a corporation or a partnership) in which such
Person, directly or indirectly, at the date of determination, has (x) at least a
majority ownership interest or (y) the power to elect or direct the election of
a majority of the directors or other governing body of such Person.
"SUBSTITUTE LIMITED PARTNER" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 12.2 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"SURVIVING BUSINESS ENTITY" has the meaning assigned to such term in Section
16.2(b).
"TARGET DISTRIBUTION" means each of the First Target Distribution, the
Second Target Distribution, the Third Target Distribution, the Fourth Target
Distribution and the Fifth Target Distribution.
"THIRD COMMON UNIT LIQUIDATION AMOUNT" has the meaning assigned to such term
in Section 5.1(c)(i)(A)(5).
"THIRD TARGET DISTRIBUTION" means $0.566 per Unit, subject to adjustment in
accordance with Sections 5.6 and 9.6.
"TRADING DAY" has the meaning assigned to such term in Section 17.1(a).
"TRANSFER" has the meaning assigned to such term in Section 11.1(a).
"TRANSFER AGENT" means such bank, trust company or other Person (including,
without limitation, either of the General Partners or one of their Affiliates)
as shall be appointed from time to time by the Partnership to act as registrar
and transfer agent for the Units.
"TRANSFER APPLICATION" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"UNDERWRITER" means each Person named as an underwriter in Schedule I to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"UNDERWRITING AGREEMENT" means the Underwriting Agreement dated July 31,
1996, among the Underwriters, the Partnership, Crown Pacific Limited
Partnership, the General Partners and certain holders of Common Units providing
for the purchase of Common Units by such Underwriters.
"UNIT" means a Partnership Interest of a Limited Partner or Assignee (in its
capacity as a Limited Partner or Assignee without reference to any general
partner interests held by it) in the Partnership representing a fractional part
of the Partnership Interests of all Limited Partners and Assignees (in their
capacities as Limited Partners or Assignees without reference to any general
partner interests held by them) and shall include, without limitation, Common
Units and Subordinated Units; provided that each Common Unit at any time
Outstanding shall represent the same fractional part of the Partnership
Interests of all Limited Partners and Assignees holding Common Units as each
other Common Unit, and each Subordinated Unit at any time Outstanding shall
represent the same fractional part of the Partnership Interests of all Limited
Partners and Assignees holding Subordinated Units as each other Subordinated
Unit.
"UNPAID MQD" means an amount equal to (a) the Minimum Quarterly Distribution
for the Quarter during which the Liquidation Date occurs, less (b) the amount of
any distributions made, on a
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per Unit basis, with respect to the Quarter described in (a) pursuant to (i) if
with regard to a Common Unit, Sections 5.4(a)(i), 5.4(b)(i), 5.4(c)(i) and
5.4(d)(i), or (ii) if with regard to a Subordinated Unit, Sections 5.4(a)(iii),
5.4(b)(iii) and 5.4(c)(iii).
"UNPAID FIFTH TARGET DISTRIBUTION" means, with respect to any Unit, the
excess, if any, of (a) (i) the Fifth Target Distribution less (ii) the Fourth
Target Distribution, for each Quarter of the Partnership's existence, over (b)
(i) the amount of Available Cash distributed with respect to a Common Unit
pursuant to Section 5.4 for any such Quarter (treating any amount distributed
pursuant to Section 5.4(a)(ii), 5.4(b)(ii) or 5.4(c)(ii) on a first-in,
first-out basis, as if it had been distributed when due) in excess of the
Minimum Quarterly Distribution LESS (ii) the amounts, if any, with respect to
such Quarter, described in subclause (b) of the definition of "UNPAID FOURTH
TARGET DISTRIBUTION" and subclause (b) of the definition of "UNPAID THIRD TARGET
DISTRIBUTION"; provided, however, that the amount described in subclause (b) of
this definition of "UNPAID FIFTH TARGET DISTRIBUTION" shall not exceed the
amount described in subclause (a) of this definition of "UNPAID FIFTH TARGET
DISTRIBUTION".
"UNPAID FOURTH TARGET DISTRIBUTION" means, with respect to any Unit, the
excess, if any, of (a) (i) the Fourth Target Distribution less (ii) the Third
Target Distribution, for each Quarter of the Partnership's existence, over (b)
(i) the amount of Available Cash distributed with respect to a Common Unit
pursuant to Section 5.4 for any such Quarter (treating any amount distributed
pursuant to Section 5.4(a)(ii), 5.4(b)(ii) or 5.4(c)(ii) on a first-in,
first-out basis, as if it and been distributed when due) in excess of the
Minimum Quarterly Distribution LESS (ii) the amounts, if any, with respect to
such Quarter, described in subclause (b) of the definition of "UNPAID THIRD
TARGET DISTRIBUTION"; provided, however, that the amount described in subclause
(b) of this definition of "UNPAID FOURTH TARGET DISTRIBUTION" shall not exceed
the amount described in subclause (a) of this definition of "UNPAID FOURTH
TARGET DISTRIBUTION".
"UNPAID THIRD TARGET DISTRIBUTION" means, with respect to any Unit, the
excess, if any, of (a) (i) the Third Target Distribution less (ii) the Minimum
Quarterly Distribution, for each Quarter of the Partnership's existence, over
(b) the amount of Available Cash distributed with respect to a Common Unit
pursuant to Section 5.4 for any such Quarter (treating any amount distributed
pursuant to Section 5.4(a)(ii), 5.4(b)(ii) or 5.4(c)(ii) on a first-in,
first-out basis, as if it had been distributed when due) in excess of the
Minimum Quarterly Distribution; PROVIDED, HOWEVER, that the amount described in
this subclause (b) with respect to any Quarter shall not exceed the amount
described in subclause (a) of this definition of "UNPAID THIRD TARGET
DISTRIBUTION".
"UNREALIZED GAIN" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date over (b) the Carrying Value of such property as
of such date (prior to any adjustment to be made pursuant to Section 4.5(b)(vii)
or 4.5(b)(viii) as of such date). For such purposes, the fair market value of
the partnership assets shall be determined so that the Limited Partner Equity
Value is the fair market value of the Partnership assets that would be
distributed with respect to the Common Units and Subordinated Units Outstanding
pursuant to Article XIV upon a hypothetical dissolution and liquidation of the
Partnership as of the relevant date of determination; PROVIDED, HOWEVER, that in
the event of an actual distribution of Partnership property pursuant to Section
14.4, the fair market value of any Partnership property so distributed shall be
determined by the Managing General Partner using such reasonable method of
valuation as it may adopt. The Managing General Partner shall allocate such
aggregate value among the assets of the Partnership (in such manner as it
determines in its sole discretion to be reasonable) to arrive at a fair market
value for individual properties.
"UNREALIZED LOSS" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 4.5(b)(vii) or 4.5(b)(viii) as of such date) over (b) the fair market
value of such property as of such date. For such purposes, the fair market value
of the partnership assets shall be determined so that the Limited Partner Equity
Value is the fair market value of the Partnership assets that would be
distributed with respect to the Common Units and
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Subordinated Units Outstanding pursuant to Article XIV upon a hypothetical
dissolution and liquidation of the Partnership as of the relevant date of
determination; PROVIDED, HOWEVER, that in the event of an actual distribution of
Partnership property pursuant to Section 14.4, the fair market value of any
Partnership property so distributed shall be determined by the Managing General
Partner using such reasonable method of valuation as it may adopt. The Managing
General Partner shall allocate such aggregate value among the assets of the
Partnership (in such manner as it determines in its sole discretion to be
reasonable) to arrive at a fair market value for individual properties.
"UNRECOVERED INITIAL UNIT PRICE" means, at any time, with respect to any
Unit, the Initial Unit Price, less the sum of (i) all distributions theretofore
made in respect of a Common Unit issued on the Initial Closing Date pursuant to
Sections 5.5(a) and (ii) any distributions of cash (or the Net Agreed Value of
any distributions in kind) pursuant to Section 14.3 or 14.4 theretofore made in
respect of a Common Unit, adjusted as the Managing General Partner determines to
be appropriate to give effect to any distribution, subdivision or combination of
Units.
"WITHDRAWAL OPINION OF COUNSEL" has the meaning assigned to such term in
Section 13.1(b).
"WORKING CAPITAL RESERVE" means the amount available to be borrowed at the
time of determination under the Partnership's or the Operating Partnership's
working capital facility, subject in any case to a maximum amount of
$40,000,000.
ARTICLE III
PURPOSE
3.1 PURPOSE AND BUSINESS. The purpose and nature of the business to be
conducted by the Partnership shall be (a) to serve as a limited partner in the
Operating Partnership and, in connection therewith, to exercise all of the
rights and powers conferred upon the Partnership as a limited partner in the
Operating Partnership pursuant to the Operating Partnership Agreement or
otherwise, (b) to engage directly in, or to enter into or form any corporation,
partnership, joint venture, limited liability company or other arrangement to
engage in, any business activity that the Operating Partnership is permitted to
engage in by the Operating Partnership Agreement and, in connection therewith,
to exercise all of the rights and powers conferred upon the Partnership pursuant
to the agreements relating to such business activity, (c) to engage directly in,
or to enter into or form any corporation, partnership, joint venture, limited
liability company or other arrangement to engage in, any business activity that
is approved by the Managing General Partner and which lawfully may be conducted
by a limited partnership organized pursuant to the Delaware Act and, in
connection therewith, to exercise all of the rights and powers conferred upon
the Partnership pursuant to the agreements relating to such business activity,
and (d) to do anything necessary or appropriate to the foregoing, including,
without limitation, the making of capital contributions or loans to the
Operating Partnership. The Managing General Partner has no obligation or duty to
the Partnership, the Special General Partner, the Limited Partners or the
Assignees to propose or approve, and in its sole discretion may decline to
propose or approve, the conduct by the Partnership of any business.
3.2 POWERS. The Partnership shall be empowered to do any and all acts and
things necessary, appropriate, proper, advisable, incidental to or convenient
for the furtherance and accomplishment of the purposes and business described in
Section 3.1 and for the protection and benefit of the Partnership.
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ARTICLE IV
CAPITAL CONTRIBUTIONS
4.1 INITIAL CONTRIBUTIONS. In connection with the formation of the
Partnership under the Delaware Act and pursuant to the Prior Agreement, the
Managing General Partner, the Special General Partner and the Initial Limited
Partners have each made Capital Contributions to the Partnership and have been
admitted as Partners of the Partnership.
4.2 CONTRIBUTIONS BY ADDITIONAL LIMITED PARTNERS. Subject to the
conditions contained in the Underwriting Agreement, on the Closing Date, each
Underwriter shall contribute and deliver to the Partnership cash in an amount
equal to the Issue Price per Common Unit, multiplied by the number of Common
Units specified in the Underwriting Agreement to be purchased by such
Underwriter at the "First Closing Date", as such term is defined in the
Underwriting Agreement. In exchange for such Capital Contribution by the
Underwriters, the Partnership shall issue Common Units to each Underwriter on
whose behalf such Capital Contribution is made in an amount equal to the
quotient obtained by dividing (x) the cash contribution to the Partnership by or
on behalf of such Underwriter by (y) the Issue Price per Common Unit.
4.3 ISSUANCES OF ADDITIONAL UNITS AND OTHER SECURITIES. (a) Subject to
Section 4.3(c), the Managing General Partner is hereby authorized to cause the
Partnership to issue, in addition to the Partnership Interests and Units issued
pursuant to Sections 4.1 and 4.2, such additional Units, or classes or series
thereof, or options, rights, warrants or appreciation rights relating thereto,
or any other type of equity security that the Partnership may lawfully issue,
any unsecured or secured debt obligations of the Partnership convertible into or
exchangeable or exercisable for any class or series of equity securities of the
Partnership (collectively, "Partnership Securities"), for any Partnership
purpose, at any time or from time to time, to the Partners or to other Persons
for such consideration and on such terms and conditions as shall be established
by the Managing General Partner in its sole discretion, all without the approval
of any Limited Partners. The Managing General Partner shall have sole
discretion, subject to the guidelines set forth in this Section 4.3 and the
requirements of the Delaware Act, in determining the consideration and terms and
conditions with respect to any future issuance of Partnership Securities.
(b) Additional Partnership Securities to be issued by the Partnership
pursuant to this Section 4.3 shall be issuable from time to time in one or more
classes, or one or more series of any of such classes, with such designations,
preferences and relative, participating, optional or other special rights,
powers and duties, including, without limitation, rights, powers and duties
senior to existing classes and series of Partnership Securities (except as
provided in Section 4.3(c)), all as shall be fixed by the Managing General
Partner in the exercise of its sole discretion, subject to Delaware law and
Section 4.3(c), including, without limitation, (i) the allocations of items of
Partnership income, gain, loss, deduction and credit to each such class or
series of Partnership Securities; (ii) the right of each such class or series of
Partnership Securities to share in Partnership distributions; (iii) the rights
of each such class or series of Partnership Securities upon dissolution and
liquidation of the Partnership; (iv) whether such class or series of additional
Partnership Securities is redeemable by the Partnership and, if so, the price at
which, and the terms and conditions upon which, such class or series of
additional Partnership Securities may be redeemed by the Partnership; (v)
whether such class or series of additional Partnership Securities is issued with
the privilege of conversion, exchange or exercise and, if so, the rate at which,
and the terms and conditions upon which, such class or series of Partnership
Securities may be converted into or exchanged or exercised for any other class
or series of Partnership Securities or other property; (vi) the terms and
conditions upon which each such class or series of Partnership Securities will
be issued, evidenced by certificates and assigned or transferred; and (vii) the
right, if any, of each such class or series of Partnership Securities to vote on
Partnership matters, including, without limitation, matters relating to the
relative rights, preferences and privileges of each such class or series.
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(c) Notwithstanding the terms of Sections 4.3(a) and 4.3(b), the issuance by
the Partnership of any Partnership Securities pursuant to this Section 4.3 shall
be subject to the following restrictions and limitations:
(i) After the Public Offering and during the Subordination Period,
the Partnership shall not issue an aggregate of more than 1,544,670
additional Common Units (excluding Common Units issued upon conversion of
Subordinated Units pursuant to Section 5.7(b)) or an equivalent number of
other Partnership Securities having rights to distributions and
allocations or in liquidation ranking on a parity with the Common Units,
in either case without the prior approval of two-thirds of the
Outstanding Common Units (excluding Common Units held by the General
Partners and their Affiliates); PROVIDED, HOWEVER, that if Units are to
be issued in connection with a merger or consolidation requiring the
approval of a majority of the Outstanding Common Units, the required vote
shall be a majority of the Outstanding Common Units (excluding, during
the Subordination Period, Common Units held by the General Partners and
their Affiliates); and
(ii) During the Subordination Period, the Partnership shall not issue
additional Partnership Securities having rights to distributions and
allocations or in liquidation ranking prior or senior to the Common
Units, without the prior approval of two-thirds of the Outstanding Common
Units (excluding Units held by the General Partners and their
Affiliates); PROVIDED, HOWEVER, that if Units are to be issued in
connection with a merger or consolidation requiring the approval of a
majority of the Outstanding Common Units, the required vote shall be a
majority of the Outstanding Common Units (excluding, during the
Subordination Period, Common Units held by the General Partners and their
Affiliates); and
(iii) Upon the issuance of any Partnership Interests by the
Partnership or the making of any other Capital Contributions to the
Partnership, the Managing General Partner and the Special General Partner
shall be required to make additional Capital Contributions to the
Partnership in an amount equal to .99% and .01%, respectively, of the
additional Capital Contribution then made by a Person other than the
General Partners.
(d) The Managing General Partner is hereby authorized and directed to take
all actions that it deems necessary or appropriate in connection with each
issuance of Units or other Partnership Securities pursuant to Section 4.3(a) and
to amend this Agreement in any manner that it deems necessary or appropriate to
provide for each such issuance, to admit Additional Limited Partners in
connection therewith and to specify the relative rights, powers and duties of
the holders of the Units or other Partnership Securities being so issued.
(e) The Managing General Partner shall do all things necessary to comply
with the Delaware Act and is authorized and directed to do all things it deems
to be necessary or advisable in connection with any future issuance of
Partnership Securities, including, without limitation, compliance with any
statute, rule, regulation or guideline of any federal, state or other
governmental agency or any National Securities Exchange on which the Units or
other Partnership Securities are listed for trading.
4.4 LIMITED PREEMPTIVE RIGHTS. Except as provided in this Section 4.4, no
Person shall have any preemptive, preferential or other similar right with
respect to (a) additional Capital Contributions; (b) issuance or sale of any
class or series of Units or other Partnership Securities, whether unissued, held
in the treasury or hereafter created; (c) issuance of any obligations, evidences
of indebtedness or other securities of the Partnership convertible into or
exchangeable for, or carrying or accompanied by any rights to receive, purchase
or subscribe to, any such Units or other Partnership Securities; (d) issuance of
any right of subscription to or right to receive, or any warrant or option for
the purchase of, any such Units or other Partnership Securities; or (e) issuance
or sale of any other securities that may be issued or sold by the Partnership.
The General Partners shall have the right, which they may from time to time
assign in whole or in part to any of their Affiliates, to purchase Units or
other Partnership Securities from the Partnership whenever, and on the same
terms that, the
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Partnership issues Units or other Partnership Securities to Persons other than
the General Partners and their Affiliates, to the extent necessary to maintain
the Percentage Interests of the General Partners and their Affiliates equal to
that which existed immediately prior to the issuance of such Units or other
Partnership Securities.
4.5 CAPITAL ACCOUNTS. (a) The Partnership shall maintain for each Partner
(or a beneficial owner of Units held by a nominee in any case in which the
nominee has furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other method acceptable to
the Managing General Partner in its sole discretion) a separate Capital Account
in accordance with the provisions hereof which shall be interpreted in a manner
consistent with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such
Capital Account shall be INCREASED by (i) the amount of all Capital
Contributions made by such Partner pursuant to this Agreement and (ii) all items
of Partnership income and gain (including, without limitation, income and gain
exempt from tax) computed in accordance with Section 4.5(b) and allocated to
such Partner pursuant to Section 5.1, and DECREASED by (x) the amount of cash or
Net Agreed Value of all actual and deemed distributions of cash or property made
to such Partner pursuant to this Agreement and (y) all items of Partnership
deduction and loss computed in accordance with Section 4.5(b) and allocated to
such Partner pursuant to Section 5.1.
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction to be reflected in the Partners' Capital Accounts, the
determination, recognition and classification of any such item shall be the same
as its determination, recognition and classification for federal income tax
purposes (including, without limitation, any method of depreciation, cost
recovery or amortization used for that purpose), PROVIDED that:
(i) For purposes of this Section 4.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
Managing General Partner based upon the provisions of the Operating
Partnership Agreement) of all property owned by the Operating
Partnership.
(ii) All fees and other expenses incurred by the Partnership to
promote the sale of or to sell a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of
deduction at the time such fees and other expenses are incurred.
(iii) Except as otherwise provided in Treasury Regulation Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss
and deduction shall be made without regard to any election under Section
754 of the Code by the Partnership and, as to those items described in
Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without regard to the
fact that such items are not includable in gross income or are neither
currently deductible nor capitalized for federal income tax purposes. To
the extent an adjustment to the adjusted tax basis of any Partnership
asset pursuant to Section 734(b) or 743(b) of the Code is required,
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken
into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain
(if the adjustment increases the basis of the asset) or loss (if the
adjustment decreases such basis).
(iv) Any income, gain or loss attributable to the taxable disposition
of any Partnership property shall be determined as if the adjusted basis
of such property as of such date of disposition was equal in amount to
the Partnership's Carrying Value with respect to such property as of such
date.
(v) In accordance with the requirements of Section 704(b) of the
Code, any deductions for depreciation, cost recovery or amortization
attributable to any Contributed Property shall be determined as if the
adjusted basis of such property on the date it was acquired by the
Partnership was equal to the Agreed Value of such property. Upon an
adjustment pursuant to
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Section 4.5(b)(vii) or 4.5(b)(viii) to the Carrying Value of any
Partnership property subject to depreciation, cost recovery or
amortization, any further deductions for such depreciation, cost recovery
or amortization attributable to such property shall be determined (A) as
if the adjusted basis of such property were equal to the Carrying Value
of such property immediately following such adjustment and (B) using a
rate of depreciation, cost recovery or amortization derived from the same
method and useful life (or, if applicable, the remaining useful life) as
is applied for federal income tax purposes; PROVIDED, HOWEVER, that, if
the asset has a zero adjusted basis for federal income tax purposes,
depreciation, cost recovery or amortization deductions shall be
determined using any reasonable method that the Managing General Partner
may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is
placed in service. Any restoration of such basis pursuant to Section
48(q)(2) of the Code shall be treated as an item of income.
(vii) Consistent with the provisions of Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Units for cash or
Contributed Property or the conversion of the Managing General Partner's
Partnership Interest to Units pursuant to Section 13.3(b), the Carrying
Value of each Partnership property immediately prior to such issuance
shall be adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property. Any such
Unrealized Gain or Unrealized Loss so reflected in the Carrying Value of
Partnership property shall be treated as an item of income, gain, loss or
deduction recognized by the Partnership on the date of the adjustment to
the Carrying Value of Partnership property.
(viii) Consistent with the provisions of Treasury Regulation Section
1.704-1(b)(2)(iv)(f), immediately prior to any distribution to a Partner
of any Partnership property (other than a distribution of cash that is
not in redemption or retirement of a Partnership Interest), the Carrying
Value of each Partnership property immediately prior to such distribution
shall be adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property. Any such
Unrealized Gain or Unrealized Loss so reflected in the Carrying Value of
Partnership property shall be treated as an item of income, gain, loss or
deduction recognized by the Partnership on the date of the adjustment to
the Carrying Value of Partnership property.
(c)(i) Except as otherwise provided in Section 4.5(c)(ii), a transferee of
a Partnership Interest shall succeed to a pro rata portion of the Capital
Account of the transferor relating to the Partnership Interest so transferred;
PROVIDED, HOWEVER, that, if the transfer causes a termination of the Partnership
under Section 708(b)(1)(B) of the Code, the Partnership's properties shall be
deemed to have been distributed in liquidation of the Partnership to the
Partners (including any transferee of a Partnership Interest that is a party to
the transfer causing such termination) pursuant to Sections 14.3 and 14.4 and
recontributed by such Partners to the Partnership. In such event, the Carrying
Values of the Partnership properties shall be adjusted immediately prior to such
deemed distribution pursuant to Section 4.5(b)(viii) and such Carrying Values
shall then constitute the Agreed Values of such properties upon such deemed
contribution to the reconstituted Partnership. The Capital Accounts of such
reconstituted Partnership shall be maintained in accordance with the provisions
of this Section 4.5.
(ii) Immediately prior to the conversion of a Subordinated Unit into
a Common Unit pursuant to Section 5.7(b) or the sale, exchange or other
disposition of a Subordinated Unit by a holder thereof, the Capital
Account maintained for such Person with respect to its Subordinated Units
will (A) FIRST, be allocated to the Subordinated Units to be converted or
transferred, as the case may be, in an amount equal to the product of (x)
the number of such
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Subordinated Units to be converted or transferred, as the case may be,
and (y) the Per Unit Capital Amount for a Common Unit, and (B) SECOND,
any remaining balance in such Capital Account will be retained by the
transferor, regardless of whether it has retained any Subordinated Units.
Following any such allocation, the transferor's Capital Account, if any,
maintained with respect to the retained Subordinated Units, if any, will
have a balance equal to the amount allocated under clause (B)
hereinabove, and the transferee's Capital Account established with
respect to the transferred Subordinated Units will have a balance equal
to the amount allocated under clause (A) hereinabove.
4.6 INTEREST. No interest shall be paid by the Partnership on Capital
Contributions or on balances in Partners' Capital Accounts.
4.7 NO WITHDRAWAL. No Partner shall be entitled to withdraw any part of
its Capital Contributions or its Capital Account or to receive any distribution
from the Partnership, except as provided in Section 4.1, and Articles V, VII,
XIII and XIV.
4.8 LOANS FROM PARTNERS. Loans by a Partner to the Partnership shall not
constitute Capital Contributions. If any Partner shall advance funds to the
Partnership in excess of the amounts required hereunder to be contributed by it
to the capital of the Partnership, the making of such excess advances shall not
result in any increase in the amount of the Capital Account of such Partner. The
amount of any such excess advances shall be a debt obligation of the Partnership
to such Partner and shall be payable or collectible only out of the Partnership
assets in accordance with the terms and conditions upon which such advances are
made.
4.9 NO FRACTIONAL UNITS. No fractional Units shall be issued by the
Partnership.
4.10 SPLITS AND COMBINATIONS. (a) Subject to Section 4.10(d), the Managing
General Partner may make a pro rata distribution of Units or other Partnership
Securities to all Record Holders or may effect a subdivision or combination of
Units or other Partnership Securities; PROVIDED, HOWEVER, that after any such
distribution, subdivision or combination, each Partner shall have the same
Percentage Interest in the Partnership as before such distribution, subdivision
or combination.
(b) Whenever such a distribution, subdivision or combination of Units or
other Partnership Securities is declared, the Managing General Partner shall
select a Record Date as of which the distribution, subdivision or combination
shall be effective and shall send notice of the distribution, subdivision or
combination at least 20 days prior to such Record Date to each Record Holder as
of the date not less than 10 days prior to the date of such notice. The Managing
General Partner also may cause a firm of independent public accountants selected
by it to calculate the number of Units to be held by each Record Holder after
giving effect to such distribution, subdivision or combination. The Managing
General Partner shall be entitled to rely on any certificate provided by such
firm as conclusive evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision or combination,
the Managing General Partner may cause Certificates to be issued to the Record
Holders of Units or other Partnership Securities as of the applicable Record
Date representing the new number of Units held by such Record Holders, or the
Managing General Partner may adopt such other procedures as it may deem
appropriate to reflect such distribution, subdivision or combination; PROVIDED,
HOWEVER, if any such distribution, subdivision or combination results in a
smaller total number of Units or other Partnership Securities Outstanding, the
Managing General Partner shall require, as a condition to the delivery to a
Record Holder of such new Certificate, the surrender of any Certificate held by
such Record Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units or other Partnership
Securities upon any distribution, subdivision or combination of Units or other
Partnership Securities. If a distribution, subdivision or combination of Units
or other Partnership Securities would result in the issuance of fractional Units
or other Partnership Securities but for the provisions of Section 4.9 and this
Section
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4.10(d), each fractional Unit or other Partnership Security shall be rounded to
the nearest whole Unit (and a 0.5 Unit or other Partnership Security shall be
rounded to the next higher Unit or other Partnership Security).
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
5.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES. For purposes of maintaining
the Capital Accounts and in determining the rights of the Partners among
themselves, the Partnership's items of income, gain, loss and deduction
(computed in accordance with Section 4.5(b)) shall be allocated among the
Partners in each taxable year (or portion thereof) as provided hereinbelow.
(a) NET INCOME. After giving effect to the allocations set forth in
Sections 5.1(d) and 5.1(e), Net Income for each taxable year (and all items of
income, gain, loss and deduction taken into account in computing Net Income for
such taxable year) shall be allocated as follows:
(i) FIRST, 100% to the General Partners, in proportion to their
respective Percentage Interests, until the aggregate Net Income allocated to
each of the General Partners pursuant to this Section 5.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to each of the General Partners pursuant to
Section 5.1(b)(ii) for all previous taxable years; and
(ii) SECOND, 100% to the General Partners and the Limited Partners in
proportion to their respective Percentage Interests.
(b) NET LOSSES. After giving effect to the allocations set forth in
Sections 5.1(d) and 5.1(e), Net Losses for each taxable year (and all items of
income, gain, loss and deduction taken into account in computing Net Losses for
such taxable year) shall be allocated as follows:
(i) FIRST, 100% to the General Partners and the Limited Partners, in
proportion to their respective Percentage Interests; PROVIDED, that Net
Losses shall not be allocated pursuant to this Section 5.1(b)(i) to the
extent that such allocation would cause any Limited Partner to have a
deficit balance in its Adjusted Capital Account at the end of such taxable
year (or increase any existing deficit balance in its Adjusted Capital
Account); and
(ii) SECOND, the balance 100% to the General Partners, in proportion
to their respective Percentage Interests.
(c) NET TERMINATION GAINS AND LOSSES. After giving effect to the
allocations set forth in Sections 5.1(d) and 5.1(e), all items of income, gain,
loss and deduction taken into account in computing Net Termination Gain or Net
Termination Loss for each taxable year shall be allocated in the manner
described below. All allocations under this Section 5.1(c) shall be made after
Capital Account balances have been adjusted by all other allocations provided
under this Section 5.1 and after all distributions of Available Cash provided
under Section 5.4 have been made with respect to the taxable year which includes
the Liquidation Date; PROVIDED, HOWEVER, that solely for purposes of this
Section 5.1(c), Capital Account Balances shall not be adjusted for any
distributions made pursuant to Section 14.3 or 14.4.
(i) If a Net Termination Gain is recognized:
(A) Items of gross income and gain recognized by the Partnership
after the Liquidation Date shall be allocated among the Partners in the
following manner (and the Capital
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Accounts of the Partners shall be increased by the amounts so allocated
in each of the following subclauses, in the order listed, before an
allocation is made pursuant to the next succeeding subclause):
(1) FIRST, to each Partner having a deficit balance in its
Capital Account, in the proportion that such deficit balance bears to
the total deficit balances in the Capital Accounts of all Partners,
until each such Partner has been allocated an amount sufficient to
eliminate any such deficit balance in its Capital Account;
(2) SECOND, 99% to all Limited Partners holding Common Units
and 1% to the General Partners, in proportion to their respective
Percentage Interests, until the Capital Account in respect of each
Common Unit then Outstanding is equal to the sum of (aa) the
Unrecovered Initial Unit Price PLUS (bb) the Unpaid MQD plus (cc) any
then existing Cumulative Common Unit Arrearage (the sum of (aa) plus
(bb) plus (cc) is hereinafter defined as the "FIRST COMMON UNIT
LIQUIDATION AMOUNT");
(3) THIRD, 99% to all Limited Partners holding Subordinated
Units and 1% to the General Partners, in proportion to their
respective Percentage Interests, until the Capital Account in respect
of each Subordinated Unit then Outstanding is equal to the sum of
(aa) the Unrecovered Initial Unit Price plus (bb) the Unpaid MQD;
(4) FOURTH, 99% to all Limited Partners and 1% to the General
Partners, in accordance with their respective Percentage Interests,
until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (aa) the First Common Unit
Liquidation Amount PLUS (bb) the Unpaid Third Target Distribution
(the sum of (aa) plus (bb) is hereinafter defined as the "SECOND
COMMON UNIT LIQUIDATION AMOUNT");
(5) FIFTH, 85.867% to all Limited Partners, in proportion to
their respective Percentage Interests, 14.123% to the Managing
General Partner and .01% to the Special General Partner, until the
Capital Account in respect of each Common Unit then Outstanding is
equal to the sum of (aa) the Second Common Unit Liquidation Amount
PLUS (bb) the Unpaid Fourth Target Distribution (the sum of (aa) plus
(bb) is hereinafter defined as the "THIRD COMMON UNIT LIQUIDATION
AMOUNT"); provided, however, that if, prior to the application of
this Section 5.1(c)(i)(A)(5), the Capital Account in respect of any
Common Unit exceeds the Second Common Unit Liquidation Amount, then
prior to the application of this Section 5.1(c)(i)(A)(5) the Managing
General Partner shall be allocated an amount equal to 13.133% of the
amount of any such excess (but only to the extent that any such
excess does not exceed the excess of the Third Common Unit
Liquidation Amount over the Second Common Unit Liquidation Amount);
(6) SIXTH, 75.765% to all Limited Partners, in proportion to
their respective Percentage Interests, 24.225% to the Managing
General Partner and .01% to the Special General Partner, until the
Capital Account in respect of each Common Unit then Outstanding is
equal to the sum of (aa) the Third Common Unit Liquidation Amount
PLUS (bb) the Unpaid Fifth Target Distribution (the sum of (aa) plus
(bb) is hereinafter defined as the "FOURTH COMMON UNIT LIQUIDATION
AMOUNT"); provided, however, that if, prior to the application of
this Section 5.1(c)(i)(A)(6), the Capital Account in respect of any
Common Unit then Outstanding exceeds the Third Common Unit
Liquidation Amount, then, prior to the application of this Section
5.1(c)(i)(A)(6) the Managing General Partner shall be allocated an
amount equal to 23.235% of the amount of any such excess (but only to
the extent that any such excess does not exceed the excess of the
Fourth Common Unit Liquidation Amount over the Third Common Unit
Liquidation Amount); and
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(7) SEVENTH, if the Capital Account in respect of any Common
Unit then Outstanding exceeds the Fourth Common Unit Liquidation
Amount, the Managing General Partner shall be allocated an amount
equal to 48.49% of the amount of such excess.
(B) If, after applying Section 5.1(c)(i)(A), a recomputation of Net
Termination Gain (made by excluding the amounts allocated pursuant to
Section 5.1(c)(i)(A)) results in the existence of a Net Termination Gain,
such Net Termination Gain shall be allocated 50.51% to all Limited
Partners holding Units, in proportion to their respective Percentage
Interests, 49.48% to the Managing General Partner and .01% to the Special
General Partner.
(C) If, after applying Section 5.1(c)(i)(A), a recomputation of Net
Termination Gain (made by excluding the amounts allocated pursuant to
Section 5.1(c)(i)(A)) results in the existence of a Net Termination Loss,
such Net Termination Loss shall be allocated among the Partners in the
following manner (and the Capital Accounts of the Partners shall be
decreased by the amounts so allocated in each of the following
subclauses, in the order listed, before an allocation is made pursuant to
the next succeeding subclause):
(1) FIRST, 50.51% to all Limited Partners, in proportion to
their respective Percentage Interests, 49.48% to the Managing General
Partner and .01% to the Special General Partner until the Capital
Account in respect of each Common Unit then Outstanding is equal to
the Fourth Common Unit Liquidation Amount;
(2) SECOND, 75.765% to all Limited Partners, in proportion to
their respective Percentage Interests, 24.225% to the Managing
General Partner and .01% to the Special General Partner until the
Capital Account in respect of each Common Unit then Outstanding is
equal to the Third Common Unit Liquidation Amount;
(3) THIRD, 85.867% to all Limited Partners, in proportion to
their respective Percentage Interests, 14.123% to Managing General
Partner and .01% to the Special General Partner until the Capital
Account in respect of each Common Unit then Outstanding is equal to
the Second Common Unit Liquidation Amount;
(4) FOURTH, 99% to all Limited Partners and 1% to the General
Partners, in accordance with their respective Percentage Interests,
until the Capital Account in respect of each Common Unit then
Outstanding is equal to the First Common Unit Liquidation Amount;
(5) FIFTH, 99% to all Limited Partners holding Subordinated
Units and 1% to the General Partners, in proportion to their
respective Percentage Interests until the Capital Account in respect
of each Subordinated Unit then Outstanding has been reduced to zero;
and
(6) SIXTH, 99% to all Limited Partners holding Common Units,
and 1% to the General Partners, in proportion to their respective
Percentage Interests, until the Capital Account in respect of each
Common Unit then Outstanding has been reduced to zero; and
(7) SEVENTH, to all Partners who were allocated items of income
or gain pursuant to Section 5.1(c)(i)(A)(1) in the ratio that such
items were allocated to such Partners.
(ii) If (1) the Capital Account in respect of any Common Unit then
Outstanding, prior to the application of this Section 5.1(c)(ii), exceeds
the First Common Unit Liquidation Amount and (2) a Net Termination Loss
is thereafter recognized:
(A) Items of gross income and gain recognized by the Partnership
after the Liquidation Date shall be allocated among the Partners in
the following manner (and the Capital
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Accounts of the Partners shall be increased by the amounts so
allocated in each of the following subclauses, in the order listed,
before an allocation is made pursuant to the next succeeding
subclause):
(1) FIRST, if the Capital Account in respect of any Common
Unit, prior to the application of this Section 5.1(c)(ii) exceeds the
Second Common Unit Liquidation Amount, 100% to the Managing General
Partner in an amount equal to 13.133% of the amount of such excess
(but only to the extent any such excess does not exceed the excess of
the Third Common Unit Liquidation Amount over the Second Common Unit
Liquidation Amount);
(2) SECOND, if the Capital Account in respect of any Common
Unit, prior to the application of this Section 5.1(c)(ii), exceeds
the Third Common Unit Liquidation Amount, 100% to the Managing
General Partner in an amount equal to 23.225% of any such excess (but
only to the extent any such excess does not exceed the excess of the
Fourth Common Unit Liquidation Amount over the Third Common Unit
Liquidation Amount); and
(3) THIRD, if the Capital Account in respect of any Common
Unit, prior to the application of this Section 5.1(c)(ii), exceeds
the Fourth Common Unit Liquidation Amount, 100% to the Managing
General Partner in an amount equal to 48.49% of any such excess.
(B) After the allocations provided in Section 5.1(c)(ii)(A) have been
made, Net Termination Loss shall be recomputed by deducting the amounts
allocated pursuant to Section 5.1(c)(ii)(A), and the recomputed Net
Termination Loss shall be allocated among the Partners in the following
manner (and the Capital Accounts of the Partners shall be decreased by
the amounts so allocated in each of the following subclauses, in the
order listed, before an allocation is made pursuant to the next
succeeding subclause):
(1) FIRST, 50.51% to all Limited Partners, in proportion to
their respective Percentage Interests, 49.48% to the Managing General
Partner and .01% to the Special General Partner until the Capital
Account in respect of each Common Unit then Outstanding is equal to
the Fourth Common Unit Liquidation Amount;
(2) SECOND, 75.765% to all Limited Partners, in proportion to
their respective Percentage Interests, 24.225% to the Managing
General Partner and .01% to the Special General Partner until the
Capital Account in respect of each Common Unit then Outstanding is
equal to the Third Common Unit Liquidation Amount;
(3) THIRD, 85.867% to all Limited Partners, in proportion to
their respective Percentage Interests, 14.123% to Managing General
Partner and .01% to the Special General Partner until the Capital
Account in respect of each Common Unit then Outstanding is equal to
the Second Common Unit Liquidation Amount;
(4) FOURTH, 99% to all Limited Partners and 1% to the General
Partners, in accordance with their respective Percentage Interests,
until the Capital Account in respect of each Common Unit then
Outstanding is equal to the First Common Unit Liquidation Amount;
(5) FIFTH, 99% to all Limited Partners holding Subordinated
Units and 1% to the General Partners, in proportion to their
respective Percentage Interests until the Capital Account in respect
of each Subordinated Unit then Outstanding has been reduced to zero;
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(6) SIXTH, 99% to all Limited Partners holding Common Units,
and 1% to the General Partners, in proportion to their respective
Percentage Interests, until the Capital Account in respect of each
Common Unit then Outstanding has been reduced to zero; and
(7) SEVENTH, 100% to the General Partners in proportion to
their respective Percentage Interests.
(iii) If (1) the Capital Account in respect of any Common Unit then
Outstanding, prior to the application of this Section 5.1(c)(iii), is
less than the First Common Unit Liquidation Amount and (2) a Net
Termination Loss is thereafter recognized, then such Net Termination Loss
shall be allocated among the Partners in the following manner (and the
Capital Accounts of the Partners shall be reduced by the amounts so
allocated in each of the following subclauses, in the order listed,
before an allocation is made pursuant to the next succeeding subclause):
(A) FIRST, 99% to all Limited Partners holding Subordinated Units
and 1% to the General Partners, in proportion to their respective
Percentage Interests until the Capital Account in respect of each
Subordinated Unit then Outstanding has been reduced to zero;
(B) SECOND, 99% to all Limited Partners holding Common Units, and
1% to the General Partners, in proportion to their respective
Percentage Interests, until the Capital Account in respect of each Common
Unit then Outstanding has been reduced to zero; and
(C) THIRD, to the General Partners, in proportion to their
respective Percentage Interests.
(d) AGREED ALLOCATIONS.
(i) PRIORITY ALLOCATIONS.
(A) For calendar year 1996, a pro rata portion of each item of
Partnership gross income or gain shall be allocated to the Special
Limited Partners (as such term is defined in the Amended and Restated
Agreement of Limited Partnership of Crown Pacific Partners, L.P., dated
December 22, 1994 (the "Prior Agreement")) until each Special Limited
Partner has been allocated an aggregate amount of gross income or gain
for such year pursuant to this Section 5.1(d)(i)(A) equal to the amount
of cash distributed to such Special Limited Partner with respect to such
year.
(B) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to Sections
14.3 or 14.4) to any Limited Partner with respect to a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to any other Limited Partner (on a per Unit
basis), then, after the application of Section 5.1(d)(i)(A), (1) each
Limited Partner receiving such greater cash or property distribution
shall be allocated gross income in an amount equal to the product of (aa)
the amount by which the distribution (on a per Unit basis) to such
Limited Partner exceeds the distribution (on a per Unit basis) to the
Limited Partners receiving the lesser distribution and (bb) the number of
Units owned by the Limited Partner receiving the greater distribution;
and (2) the General Partners shall be allocated gross income, in
proportion to their respective Percentage Interests, in an aggregate
amount equal to 1/99 of the sum of the amounts allocated in clause (1)
above.
(C) After the application of Sections 5.1(d)(i)(A) and 5.1(d)(i)(B),
all or a pro rata portion of each of the remaining items of Partnership
gross income or gain for the taxable year, if any, shall be allocated
100% to the Managing General Partner until the aggregate amount of such
items allocated to the Managing General Partner under this paragraph
(d)(i)(C) for the
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current taxable year and all previous taxable years is equal to the cumulative
amount of all Incentive Distributions made to the Managing General Partner from
the Initial Closing Date to a date 45 days after the end of the current taxable
year.
(ii) NONRECOURSE LIABILITIES. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that, for each taxable year of the
Partnership, Nonrecourse Liabilities of the Partnership in excess of the sum
of (A) the amount of Partnership Minimum Gain and (B) the total amount of
Nonrecourse Built-in Gain shall be allocated among the Partners in
accordance with their anticipated share of the income of the Partnership for
that taxable year, as determined by the Managing General Partner in its
reasonable discretion.
(iii) ECONOMIC UNIFORMITY. At the election of the Managing General
Partner with respect to any taxable period ending upon, or after, the
termination of the Subordination Period, after the application of Section
5.1(d)(i), all or a PRO RATA portion of each of the remaining items of
Partnership gross income or gain for such taxable period shall be allocated
100% to each Partner holding Subordinated Units in the proportion of the
number of Subordinated Units held by such Partner to the total number of
Subordinated Units then Outstanding, until each such Partner has been
allocated an amount of gross income or gain which increases the Capital
Account maintained with respect to such Subordinated Units to an amount
equal to the product of (A) the number of Subordinated Units held by such
Partner and (B) the Per Unit Capital Amount for a Common Unit. The purpose
of this allocation is to establish uniformity between the Capital Accounts
underlying Subordinated Units and the Capital Accounts underlying Common
Units immediately prior to the conversion of such Subordinated Units into
Common Units. This allocation method for establishing such economic
uniformity will only be available to the Managing General Partner if the
method for allocating the Capital Account maintained with respect to the
Subordinated Units between the transferred and retained Subordinated Units
pursuant to Section 4.5(c)(ii) does not otherwise provide such economic
uniformity to the Subordinated Units.
(iv) DISCRETIONARY ALLOCATION.
(A) Notwithstanding any other provision of this Section 5.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related
Discretionary Allocation not otherwise been provided in this Section 5.1.
Notwithstanding the preceding sentence, Required Allocations relating to
(1) Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a decrease in Partnership Minimum Gain and (2)
Partner Nonrecourse Deductions shall not be taken into account except to
the extent that there has been a decrease in Partner Nonrecourse Debt
Minimum Gain. Allocations pursuant to this Section 5.1(d)(iv)(A) shall
only be made with respect to Required Allocations to the extent the
Managing General Partner reasonably determines that such allocations will
otherwise be inconsistent with the economic agreement among the Partners.
Further, allocations pursuant to this Section 5.1(d)(iv)(A) shall be
deferred with respect to allocations pursuant to clauses (1) and (2)
hereof to the extent the Managing General Partner reasonably determines
that such allocations are likely to be offset by subsequent Required
Allocations.
(B) The Managing General Partner shall have discretion, with respect
to each taxable period, to (1) apply the provisions of Section
5.1(d)(iv)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations,
and (2) divide all allocations pursuant to Section 5.1(d)(iv)(A) among
the Partners in a manner that is likely to minimize such economic
distortions.
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(e) REQUIRED ALLOCATIONS. Notwithstanding any other provision of this
Section 5.1, the following special allocations shall be made for each taxable
year:
(i) PARTNERSHIP MINIMUM GAIN CHARGEBACK. Notwithstanding any other
provision of this Section 5.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-2(j)(2)(i), or any successor provision. For purposes of this Section
5.1(e), each Partner's Adjusted Capital Account balance shall be determined,
and the allocation of income or gain required hereunder shall be effected,
prior to the application of any other allocations pursuant to this Section
5.1(e) with respect to such taxable period (other than an allocation
pursuant to Sections 5.1(e)(v) and 5.1(e)(vi)). This Section 5.1(e)(i) is
intended to comply with the Partnership Minimum Gain chargeback requirement
in Treasury Regulation Section 1.704-2(f) and shall be interpreted
consistently therewith.
(ii) CHARGEBACK OF PARTNER NONRECOURSE DEBT MINIMUM
GAIN. Notwithstanding the other provisions of this Section 5.1 (other than
Section 5.1(e)(i)), except as provided in Treasury Regulation Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership taxable period, any Partner with a share
of Partner Nonrecourse Debt Minimum Gain at the beginning of such taxable
period shall be allocated items of Partnership income and gain for such
period (and, if necessary, subsequent periods) in the manner and amounts
provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-2(j)(2)(ii), or any successor provisions. For purposes of this Section
5.1(e), each Partner's Adjusted Capital Account balance shall be determined,
and the allocation of income or gain required hereunder shall be effected,
prior to the application of any other allocations pursuant to this Section
5.1(e), other than Section 5.1(e)(i) and other than an allocation pursuant
to Sections 5.1(e)(v) and 5.1(e)(vi), with respect to such taxable period.
This Section 5.1(e)(ii) is intended to comply with the chargeback of items
of income and gain requirement in Treasury Regulation Section 1.704-2(i)(4)
and shall be interpreted consistently therewith.
(iii) QUALIFIED INCOME OFFSET. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or
1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be
specially allocated to such Partner in an amount and manner sufficient to
eliminate, to the extent required by the Treasury Regulations promulgated
under Section 704(b) of the Code, the deficit balance, if any, in its
Adjusted Capital Account created by such adjustments, allocations or
distributions as quickly as possible unless such deficit balance is
otherwise eliminated or to be eliminated pursuant to Section 5.1(e)(i) or
(ii).
(iv) GROSS INCOME ALLOCATIONS. In the event any Partner has a deficit
balance in its Adjusted Capital Account at the end of any Partnership
taxable year, such Partner shall be allocated a pro rata portion of each
item of Partnership gross income and gain in the amount of such excess as
quickly as possible; PROVIDED, that an allocation pursuant to this Section
5.1(e)(iv) shall be made only if and to the extent that such Partner would
have a deficit balance in its Adjusted Capital Account after all other
allocations provided for in this Section 5.1 have been tentatively made as
if this Section 5.1(e)(iv) were not in this Agreement.
(v) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the Managing General Partner determines
in its good faith discretion that the Partnership's Nonrecourse Deductions
must be allocated in a different ratio to satisfy the safe harbor
requirements of the Treasury Regulations promulgated under Section 704(b) of
the Code, the Managing General Partner is authorized, upon notice to the
Limited Partners, to revise the prescribed ratio to the numerically closest
ratio that does satisfy such requirements.
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(vi) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that bears the
Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which
such Partner Nonrecourse Deductions are attributable in accordance with
Treasury Regulation Section 1.704-2(i). If more than one Partner bears the
Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such
Partner Nonrecourse Deductions attributable thereto shall be allocated
between or among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
5.2 ALLOCATIONS FOR TAX PURPOSES. (a) Except as otherwise provided herein,
for federal income tax purposes, each item of income, gain, loss and deduction
shall be allocated among the Partners in the same manner as its correlative item
of "book" income, gain, loss or deduction is allocated pursuant to Section 5.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between the
Agreed Value of such property and its adjusted basis at the time of
contribution; and (B) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the Partners
in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 5.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the Unrealized
Gain or Unrealized Loss attributable to such property and the allocations
thereof pursuant to Section 4.5(b)(vii) or 4.5(b)(viii), and (2) second, in
the event such property was originally a Contributed Property, be allocated
among the Partners in a manner consistent with Section 5.2(b)(i)(A); and (B)
any item of Residual Gain or Residual Loss attributable to an Adjusted
Property shall be allocated among the Partners in the same manner as its
correlative item of "book" gain or loss is allocated pursuant to Section
5.1.
(iii) The Managing General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of each class of Units, the Managing General Partner
shall have sole discretion to (i) adopt such conventions as it deems appropriate
in determining the amount of depreciation, amortization and cost recovery
deductions; (ii) make special allocations for federal income tax purposes of
income (including, without limitation, gross income) or deductions; and (iii)
amend the provisions of this Agreement as appropriate (x) to reflect the
proposal or promulgation of Treasury regulations under Section 704(b) or Section
704(c) of the Code or (y) otherwise to preserve or achieve uniformity of the
Units (or any class or classes thereof). The Managing General Partner may adopt
such conventions, make such allocations and make such amendments to this
Agreement as provided in this Section 5.2(c) only if such conventions,
allocations or amendments would not have a material adverse effect on the
Partners, the holders of any class or classes of Units issued and Outstanding or
the Partnership, and if such allocations are consistent with the principles of
Section 704 of the Code.
(d) The Managing General Partner in its sole discretion may determine to
depreciate or amortize the portion of an adjustment under Section 743(b) of the
Code attributable to unrealized appreciation in any Adjusted Property (to the
extent of the unamortized Book-Tax Disparity) using a predetermined rate derived
from the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite the inconsistency of such
approach with Proposed Treasury Regulation Section 1.168-2(n), Treasury
Regulation Section 1.167(c)-1(a)(6) or the legislative history of Section 197 of
the Code. If the Managing General Partner determines that such
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reporting position cannot reasonably be taken, the Managing General Partner may
adopt depreciation and amortization conventions under which all purchasers
acquiring Units in the same month would receive depreciation and amortization
deductions, based upon the same applicable rates as if they had purchased a
direct interest in the Partnership's property. If the Managing General Partner
chooses not to utilize such aggregate method, the Managing General Partner may
use any other reasonable depreciation and amortization conventions to preserve
the uniformity of the intrinsic tax characteristics of any Units that would not
have a material adverse effect on the Limited Partners or the Record Holders of
any class or classes of Units.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after taking
into account other required allocations of gain pursuant to this Section 5.2, be
characterized as Recapture Income in the same proportions and to the same extent
as such Partners (or their predecessors in interest) have been allocated any
deductions directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to any
election under Section 754 of the Code which may be made by the Partnership;
PROVIDED, HOWEVER, that such allocations, once made, shall be adjusted as
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable
to a transferred Partnership Interest of a General Partner or to transferred
Units shall, for federal income tax purposes, be determined on an annual basis
and prorated on a monthly basis and shall be allocated to the Partners as of the
opening of the New York Stock Exchange on the first Business Day of each month;
PROVIDED, HOWEVER that if the Underwriters' Overallotment Option is exercised,
Common Units issued pursuant thereto shall be treated for this purpose as if
issued on the Closing Date; and PROVIDED, FURTHER that gain or loss on a sale or
other disposition of any assets of the Partnership other than in the ordinary
course of business shall be allocated to the Partners as of the opening of the
New York Stock Exchange on the first Business Day of the month in which such
gain or loss is recognized for federal income tax purposes. The Managing General
Partner may revise, alter or otherwise modify such methods of allocation as it
determines necessary, to the extent permitted or required by Section 706 of the
Code and the regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article V shall instead be made to the beneficial owner of
Units held by a nominee in any case in which the nominee has furnished the
identity of such owner to the Partnership in accordance with Section 6031(c) of
the Code or any other method acceptable to the Managing General Partner in its
sole discretion.
5.3 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS. (a) Within 45 days
following the end of each Quarter an amount equal to 100% of Available Cash with
respect to such Quarter shall be distributed in accordance with this Article V
by the Partnership to the Partners, as of the Record Date selected by the
Managing General Partner in its reasonable discretion. All amounts of Available
Cash distributed by the Partnership on any date from any source shall be deemed
to be Cash from Operations until the sum of all amounts of Available Cash
theretofore distributed by the Partnership to the Partners pursuant to Section
5.4 equals the aggregate amount of all Cash from Operations generated by the
Partnership since the Initial Closing Date through the close of the immediately
preceding Quarter. Any remaining amounts of Available Cash distributed by the
Partnership on such date shall, except as otherwise provided in Section 5.5, be
deemed to be Cash from Interim Capital Transactions.
(b) Notwithstanding the definitions of Available Cash and Cash from
Operations contained herein, disbursements (including, without limitation,
contributions to the Operating Partnership or disbursements on behalf of the
Operating Partnership) made or cash reserves established, increased
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or reduced after the end of any Quarter but on or before the date on which the
Partnership makes its distribution of Available Cash in respect of such Quarter
shall be deemed to have been made, established, increased or reduced for
purposes of determining Available Cash and Cash from Operations, within such
Quarter if the Managing General Partner so determines. Notwithstanding the
foregoing, in the event of the dissolution and liquidation of the Partnership,
all proceeds of such liquidation shall be applied and distributed in accordance
with, and subject to the terms and conditions of, Sections 14.3 and 14.4.
5.4 DISTRIBUTIONS OF CASH FROM OPERATIONS. (a) FOR THE CALENDAR YEAR ENDED
DECEMBER 31, 1996. Available Cash with respect to any of the four Quarters of
the calendar year ended December 31, 1996 that is deemed to be Cash from
Operations pursuant to the provisions of Section 5.3 or 5.5 shall be distributed
as follows, except as otherwise required by Section 4.3(b) in respect of
additional Partnership Securities issued pursuant thereto:
(i) FIRST, 99% to the Limited Partners holding Common Units and 1% to
the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Minimum Quarterly Distribution;
(ii) SECOND, 99% to the Limited Partners holding Common Units and 1%
to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Cumulative Common Unit Arrearage, if
any, existing with respect to such Quarter;
(iii) THIRD, 99% to the Limited Partners holding Subordinated Units
and 1% to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Subordinated
Unit then Outstanding an amount equal to the Minimum Quarterly Distribution;
(iv) FOURTH, 99% to the Limited Partners holding Common Units and 1%
to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution;
(v) FIFTH, 99% to the Limited Partners holding Subordinated Units and
1% to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Subordinated
Unit then Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution; and
(vi) THEREAFTER, 100% to the Limited Partners and the General
Partners in proportion to the total amount of Available Cash constituting
Cash from Operations distributed pursuant to Sections 5.4(a)(i) through (v)
to each such Person, respectively, for each such Quarter (up to and
including the Quarter with respect to which such distribution is being
made);
PROVIDED, HOWEVER, if the Minimum Quarterly Distribution and the First
Target Distribution have been reduced to zero pursuant to Section 5.6, the
distributions of Available Cash that is deemed to be Cash from Operations
will be made in accordance with Section 5.4(a)(vi).
(b) FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1997. Available Cash with
respect to any of the four Quarters in the calendar year ended December 31, 1997
that is deemed to be Cash from Operations pursuant to the provisions of Section
5.3 or 5.5 shall be distributed as follows, except as otherwise required by
Section 4.3(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) FIRST, 99% to the Limited Partners holding Common Units and 1% to
the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Minimum Quarterly Distribution;
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(ii) SECOND, 99% to the Limited Partners holding Common Units and 1%
to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Cumulative Common Unit Arrearage, if
any, existing with respect to such Quarter;
(iii) THIRD, 99% to the Limited Partners holding Subordinated Units
and 1% to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Subordinated
Unit then Outstanding an amount equal to the Minimum Quarterly Distribution;
(iv) FOURTH, 99% to the Limited Partners holding Common Units and 1%
to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the Minimum Quarterly Distribution;
(v) FIFTH, 99% to the Limited Partners holding Subordinated Units and
1% to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Subordinated
Unit then Outstanding an amount equal to the excess of the Second Target
Distribution over the Minimum Quarterly Distribution; and
(vi) THEREAFTER, 100% to the Limited Partners and the General
Partners in proportion to the total amount of Available Cash constituting
Cash from Operations distributed pursuant to Sections 5.4(b)(i) through (v)
to each such Person, respectively, for each such Quarter (up to and
including the Quarter with respect to which such distribution is being
made);
PROVIDED, HOWEVER, if the Minimum Quarterly Distribution and the Second
Target Distribution have been reduced to zero pursuant to Section 5.6, the
distributions of Available Cash that is deemed to be Cash from Operations
will be made in accordance with (i) Section 5.4(a)(vi) for the first Quarter
of the year ended December 31, 1997 if such reductions in the Minimum
Quarterly Distribution and the Second Target Distribution occurred at any
time on or before March 31, 1997, and (ii) Section 5.4(b)(vi) if such
reductions in the Minimum Quarterly Distribution and the Second Target
Distribution occurred after March 31, 1997.
(c) FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1998 AND FOR THE REMAINDER OF
THE SUBORDINATION PERIOD. Available Cash with respect to any of the Quarters
beginning on or after January 1, 1998 through the end of the Subordination
Period that is deemed to be Cash from Operations pursuant to the provisions of
Section 5.3 or 5.5 shall be distributed as follows, except as otherwise required
by Section 4.3(b) in respect of additional Partnership Securities issued
pursuant thereto:
(i) FIRST, 99% to the Limited Partners holding Common Units and 1%
to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Minimum Quarterly Distribution;
(ii) SECOND, 99% to the Limited Partners holding Common Units and 1%
to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Cumulative Common Unit Arrearage, if
any, existing with respect to such Quarter;
(iii) THIRD, 99% to the Limited Partners holding Subordinated Units
and 1% to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Subordinated
Unit then Outstanding an amount equal to the Minimum Quarterly Distribution;
(iv) FOURTH, 99% to the Limited Partners holding Common Units and 1%
to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the Minimum Quarterly Distribution;
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(v) FIFTH, 99% to the Limited Partners holding Subordinated Units and
1% to the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Subordinated
Unit then Outstanding an amount equal to the excess of the Second Target
Distribution over the Minimum Quarterly Distribution;
(vi) SIXTH, 99% to the Limited Partners holding Common Units and
Subordinated Units and 1% to the General Partners, in proportion to their
respective Percentage Interests, until there has been distributed in respect
of each Common Unit and each Subordinated Unit then Outstanding an amount
equal to the excess of the Third Target Distribution over the Second Target
Distribution;
(vii) SEVENTH, 85.867% to the Limited Partners holding Common Units
and Subordinated Units and 1% to the General Partners, in proportion to
their respective Percentage Interests, and 13.133% to the Managing General
Partner, until there has been distributed in respect of each Common Unit and
each Subordinated Unit then Outstanding an amount equal to the excess of the
Fourth Target Distribution over the Third Target Distribution;
(viii) EIGHTH, 75.765% to the Limited Partners holding Common Units
and Subordinated Units and 1% to the General Partners, in proportion to
their respective Percentage Interests, and 23.235% to the Managing General
Partner, until there has been distributed in respect of each Common Unit and
each Subordinated Unit then Outstanding an amount equal to the excess of the
Fifth Target Distribution over the Fourth Target Distribution; and
(ix) THEREAFTER, 50.51% to the Limited Partners holding Common Units
and Subordinated Units and 1% to the General Partners, in proportion to
their respective Percentage Interests, and 48.49% to the Managing General
Partner;
PROVIDED, HOWEVER, if the Minimum Quarterly Distribution, the Third Target
Distribution, the Fourth Target Distribution and the Fifth Target
Distribution have been reduced to zero pursuant to Section 5.6, the
distributions of Available Cash that is deemed to be Cash from Operations
with respect to any Quarter will be made in accordance with Section
5.4(c)(ix).
(d) AFTER THE SUBORDINATION PERIOD. Available Cash with respect to any
Quarter after the Subordination Period that is deemed to be Cash from Operations
pursuant to the provisions of Section 5.3 or 5.5 shall be distributed as
follows, except as otherwise required by Section 4.3(b) in respect of additional
Partnership Securities issued pursuant thereto:
(i) FIRST, 99% to the Limited Partners and 1% to the General
Partners, in proportion to their respective Percentage Interests, until
there has been distributed in respect of each Unit then Outstanding an
amount equal to the Minimum Quarterly Distribution;
(ii) SECOND, 99% to the Limited Partners and 1% to the General
Partners, in proportion to their respective Percentage Interests, until
there has been distributed in respect of each Unit then Outstanding an
amount equal to the excess of the Third Target Distribution over the Minimum
Quarterly Distribution;
(iii) THIRD, 85.867% to the Limited Partners and 1% to the General
Partners, in proportion to their respective Percentage Interests, and
13.133% to the Managing General Partner until there has been distributed in
respect of each Unit then Outstanding an amount equal to the excess of the
Fourth Target Distribution over the Third Target Distribution;
(iv) FOURTH, 75.765% to the Limited Partners and 1% to the General
Partners, in proportion to their respective Percentage Interests, and
23.235% to the Managing General Partner, until there has been distributed in
respect of each Unit then Outstanding an amount equal to the excess of the
Fifth Target Distribution over the Fourth Target Distribution; and
(v) THEREAFTER, 50.51% to the Limited Partners and 1% to the General
Partners, in proportion to their respective Percentage Interests, and 48.49%
to the Managing General Partner;
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PROVIDED, HOWEVER, if the Minimum Quarterly Distribution, the Third Target
Distribution, the Fourth Target Distribution and the Fifth Target
Distribution have been reduced to zero pursuant to Section 5.6, the
distributions of Available Cash that is deemed to be Cash from Operations
with respect to any Quarter will be made in accordance with Section
5.4(d)(v).
5.5 DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS. Available
Cash that constitutes Cash from Interim Capital Transactions shall be
distributed, unless the provisions of Section 5.3 require otherwise, as follows:
(a) FIRST, 99% to all Limited Partners and 1% to the General Partners,
in accordance with their respective Percentage Interests, until a
hypothetical holder of a Common Unit acquired on the Initial Closing Date
has received with respect to such Common Unit, during the period from the
Initial Closing Date through such date, distributions of Available Cash that
are deemed to be Cash from Interim Capital Transactions pursuant to this
Section 5.5(a) in an aggregate amount equal to the Initial Unit Price; and
(b) SECOND, 99% to the Limited Partners holding Common Units and 1% to
the General Partners, in proportion to their respective Percentage
Interests, until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Cumulative Common Unit Arrearage, if
any.
Thereafter, all Available Cash shall be deemed to be Cash from Operations
and shall be distributed in accordance with Section 5.4.
5.6 ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET
DISTRIBUTIONS. (a) The Minimum Quarterly Distribution and each Target
Distribution shall be proportionately adjusted in the event of any distribution,
combination or subdivision (whether effected by a distribution payable in Units
or otherwise) of Units or other Partnership Securities in accordance with
Section 4.10. In the event of a distribution of Available Cash that is deemed to
be Cash from Interim Capital Transactions, the Minimum Quarterly Distribution
and each Target Distribution shall be adjusted proportionately downward to equal
the product obtained by multiplying the otherwise applicable Minimum Quarterly
Distribution or Target Distribution, as the case may be, by a fraction of which
the numerator is the Unrecovered Initial Unit Price of the Common Units
immediately after giving effect to such distribution and of which the
denominator is the Unrecovered Initial Unit Price of the Common Units
immediately prior to giving effect to such distribution.
(b) The Minimum Quarterly Distribution and each Target Distribution shall
also be subject to adjustment pursuant to Section 9.6.
5.7 SPECIAL PROVISIONS RELATING TO THE SUBORDINATED UNITS.
(a) Except with respect to the right to vote on or approve matters requiring
the vote or approval of a percentage of the holders of Outstanding Common Units
and the right to participate in allocations of income, gain, loss and deduction
and distributions of cash made with respect to Common Units pursuant to this
Article V, the holder of a Subordinated Unit shall have all of the rights and
obligations of a Limited Partner holding Common Units hereunder; PROVIDED,
HOWEVER, that immediately upon the end of the Subordination Period or upon the
conversion of Subordinated Units prior to the end of the Subordination Period as
provided in subparagraph (b)(i) below, the holder of a Subordinated Unit
converted pursuant to subparagraph (b)(i) or (b)(ii) below shall possess all of
the rights and obligations of a Limited Partner holding Common Units hereunder,
including, without limitation, the right to vote as a Common Unitholder and the
right to participate in allocations of income, gain, loss and deduction and
distributions of cash made with respect to Common Units pursuant to this Article
V (but such Subordinated Units shall remain subject to the provisions of
Sections 4.5(c)(ii) and 5.1(d)(iii)).
(b) (i) Subject to subparagraph (c) below, a total of 50% of the Outstanding
Subordinated Units will convert into Common Units on the first day (the "First
Conversion Date") of any Quarter
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commencing on or after January 1, 1999 and ending on or before December 31, 1999
(x) after the Partnership has, with respect to each of the three consecutive
non-overlapping four-Quarter periods immediately preceding such date, made
distributions of Available Cash constituting Cash from Operations in an amount
equal to or greater than the applicable Target Distribution on each Common Unit
and each Subordinated Unit Outstanding for such periods and (y) on which there
are no Common Unit Arrearages; PROVIDED, HOWEVER, that in determining the amount
of Available Cash constituting Cash from Operations distributed in any
four-Quarter period the following amounts shall not be included: (A) any
positive balance in Cash from Operations at the beginning of such four-Quarter
period, (B) any net increase in working capital borrowings at the end of such
four-Quarter period over the amount of working capital borrowings at the
beginning of such four-Quarter period and (C) with respect to the third of such
three consecutive non-overlapping four-Quarter periods only, any net decrease in
the aggregate amount of reserves at the end of such four-Quarter period from the
aggregate amount of reserves at the beginning of such four-Quarter period.
(ii) Subject to paragraph (c) immediately below, all Subordinated Units then
Outstanding will convert into Common Units on the first day (the "Second
Conversion Date") of any Quarter commencing on or after January 1, 2000 (x)
after the Partnership has, with respect to each of the three consecutive
non-overlapping four-Quarter periods immediately preceding such date, made
distributions of Available Cash constituting Cash from Operations in an amount
equal to or greater than the Second Target Distribution on each Common Unit and
each Subordinated Unit Outstanding for such periods and (y) on which there are
no Common Unit Arrearages; PROVIDED, HOWEVER, that in determining the amount of
Available Cash constituting Cash from Operations distributed in any four-Quarter
period the following amounts shall not be included: (A) any positive balance in
Cash from Operations at the beginning of such four-Quarter period, (B) any net
increase in working capital borrowings at the end of such four-Quarter period
over the amount of working capital borrowings at the beginning of such
four-Quarter period and (c) with respect to the third of such three consecutive
non-overlapping four-Quarter periods only, any net decrease in the aggregate
amount of reserves at the end of such four-Quarter period from the aggregate
amount of reserves at the beginning of such four-Quarter period.
(iii) The Subordinated Units to be converted pursuant to Section 5.7(b)(i)
shall be designated by the Managing General Partner in its sole discretion. The
Subordinated Units to be converted on the Second Conversion Date pursuant to
Section 5.7(b)(ii) shall include all Outstanding Subordinated Units that are not
converted on the First Conversion Date pursuant to Section 5.7(b)(i).
(c) After the end of the Subordination Period or upon the occurrence of the
events described in subparagraph (b)(i) of this Section 5.7, as the case may be,
once the Managing General Partner determines, based on advice of counsel, that a
Subordinated Unit has, as a substantive matter, like intrinsic economic and
federal income tax characteristics, in all material respects, to the intrinsic
economic and federal income tax characteristics of a Common Unit then
Outstanding, then the Subordinated Unit shall be converted to a Common Unit (on
a one-for-one basis) and from that time forward shall constitute a Common Unit
for all purposes under this Agreement. In connection with the condition set
forth above, it is understood that the Managing General Partner may take
whatever reasonable steps are required to provide economic uniformity to the
Subordinated Units in preparation for a conversion into Common Units, including
the application of Sections 4.5(c) and 5.1(d)(iii); PROVIDED, HOWEVER, that no
such steps may be taken that would have a material adverse effect on the Limited
Partners holding Common Units or the Record Holders of any class of Units.
ARTICLE VI
MANAGEMENT AND OPERATION OF BUSINESS
6.1 MANAGEMENT. (a) The Managing General Partner shall conduct, direct and
manage all activities of the Partnership. Except as otherwise expressly provided
in this Agreement, all management powers over the business and affairs of the
Partnership shall be exclusively vested in the
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Managing General Partner, and neither the Special General Partner nor any
Limited Partner or Assignee shall have any management power over the business
and affairs of the Partnership. In addition to the powers now or hereafter
granted a general partner of a limited partnership under applicable law or which
are granted to the Managing General Partner under any other provision of this
Agreement, except as otherwise expressly provided herein, the Managing General
Partner shall have full power and authority to do all things and on such terms
as it, in its sole discretion, may deem necessary or appropriate to conduct the
business of the Partnership, to exercise all powers set forth in Section 3.2 and
to effectuate the purposes set forth in Section 3.1, including, without
limitation, the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 6.3);
(iv) the use of the assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with the terms of this
Agreement, including, without limitation, the financing of the conduct of
the operations of the Partnership or the Operating Partnership, the lending
of funds to other Persons for the benefit of the Partnership (including,
without limitation, the Operating Partnership) and the repayment of
obligations of the Partnership and the Operating Partnership and the making
of capital contributions to the Operating Partnership;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including, without limitation, instruments
that limit the liability of the Partnership under contractual arrangements
to all or particular assets of the Partnership, with the other party to the
contract to have no recourse against the General Partners or their assets
other than their interest in the Partnership, even if such action results in
the terms of the transaction being less favorable to the Partnership than
would otherwise be the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including, without
limitation, employees having titles such as "president," "vice president,"
"secretary" and "treasurer") and agents, outside attorneys, accountants,
consultants and contractors and the determination of their compensation and
other terms of employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership, the Operating Partnership and the Partners (including, without
limitation, the assets of the Operating Partnership and the Partnership) as
it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations or other relationships
(including, without limitation, the acquisition of interests in, and the
contributions of property to, the Operating Partnership from time to time);
(x) the control of any matters affecting the rights and obligations of
the Partnership, including, without limitation, the bringing and defending
of actions at law or in equity and otherwise engaging in the conduct of
litigation and the incurring of legal expense and the settlement of claims
and litigation;
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(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with The New York Stock
Exchange, Inc. and any other securities exchange and the delisting of some
or all of the Units from, or requesting that trading be suspended on, any
such exchange (subject to any prior approval that may be required under
Section 1.6);
(xiii) the purchase, sale or other acquisition or disposition of Units,
or, unless restricted or prohibited by Section 4.3(c), the issuance of
additional Units and other Partnership Securities; and
(xiv) the undertaking of any action in connection with the Partnership's
participation in the Operating Partnership as the limited partner
(including, without limitation, contributions or loans of funds by the
Partnership to the Operating Partnership).
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and Assignees and each other Person who may
acquire an interest in Units, to the extent permitted by law, hereby (i)
approves, ratifies and confirms the execution, delivery and performance by the
parties thereto of the Operating Partnership Agreement, the Underwriting
Agreement, the agreements and other documents filed as exhibits to the
Registration Statement, and the other agreements described in or filed as a part
of the Registration Statement, and the engaging by any Affiliate of either of
the General Partners in business and activities (other than Restricted
Activities) that are in direct competition with the business and activities of
the Partnership and the Operating Partnership; (ii) agrees that the Managing
General Partner (on its own or through any officer of the Partnership) is
authorized to execute, deliver and perform the agreements referred to in clause
(i) of this sentence and the other agreements, acts, transactions and matters
described in or contemplated by the Registration Statement on behalf of the
Partnership without any further act, approval or vote of the Partners or the
Assignees or the other Persons who may acquire an interest in Units; and (iii)
agrees that the execution, delivery or performance by the General Partners, the
Partnership, the Operating Partnership or any Affiliate of any of them, of this
Agreement or any agreement authorized or permitted under this Agreement
(including, without limitation, the exercise by the Managing General Partner or
any Affiliate of the Managing General Partner of the rights accorded pursuant to
Article XVII), or the engaging by any Affiliate of either of the General
Partners in any business and activities (other than Restricted Activities) that
are in direct competition with the business and activities of the Partnership
and the Operating Partnership, shall not constitute a breach by the General
Partners of any duty that the General Partners may owe the Partnership or the
Limited Partners or the Assignees or any other Persons under this Agreement (or
any other agreements) or of any duty stated or implied by law or equity. The
term "Affiliate" when used in this Section 6.1(b) with respect to the General
Partners shall not include the Partnership or any Subsidiary of the Partnership.
6.2 CERTIFICATE OF LIMITED PARTNERSHIP. The Managing General Partner has
caused the Certificate of Limited Partnership to be filed with the Secretary of
State of the State of Delaware as required by the Delaware Act and shall use all
reasonable efforts to cause to be filed such other certificates or documents as
may be determined by the Managing General Partner in its sole discretion to be
reasonable and necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a partnership in which
the limited partners have limited liability) in the State of Delaware or any
other state in which the Partnership may elect to do business or own property.
To the extent that such action is determined by the Managing General Partner in
its sole discretion to be reasonable and necessary or appropriate, the Managing
General Partner shall file amendments to and restatements of the Certificate of
Limited Partnership and do all things to maintain the Partnership as a limited
partnership (or a partnership in which the limited partners have limited
liability) under the laws of the State of Delaware or of any other state in
which the Partnership may elect to do business or own property. Subject to the
terms of Section 7.5(a), the
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Managing General Partner shall not be required, before or after filing, to
deliver or mail a copy of the Certificate of Limited Partnership, any
qualification document or any amendment thereto to any Limited Partner or
Assignee.
6.3 RESTRICTIONS ON GENERAL PARTNERS' AUTHORITY. (a) The General Partners
may not, without written approval of the specific act by all of the Outstanding
Units or by other written instrument executed and delivered by all of the
Outstanding Units subsequent to the date of this Agreement, take any action in
contravention of this Agreement, including, without limitation, (i) any act that
would make it impossible to carry on the ordinary business of the Partnership,
except as otherwise provided in this Agreement; (ii) possess Partnership
property, or assign any rights in specific Partnership property, for other than
a Partnership purpose; (iii) admit a Person as a Partner, except as otherwise
provided in this Agreement; (iv) amend this Agreement in any manner, except as
otherwise provided in this Agreement; or (v) transfer its interest as a general
partner of the Partnership, except as otherwise provided in this Agreement.
(b) Except as provided in Articles XIV and XVI, no General Partner may sell,
exchange or otherwise dispose of all or substantially all of the Partnership's
assets in a single transaction or a series of related transactions or approve on
behalf of the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Operating Partnership, without the
approval of at least a majority of the Outstanding Units (excluding, during the
Subordination Period, Units held by the General Partners and their Affiliates);
PROVIDED, HOWEVER, that this provision shall not preclude or limit the Managing
General Partner's ability to mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of the Partnership's assets and shall not
apply to any forced sale of any or all of the Partnership's assets pursuant to
the foreclosure of, or other realization upon, any such encumbrance. Without the
approval of at least a majority of the Outstanding Units (excluding during the
Subordination Period, Units held by the General Partners and their Affiliates),
the Managing General Partner shall not, on behalf of the Partnership, (i)
consent to any amendment to the Operating Partnership Agreement or, except as
expressly permitted by Section 6.9(d), take any action permitted to be taken by
a partner of the Operating Partnership, in either case, that would have a
material adverse effect on the Partnership as a partner of the Operating
Partnership or (ii) except as permitted under Sections 11.2, 13.1 and 13.2,
elect or cause the Partnership to elect a successor general partner of the
Operating Partnership.
(c) Unless approved by the affirmative vote of the holders of at least a
majority of each class of Outstanding Units, including a majority of the Common
Units (excluding, during the Subordination Period, Common Units owned by the
General Partners and their Affiliates), no General Partner shall take any action
or refuse to take any reasonable action the effect of which, if taken or not
taken, as the case may be, would be to cause the Partnership or the Operating
Partnership to be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax purposes; PROVIDED
that this Section 6.3(c) shall not be construed to apply to amendments to this
Agreement (which are governed by Article XV) or mergers or consolidations of the
Partnership with any Person (which are governed by Article XVI).
(d) At all times while serving as the general partners of the Partnership,
neither General Partner shall (except as provided below) (i) make any dividend
or distribution on, or repurchase any shares of, its stock or partnership
interests, as the case may be, unless it shall first receive an Opinion of
Counsel that the effect of such dividend, distribution, repurchase or other
action would not reduce its net worth below an amount such that the Partnership
will be treated as an association taxable as a corporation for federal income
tax purposes or (ii) take any other action within its control if the effect of
such other action would be to reduce its net worth below an amount necessary to
receive an Opinion of Counsel that the Partnership will be treated as a
partnership for federal income tax purposes. The Partnership shall bear the
expense of any such Opinion of Counsel required to be obtained by the Managing
General Partner pursuant to this Section 6.3.
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6.4 REIMBURSEMENT OF THE GENERAL PARTNERS. (a) Except as provided in this
Section 6.4 and elsewhere in this Agreement or in the Operating Partnership
Agreement, the General Partners shall not be compensated for their services as
general partners of the Partnership or the Operating Partnership; PROVIDED,
HOWEVER, that for so long as Fremont owns an interest in the Managing General
Partner, Fremont shall be entitled to receive from the Managing General Partner
an annual amount equal to $100,000, payable semi-annually in arrears on January
15 and July 15 of each calendar year, in consideration for management services,
which fee shall be reimbursed by the Partnership.
(b) Each of the General Partners shall be reimbursed on a monthly basis, or
such other basis as the Managing General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments it
makes on behalf of the Partnership (including, without limitation, salary,
bonus, incentive compensation and other amounts paid to any Person to perform
services for the Partnership or for such General Partner in the discharge of its
duties to the Partnership), and (ii) all other necessary or appropriate expenses
allocable to the Partnership or otherwise reasonably incurred by such General
Partner in connection with operating the Partnership's business (including,
without limitation, expenses allocated to such General Partner by its
Affiliates). The Managing General Partner shall determine the fees and expenses
that are allocable to the Partnership in any reasonable manner determined by the
Managing General Partner in its sole discretion. Reimbursements pursuant to this
Section 6.4 shall be in addition to any reimbursement to the General Partners as
a result of indemnification pursuant to Section 6.7.
(c) Except as provided in Section 4.3(c), the Managing General Partner in
its sole discretion and without the approval of the Limited Partners (who shall
have no right to vote in respect thereof) may propose and adopt on behalf of the
Partnership, employee benefit and incentive plans (including, without
limitation, plans involving the issuance of Units), or issue Partnership
Securities pursuant to any employee benefit or incentive plan maintained or
sponsored by either of the General Partners or one of their Affiliates, in each
case for the benefit of employees of either of the General Partners, the
Partnership, the Operating Partnership or any Affiliate of any of them in
respect of services performed, directly or indirectly, for the benefit of the
Partnership or the Operating Partnership. The Partnership agrees to issue and
sell to the General Partners any Units or other Partnership Securities that the
General Partners are obligated to provide to any employees pursuant to any such
benefit or incentive plans. Expenses incurred by the General Partners in
connection with any such plans (including the net cost to the General Partners
of Units purchased by the General Partners from the Partnership to fulfill
options or awards under such plans) shall be reimbursed in accordance with
Section 6.4(b). Any and all obligations of the General Partners under any
employee benefit or incentive plans adopted by the Managing General Partner as
permitted by this Section 6.4(c) shall constitute obligations of the General
Partners hereunder and shall be assumed by any successor General Partners
approved pursuant to Section 13.1, 13.2 or 13.4 or the transferee of or
successor to all of the Partnership Interest of the Managing General Partner or
the Special General Partner, as the case may be, in the Partnership pursuant to
Section 11.2.
6.5 OUTSIDE ACTIVITIES. (a) After the Closing Date, the Managing General
Partner, for so long as it is a general partner of the Partnership, (i) agrees
that its sole business will be to act as a general partner of the Partnership,
the Operating Partnership, and any other partnership of which the Partnership or
the Operating Partnership is, directly or indirectly, a partner and to undertake
activities that are ancillary or related thereto (including being a limited
partner in the Partnership), (ii) shall not enter into or conduct any business
or incur any debts or liabilities except in connection with or incidental to (A)
its performance of the activities required or authorized by this Agreement or
the Operating Partnership Agreement or described in or contemplated by the
Registration Statement and (B) the acquisition, ownership or disposition of
Partnership Interests in the Partnership or partnership interests in the
Operating Partnership or any other partnership of which the Partnership or the
Operating Partnership is, directly or indirectly, a partner, except that,
notwithstanding the foregoing, employees of the Managing General Partner may
perform limited services for the Special General Partner and its Affiliates (it
being understood that full time employees of the Managing
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General Partner shall devote substantially all their employment services to the
Partnership and the Operating Partnership), and (iii) shall not, and shall cause
its Affiliates not to, engage in any Restricted Activity.
(b) Except as described in Section 6.5(a), each Indemnitee (other than the
Managing General Partner) shall have the right to engage in businesses of every
type and description and other activities for profit and to engage in and
possess an interest in other business ventures of any and every type or
description, independently or with others, whether in the businesses engaged in
by the Partnership or the Operating Partnership or anticipated to be engaged in
by the Partnership, the Operating Partnership or otherwise, including, without
limitation, in the case of any Affiliates of the General Partners, business
interests and activities (other than Restricted Activities) in direct
competition with the business and activities of the Partnership or the Operating
Partnership, and none of the same shall constitute a breach of this Agreement or
any duty to the Partnership, the Operating Partnership or any Partner or
Assignee. Notwithstanding the foregoing, Fremont, Sequoia and their subsidiaries
may make or maintain (i) a non-controlling investment in any entity that engages
in Restricted Activities and (ii) a controlling investment in any entity that
engages in Restricted Activities (A) if such Restricted Activities do not
directly and materially compete with the Partnership, (B) if such Restricted
Activities (except as provided in clause (C) below) are conducted in North
America and directly and materially compete with the Partnership, provided that
prior to making such investment Fremont, Sequoia or their subsidiaries first
offer the Partnership the opportunity to make such investment or (C) if such
entity conducts all of its operations outside of North America except for the
marketing and sale of logs, lumber, plywood or other wood products (including
manufactured, engineered or substitute wood products) in North America. None of
Fremont, Sequoia or their subsidiaries will be so restricted if and when none of
them any longer own an interest in either of the General Partners. Neither the
Partnership, the Operating Partnership, any Limited Partner nor any other Person
shall have any rights by virtue of this Agreement, the Operating Partnership
Agreement or the partnership relationship established hereby or thereby in any
business ventures of any Indemnitee (subject, in the case of the General
Partners, to compliance with Section 6.5(c)) and such Indemnitees shall have no
obligation to offer any interest in any such business ventures to the
Partnership, the Operating Partnership, any Limited Partner or any other Person.
The General Partners and any other Persons affiliated with the General Partners
may acquire Units or other Partnership Securities in addition to those acquired
by any of such Persons on the Closing Date, and, except as otherwise provided in
this Agreement, shall be entitled to exercise all rights of an Assignee or
Limited Partner, as applicable, relating to such Units or Partnership
Securities, as the case may be.
(c) Subject to the terms of Sections 6.5(a) and (b) but otherwise
notwithstanding anything to the contrary in this Agreement, (i) the engaging in
competitive activities by any of the Indemnitees (other than the Managing
General Partner) in accordance with Sections 6.5(a) and (b) is hereby approved
by the Partnership and all Partners and (ii) it shall be deemed not to be a
breach of the General Partners' fiduciary duties or any other obligation of any
type whatsoever of the General Partners for the General Partners to permit their
Affiliates to engage, or for any such Affiliate to engage, in business interests
and activities (other than Restricted Activities) in preference to or to the
exclusion of the Partnership.
(d) The term "Affiliates" when used in this Section 6.5 with respect to the
General Partners shall not include the Partnership or any Subsidiary of the
Partnership.
6.6 LOANS FROM THE GENERAL PARTNERS; CONTRACTS WITH AFFILIATES. (a) Each
of the General Partners or any Affiliate thereof may lend to the Partnership or
the Operating Partnership, and the Partnership and the Operating Partnership may
borrow, funds needed or desired by the Partnership and the Operating Partnership
for such periods of time as the Managing General Partner may determine;
PROVIDED, HOWEVER, that in any such case the lending party may not charge the
borrowing party interest at a rate greater than the rate that would be charged
the borrowing party, or impose terms less favorable to the borrowing party than
would be imposed on the borrowing party, by unrelated lenders on comparable
loans made on an arms'-length basis (without reference to the
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lending party's financial abilities or guarantees). Subject to the preceding
proviso, the borrowing party shall reimburse the lending party for any costs
(other than any additional interest costs) incurred by the lending party in
connection with the borrowing of such funds. For purposes of this Section 6.6(a)
and Section 6.6(b), the term "Partnership" shall include any Affiliate of the
Partnership that is controlled by the Partnership and the term "Operating
Partnership" shall include any Affiliate of the Operating Partnership that is
controlled by the Operating Partnership. The Partnership and the Operating
Partnership shall not lend funds to the General Partners or any of their
Affiliates.
(b) The Partnership may lend or contribute to the Operating Partnership, and
the Operating Partnership may borrow, funds on terms and conditions established
in the sole discretion of the Managing General Partner; PROVIDED, HOWEVER that
the Partnership may not charge the Operating Partnership interest at a rate
greater than the rate that would be charged to the Operating Partnership, or
impose terms less favorable to the Operating Partnership than would be imposed
on the Operating Partnership, by unrelated lenders on comparable loans made on
an arm's-length basis (without reference to the Managing General Partner's
financial abilities or guarantees). The foregoing authority shall be exercised
by the Managing General Partner in its sole discretion and shall not create any
right or benefit in favor of the Operating Partnership or any other Person.
(c) The General Partners may, or may enter into agreements with any of their
Affiliates to, render services to the Partnership or to the General Partners in
the discharge of their duties as general partners of the Partnership. Any
services rendered to the Partnership by the General Partners or any of their
Affiliates shall be on terms that are fair and reasonable to the Partnership;
PROVIDED, HOWEVER, that the requirements of this Section 6.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership than
those generally being provided to or available from unrelated third parties or
(iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership), is fair and
equitable to the Partnership. The provisions of Section 6.4 shall apply to the
rendering of services described in this Section 6.6(c).
(d) The Partnership may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither of the General Partners nor any of their Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; PROVIDED, HOWEVER, that the requirements
of this Section 6.6(e) shall be deemed to be satisfied as to (i) the
transactions effected pursuant to Sections 4.1, 4.2 and 4.3, and any other
transactions described in or contemplated by the Registration Statement, (ii)
any transaction approved by Special Approval, (iii) any transaction, the terms
of which are no less favorable to the Partnership than those generally being
provided to or available from unrelated third parties, or (iv) any transaction
that, taking into account the totality of the relationships between the parties
involved (including other transactions that may be particularly favorable or
advantageous to the Partnership), is fair and equitable to the Partnership.
(f) The General Partners and their Affiliates will have no obligation to
permit the Partnership or the Operating Partnership to use any facilities or
assets of the General Partners and their Affiliates, except as may be provided
in contracts entered into from time to time specifically dealing with such use,
nor shall there be any obligation on the part of the General Partners or their
Affiliates to enter into such contracts.
(g) Subject to the General Partners' compliance with their obligations
contained herein, the existence of the conflicts of interest described in the
Registration Statement are hereby approved by all Partners.
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6.7 INDEMNIFICATION. (a) To the fullest extent permitted by law but
subject to the limitations expressly provided in this Agreement, all Indemnitees
shall be indemnified and held harmless by the Partnership from and against any
and all losses, claims, damages, liabilities (joint or several), expenses
(including, without limitation, legal fees and expenses), judgments, fines,
penalties, interest, settlements and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of its status as
(i) a General Partner or Departing Partner (or any general partner thereof), or
an Affiliate of either, (ii) an officer, director, employee, partner, member,
manager, agent, trustee or member of the partnership board of the Partnership, a
General Partner or Departing Partner (or any general partner thereof) or an
Affiliate of either or (iii) a Person serving at the request of the Partnership
in another entity in a similar capacity, PROVIDED, that in each case the
Indemnitee acted in good faith and in a manner which such Indemnitee reasonably
believed to be in, or not opposed to, the best interests of the Partnership and,
with respect to any criminal proceeding, had no reasonable cause to believe its
conduct was unlawful; PROVIDED FURTHER, no indemnification pursuant to this
Section 6.7 shall be available to the General Partners, Fremont, Sequoia, Peter
W. Stott or Roger L. Krage with respect to their respective obligations incurred
pursuant to the Underwriting Agreement (other than obligations incurred by the
General Partners, Fremont, Sequoia, Peter W. Stott or Roger L. Krage on behalf
of the Partnership or the Operating Partnership). The termination of any action,
suit or proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere, or its equivalent, shall not create a presumption that the
Indemnitee acted in a manner contrary to that specified above. Any
indemnification pursuant to this Section 6.7 shall be made only out of the
assets of the Partnership, it being agreed that the General Partners shall not
be personally liable for such indemnification and shall have no obligation to
contribute or loan any monies or property to the Partnership to enable it to
effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including, without
limitation, legal fees and expenses) incurred by an Indemnitee who is
indemnified pursuant to Section 6.7(a) in defending any claim, demand, action,
suit or proceeding shall, from time to time, be advanced by the Partnership
prior to the final disposition of such claim, demand, action, suit or proceeding
upon receipt by the Partnership of an undertaking by or on behalf of the
Indemnitee to repay such amount if it shall be determined that the Indemnitee is
not entitled to be indemnified as authorized in this Section 6.7.
(c) The indemnification provided by this Section 6.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Units, as a matter of law or
otherwise, both as to actions in the Indemnitee's capacity as (i) a General
Partner or Departing Partner (or any general partner thereof) or an Affiliate
thereof, (ii) an officer, director, employee, partner, member, manager, agent,
trustee or member of the partnership board of the Partnership, a General Partner
or Departing Partner (or any general partner thereof) or an Affiliate thereof or
(iii) a Person serving at the request of the Partnership in another entity in a
similar capacity, and as to actions in any other capacity (including, without
limitation, any capacity under the Underwriting Agreement), and shall continue
as to an Indemnitee who has ceased to serve in such capacity and shall inure to
the benefit of the heirs, successors, assigns and administrators of the
Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partners or their Affiliates for the cost of) insurance, on behalf of the
General Partners and such other Persons as the Managing General Partner shall
determine, against any liability that may be asserted against or expense that
may be incurred by such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.
(e) For purposes of this Section 6.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or
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participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute "fines" within the meaning of Section 6.7(a); and action taken
or omitted by it with respect to an employee benefit plan in the performance of
its duties for a purpose reasonably believed by it to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a purpose
which is in, or not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.7 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 6.7 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be indemnified by the Partnership, nor
the obligation of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 6.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
6.8 LIABILITY OF INDEMNITEES. (a) Notwithstanding anything to the contrary
set forth in this Agreement, no Indemnitee shall be liable for monetary damages
to the Partnership, the Limited Partners, the Assignees or any other Persons who
have acquired interests in the Units, for losses sustained or liabilities
incurred as a result of any act or omission if such Indemnitee acted in good
faith.
(b) Subject to its obligations and duties as Managing General Partner set
forth in Section 6.1(a), the Managing General Partner may exercise any of the
powers granted to it by this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through its agents, and the Managing
General Partner shall not be responsible for any misconduct or negligence on the
part of any such agent appointed by the Managing General Partner in good faith.
(c) Any amendment, modification or repeal of this Section 6.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership and the Limited Partners of the
General Partners (or any general partner thereof), their directors, officers,
employees, partners, members, managers and agents under this Section 6.8 as in
effect immediately prior to such amendment, modification or repeal with respect
to claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such claims
may arise or be asserted.
6.9 RESOLUTION OF CONFLICTS OF INTEREST. (a) Unless otherwise expressly
provided in this Agreement or the Operating Partnership Agreement, whenever a
potential conflict of interest exists or arises between a General Partner or any
of its Affiliates, on the one hand, and the Partnership, the Operating
Partnership, any Partner or any Assignee, on the other, any resolution or course
of action in respect of such conflict of interest (not otherwise constituting a
breach of this Agreement) shall be permitted and deemed approved by all
Partners, and shall not constitute a breach of this Agreement, of the Operating
Partnership Agreement, of any agreement contemplated herein or therein, or of
any duty stated or implied by law or equity, if the resolution or course of
action is, or by operation of this Agreement is deemed to be, fair and
reasonable to the Partnership. The Managing General Partner shall be authorized
but not required in connection with its resolution of such conflict of interest
to seek Special Approval of a resolution of such conflict or course of action.
Any conflict of interest and
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any resolution of such conflict of interest shall be conclusively deemed fair
and reasonable to the Partnership if such conflict of interest or resolution is
(i) approved by Special Approval, (ii) on terms no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties or (iii) fair to the Partnership, taking into account the totality
of the relationships between the parties involved (including other transactions
that may be particularly favorable or advantageous to the Partnership). The
Managing General Partner may also adopt a resolution or course of action that
has not received Special Approval. The Managing General Partner (including the
Audit Committee in connection with Special Approval) shall be authorized in
connection with its determination of what is "fair and reasonable" to the
Partnership and in connection with its resolution of any conflict of interest to
consider (A) the relative interests of any party to such conflict, agreement,
transaction or situation and the benefits and burdens relating to such interest;
(B) any customary or accepted industry practices and any customary or historical
dealings with a particular Person; (C) any applicable generally accepted
accounting practices or principles; and (D) such additional factors as the
Managing General Partner (including such Audit Committee) determines in its sole
discretion to be relevant, reasonable or appropriate under the circumstances.
Nothing contained in this Agreement, however, is intended to nor shall it be
construed to require the Managing General Partner (including such Audit
Committee) to consider the interests of any Person other than the Partnership.
In the absence of bad faith by the Managing General Partner, the resolution,
action or terms so made, taken or provided by the Managing General Partner with
respect to such matter shall not constitute a breach of this Agreement or any
other agreement contemplated herein or a breach of any standard of care or duty
imposed herein or therein or, to the extent permitted by law, under the Delaware
Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the Managing General Partner or any of its Affiliates is permitted
or required to make a decision (i) in its "sole discretion" or "discretion,"
that it deems "necessary or appropriate" or under a grant of similar authority
or latitude, except as otherwise provided herein, the Managing General Partner
or such Affiliate shall be entitled to consider only such interests and factors
as it desires and shall have no duty or obligation to give any consideration to
any interest of, or factors affecting, the Partnership, the Operating
Partnership, any Limited Partner or any Assignee, (ii) unless another express
standard is provided for herein, it may make such decision in its sole
discretion (regardless of whether there is a reference to "sole discretion" or
"discretion"), in which event the provisions of preceding clause (i) shall apply
or (iii) in "good faith" or under another express standard, the Managing General
Partner or such Affiliate shall act under such express standard and shall not be
subject to any other or different standards imposed by this Agreement, the
Operating Partnership Agreement, any other agreement contemplated hereby or
under the Delaware Act or any other law, rule or regulation. In addition, any
actions taken by the Managing General Partner or such Affiliate consistent with
the standards of "reasonable discretion" set forth in the definitions of
Available Cash or Cash from Operations shall not constitute a breach of any duty
of the Managing General Partner to the Partnership or the Limited Partners. The
Managing General Partner shall have no duty, express or implied, to sell or
otherwise dispose of any asset of the Operating Partnership or of the
Partnership, other than in the ordinary course of business. No borrowing by the
Partnership or the Operating Partnership or the approval thereof by the Managing
General Partner shall be deemed to constitute a breach of any duty of the
Managing General Partner to the Partnership or the Limited Partners by reason of
the fact that the purpose or effect of such borrowing is directly or indirectly
to hasten the expiration of the Subordination Period or the conversion of any
Subordinated Units into Common Units except as provided in Section 5.7(b)
hereto.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
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(d) The Limited Partners hereby authorize the Managing General Partner, on
behalf of the Partnership as a partner of the Operating Partnership, to approve
of actions by the general partner of the Operating Partnership similar to those
actions permitted to be taken by the Managing General Partner pursuant to this
Section 6.9.
6.10 OTHER MATTERS CONCERNING THE GENERAL PARTNERS. (a) A General Partner
may rely and shall be protected in acting or refraining from acting upon any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, bond, debenture, or other paper or document believed by
it to be genuine and to have been signed or presented by the proper party or
parties.
(b) A General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants and
advisers selected by it, and any act taken or omitted to be taken in reliance
upon the opinion (including, without limitation, an Opinion of Counsel) of such
Persons as to matters that such General Partner reasonably believes to be within
such Person's professional or expert competence shall be conclusively presumed
to have been done or omitted in good faith and in accordance with such opinion.
(c) A General Partner shall have the right, in respect of any of its powers
or obligations hereunder, to act through any of its duly authorized officers, a
duly appointed attorney or attorneys-in-fact or the duly authorized officers of
the Partnership. Each such attorney shall, to the extent provided by such
General Partner in the power of attorney, have full power and authority to do
and perform each and every act and duty that is permitted or required to be done
by such General Partner hereunder.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified, waived
or limited, to the extent permitted by law, as required to permit the General
Partners to act under this Agreement or any other agreement contemplated by this
Agreement and to make any decision pursuant to the authority prescribed in this
Agreement so long as such action is reasonably believed by the Managing General
Partner to be in, or not inconsistent with, the best interests of the
Partnership.
6.11 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether
real, personal or mixed and whether tangible or intangible, shall be deemed to
be owned by the Partnership as an entity, and no Partner or Assignee,
individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all of the
Partnership assets may be held in the name of the Partnership, the Managing
General Partner, one or more of its Affiliates or one or more nominees, as the
Managing General Partner may determine. The Managing General Partner hereby
declares and warrants that any Partnership assets for which record title is held
in the name of the Managing General Partner or one or more of its Affiliates or
one or more nominees shall be held by the Managing General Partner or such
Affiliate or nominee for the use and benefit of the Partnership in accordance
with the provisions of this Agreement; PROVIDED, HOWEVER, that the Managing
General Partner shall use its reasonable efforts to cause record title to such
assets (other than those assets in respect of which the Managing General Partner
determines that the expense and difficulty of conveyancing taking into account
the value of the assets makes transfer of record title to the Partnership
impracticable) to be vested in the Partnership as soon as reasonably
practicable; PROVIDED THAT, prior to the withdrawal or removal of the Managing
General Partner or as soon thereafter as practicable, the Managing General
Partner shall use reasonable efforts to effect the transfer of record title to
the Partnership and, prior to any such transfer, will provide for the use of
such assets in a manner satisfactory to the Partnership. All Partnership assets
shall be recorded as the property of the Partnership in its books and records,
irrespective of the name in which record title to such Partnership assets is
held. The Managing General Partner covenants and agrees that at the Closing
Date, the Partnership and the Operating Partnership shall have all licenses,
permits, certificates, franchises, or other governmental authorizations or
permits necessary for the ownership of their properties or for the conduct of
their businesses, except for such licenses, permits, certificates, franchises,
or other governmental authorizations or permits, failure to have obtained which
will not, individually or in the aggregate, have a material adverse effect on
the Partnership or the Operating Partnership.
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6.12 PURCHASE OR SALE OF UNITS. The Managing General Partner may cause the
Partnership to purchase or otherwise acquire Units; PROVIDED THAT, except as
permitted pursuant to Section 11.6, the Managing General Partner may not cause
the Partnership to purchase Subordinated Units. As long as Units are held by the
Partnership or the Operating Partnership, such Units shall not be considered
Outstanding for any purpose, except as otherwise provided herein. The General
Partners or any of their Affiliates may also purchase or otherwise acquire and
sell or otherwise dispose of Units for their own account, subject to the
provisions of Articles XI and XII.
6.13 REGISTRATION RIGHTS OF THE GENERAL PARTNERS, THEIR AFFILIATES AND THE
PARTICIPATING INVESTORS. (a) If (i) either of the General Partners or any
Affiliate of either of the General Partners (including, without limitation, for
purposes of this Section 6.13, any Person that is an Affiliate of either of the
General Partners at the date hereof notwithstanding that it may later cease to
be an Affiliate of either of the General Partners) or any Participating Investor
holds Common Units that it desires to sell and (ii) Rule 144 of the Securities
Act (or any successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Common Units (the
"Holder") to dispose of the number of Common Units it desires to sell at the
time it desires to do so without registration under the Securities Act, then
upon the request of Holders holding Common Units with an aggregate Current
Market Price of at least $20 million (or upon the request of Holders holding at
least 80% of the Common Units held by Participating Investors other than the
General Partners, Fremont and their respective Affiliates, subject to a minimum
aggregate Current Market Price of at least $10 million), the Partnership shall
file with the Commission as promptly as practicable after receiving such
request, and use all reasonable efforts to cause to become effective, a
registration statement under the Securities Act registering the offering and
sale of the number of Common Units specified by the Holder; PROVIDED, HOWEVER,
that the Partnership shall use all reasonable efforts to cause the registration
statement to remain effective for a period of not less than six months or such
shorter period which will terminate when all Common Units covered by such
registration statement have been sold (but not before the expiration of the
90-day period referred to in Section 4(3) of the Securities Act and Rule 174
thereunder, if applicable); PROVIDED, that not more than one such request by
Holders shall be made within any period of 270 consecutive days; PROVIDED
FURTHER that the Partnership shall not be required to effect more than three
registrations pursuant to this Section 6.13(a), two of which may be exercised by
the General Partners, Fremont and their respective Affiliates (which
registrations may include Common Units held by Participating Investors other
than the General Partners, Fremont and their respective Affiliates for purposes
of satisfying the aforesaid $20 million minimum) and the other one of which may
be exercised by the other Participating Investors; and PROVIDED FURTHER that if
the Managing General Partner or, if at the time a request pursuant to this
Section 6.13 is submitted to the Partnership the Holder requesting registration
is an Affiliate of the Managing General Partner, the Audit Committee in
connection with Special Approval determines in its good faith judgment that a
postponement of the requested registration for up to six months would be in the
best interests of the Partnership and its Partners due to a pending transaction,
investigation or other event, the filing of such registration statement or the
effectiveness thereof may be deferred for up to six months, but not thereafter.
In connection with any registration pursuant to the immediately preceding
sentence, the Partnership shall promptly prepare and file (x) such documents as
may be necessary to register or qualify the securities subject to such
registration under the securities laws of such states as the Holder shall
reasonably request; PROVIDED, HOWEVER, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Partnership would
become subject to general service of process or to taxation or qualification to
do business as a foreign corporation or partnership doing business in such
jurisdiction, and (y) such documents as may be necessary to apply for listing or
to list the securities subject to such registration on such National Securities
Exchange as the Holder shall reasonably request, and do any and all other acts
and things that may reasonably be necessary or advisable to enable the Holder to
consummate a public sale of such Common Units in such states. Except as set
forth in Section 6.13(c), all costs and expenses of any such registration and
offering (other than the underwriting discounts and commissions for Common Units
sold by the Holders) shall be paid by the Partnership, without reimbursement by
the Holder.
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(b) If the Partnership shall at any time before the third anniversary of the
Initial Closing Date propose to file a registration statement under the
Securities Act for an offering of equity securities of the Partnership for cash
(other than an offering relating solely to an employee benefit plan), whether
for its own account or at the request of one or more Holders pursuant to Section
6.13(a), the Partnership shall give prompt written notice of such proposed
registration to all Holders and shall use all reasonable efforts to include such
number or amount of Common Units held by the Holders in such registration
statement as the Holders shall request. If the proposed offering pursuant to
this Section 6.13(b) shall be an underwritten offering by the Partnership for
its own account, then, in the event that the managing underwriter of such
offering advises the Partnership and the Holders in writing that in its opinion
the inclusion of all or some of the Holders' Common Units would adversely and
materially affect the success of the offering, the Partnership shall include in
such offering only that number or amount, if any, of Common Units held by the
Holders which, in the opinion of the managing underwriter, will not so adversely
and materially affect the offering. If the proposed offering pursuant to this
Section 6.13(b) shall be an underwritten offering made at the request of one or
more Holders (the "Requesting Holder") pursuant to Section 6.13(a), then, in the
event that the managing underwriter of such offering advises the Partnership and
the Holders (other than the Requesting Holder) in writing that in its opinion
the inclusion of all or some of the Holders' Common Units would adversely and
materially affect the success of the offering, the Partnership shall include in
such offering only that number or amount, if any, of Common Units held by
Holders (other than the Requesting Holder) which, in the opinion of the managing
underwriter, will not so adversely and materially affect the offering. Except as
set forth in Section 6.13(c), all costs and expenses of any registration and
offering pursuant to this Section 6.13(b) (other than the underwriting discounts
and commissions for Common Units sold by the Holders) shall be paid by the
Partnership, without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 6.13, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters. Further, in
addition to and not in limitation of the Partnership's obligation under Section
6.7, the Partnership shall, to the fullest extent permitted by law, indemnify
and hold harmless the Holder, its officers, directors and each Person who
controls the Holder (within the meaning of the Securities Act) and any agent
thereof (collectively, "Indemnified Persons") against any losses, claims,
demands, actions, causes of action, assessments, damages, liabilities (joint or
several), costs and expenses (including, without limitation, interest, penalties
and reasonable attorneys' fees and disbursements), resulting to, imposed upon,
or incurred by the Indemnified Persons, directly or indirectly, under the
Securities Act or otherwise (hereinafter referred to in this Section 6.13(c) as
a "claim" and in the plural as "claims"), based upon, arising out of, or
resulting from any untrue statement or alleged untrue statement of any material
fact contained in any registration statement under which any Common Units were
registered under the Securities Act or any state securities or Blue Sky laws, in
any preliminary prospectus (if used prior to the effective date of such
registration statement), or in any summary or final prospectus or in any
amendment or supplement thereto (if used during the period the Partnership is
required to keep the registration statement current), or arising out of, based
upon or resulting from the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
made therein not misleading; PROVIDED, HOWEVER, that the Partnership shall not
be liable to any Indemnified Person to the extent that any such claim arises out
of, is based upon or results from an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
such preliminary, summary or final prospectus or such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Partnership by or on behalf of such Indemnified Person specifically for use in
the preparation thereof.
(d) The provisions of Sections 6.13(a) and 6.13(b) shall continue to be
applicable with respect to the General Partners (and any of the General
Partners' Affiliates) after they cease to be Partners of the Partnership, during
a period of two years subsequent to the effective date of such cessation and for
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so long thereafter as is required for the Holder to sell all of the Common Units
or other securities of the Partnership with respect to which it has requested
during such two-year period that a registration statement be filed; PROVIDED,
HOWEVER, that the Partnership shall not be required to file successive
registration statements covering the same Common Units for which registration
was demanded during such two-year period. The provisions of Section 6.13(c)
shall continue in effect thereafter.
(e) Any request to register Common Units pursuant to this Section 6.13 shall
(i) specify the Common Units intended to be offered and sold by the Person
making the request, (ii) express such Person's present intent to offer such
Common Units for distribution, (iii) describe the nature or method of the
proposed offer and sale of Common Units, and (iv) contain the undertaking of
such Person to provide all such information and materials and take all action as
may be required in order to permit the Partnership to comply with all applicable
requirements in connection with the registration of such Common Units.
6.14 RELIANCE BY THIRD PARTIES. Notwithstanding anything to the contrary
in this Agreement, any Person dealing with the Partnership shall be entitled to
assume that the Managing General Partner and any officer of the Partnership
authorized by the Managing General Partner to act on behalf and in the name of
the Partnership has full power and authority to encumber, sell or otherwise use
in any manner any and all assets of the Partnership and to enter into any
contracts on behalf of the Partnership, and such Person shall be entitled to
deal with the Managing General Partner or any such officer as if it were the
Partnership's sole party in interest, both legally and beneficially. Each
Limited Partner hereby waives any and all defenses or other remedies that may be
available against such Person to contest, negate or disaffirm any action of the
Managing General Partner or any such officer in connection with any such
dealing. In no event shall any Person dealing with the Managing General Partner
or any such officer or its representatives be obligated to ascertain that the
terms of this Agreement have been complied with or to inquire into the necessity
or expedience of any act or action of the Managing General Partner or any such
officer. Each and every certificate, document or other instrument executed on
behalf of the Partnership by the Managing General Partner or any such officer
shall be conclusive evidence in favor of any and every Person relying thereon or
claiming thereunder that (a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (b) the Person executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on behalf of the
Partnership and (c) such certificate, document or instrument was duly executed
and delivered in accordance with the terms and provisions of this Agreement and
is binding upon the Partnership.
ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
7.1 LIMITATION OF LIABILITY. The Limited Partners and the Assignees shall
have no liability under this Agreement except as expressly provided in this
Agreement or the Delaware Act.
7.2 MANAGEMENT OF BUSINESS. No Limited Partner or Assignee (other than a
General Partner, any of its Affiliates or any officer, director, employee,
partner, member, manager, agent or trustee of a General Partner or any of its
Affiliates or of any general partner thereof, in its capacity as such, if such
Person shall also be a Limited Partner or Assignee) shall participate in the
operation, management or control (within the meaning of the Delaware Act) of the
Partnership's business, transact any business in the Partnership's name or have
the power to sign documents for or otherwise bind the Partnership. The
transaction of any such business by a General Partner, any of its Affiliates or
any officer, director, employee, partner, member, manager, agent or trustee of
such General Partner or any of its Affiliates or of any general partner thereof,
in its capacity as such, shall not affect, impair or eliminate the limitations
on the liability of the Limited Partners or Assignees under this Agreement.
7.3 OUTSIDE ACTIVITIES. Subject to the provisions of Section 6.5, which
shall continue to be applicable to the Persons referred to therein, regardless
of whether such Persons shall also be Limited
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Partners or Assignees, any Limited Partner or Assignee shall be entitled to and
may have business interests and engage in business activities in addition to
those relating to the Partnership, including, without limitation, business
interests and activities in direct competition with the Partnership or the
Operating Partnership. Neither the Partnership nor any of the other Partners or
Assignees shall have any rights by virtue of this Agreement in any business
ventures of any Limited Partner or Assignee.
7.4 RETURN OF CAPITAL. No Limited Partner or Assignee shall be entitled to
the withdrawal or return of its Capital Contribution, except to the extent, if
any, that distributions made pursuant to this Agreement or upon termination of
the Partnership may be considered as such by law and then only to the extent
provided for in this Agreement. Except to the extent provided by Article V or as
otherwise expressly provided in this Agreement, no Limited Partner or Assignee
shall have priority over any other Limited Partner or Assignee either as to the
return of Capital Contributions or as to profits, losses or distributions. Any
such return shall be a compromise to which all Partners and Assignees agree
within the meaning of Section 17-502(b) of the Delaware Act.
7.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP. (a) In
addition to other rights provided by this Agreement or by applicable law, and
except as limited by Section 7.5(b), each Limited Partner shall have the right,
for a purpose reasonably related to such Limited Partner's interest as a limited
partner in the Partnership, upon reasonable demand and at such Limited Partner's
own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local tax returns for each year;
(iii) to have furnished to him, upon notification to the Managing General
Partner, a current list of the name and last known business, residence or
mailing address of each Partner;
(iv) to have furnished to him, upon notification to the Managing General
Partner, a copy of this Agreement and the Certificate of Limited Partnership
and all amendments thereto, together with a copy of the executed copies of
all powers of attorney pursuant to which this Agreement, the Certificate of
Limited Partnership and all amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash and
a description and statement of the Agreed Value of any other Capital
Contribution by each Partner and which each Partner has agreed to contribute
in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) Notwithstanding any other provision of this Agreement, the Managing
General Partner may keep confidential from the Limited Partners and Assignees,
for such period of time as the Managing General Partner deems reasonable, any
information that the Managing General Partner reasonably believes to be in the
nature of trade secrets or other information the disclosure of which the
Managing General Partner in good faith believes is not in the best interests of
the Partnership or the Operating Partnership or could damage the Partnership or
the Operating Partnership or that the Partnership or the Operating Partnership
are required by law or by agreements with third parties to keep confidential
(other than agreements with Affiliates the primary purpose of which is to
circumvent the obligations set forth in this Section 7.5).
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
8.1 RECORDS AND ACCOUNTING. The Managing General Partner shall keep or
cause to be kept at the principal office of the Partnership appropriate books
and records with respect to the Partnership's
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business, including, without limitation, all books and records necessary to
provide to the Limited Partners any information, lists and copies of documents
required to be provided pursuant to Section 7.5(a). Any books and records
maintained by or on behalf of the Partnership in the regular course of its
business, including, without limitation, the record of the Record Holders and
Assignees of Units or other Partnership Securities, books of account and records
of Partnership proceedings, may be kept on, or be in the form of, computer
disks, hard drives, punch cards, magnetic tape, photographs, micrographics or
any other information storage device; provided, that the books and records so
maintained are convertible into clearly legible written form within a reasonable
period of time. The books of the Partnership shall be maintained, for both tax
and financial reporting purposes, on an accrual basis in accordance with
generally accepted accounting principles.
8.2 FISCAL YEAR. The fiscal year of the Partnership shall be the calendar
year.
8.3 REPORTS. (a) As soon as practicable, but in no event later than 120
days after the close of each fiscal year of the Partnership, the Managing
General Partner shall cause to be mailed to each Record Holder of a Unit as of a
date selected by the Managing General Partner in its sole discretion, an annual
report containing financial statements of the Partnership for such fiscal year
of the Partnership, presented in accordance with generally accepted accounting
principles, including a balance sheet and statements of operations, Partners'
equity and cash flows, such statements to be audited by a firm of independent
public accountants selected by the Managing General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each year, the Managing General
Partner shall cause to be mailed to each Record Holder of a Unit, as of a date
selected by the Managing General Partner in its sole discretion, a report
containing unaudited financial statements of the Partnership and such other
information as may be required by applicable law, regulation or rule of any
National Securities Exchange on which the Units are listed for trading, or as
the Managing General Partner determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
9.1 PREPARATION OF TAX RETURNS. The Managing General Partner shall arrange
for the preparation and timely filing of all returns required of the Partnership
for federal and state tax purposes and shall use all reasonable efforts to
furnish, within 90 days of the close of each calendar year, the tax information
reasonably required by holders of Outstanding Units for federal and state income
tax reporting purposes. The classification, realization and recognition of
income, gain, losses and deductions and other items shall be on the accrual
method of accounting for federal income tax purposes. The taxable year of the
Partnership shall be the calendar year.
9.2 TAX ELECTIONS. Except as otherwise provided herein, the Managing
General Partner shall, in its sole discretion, determine whether to make any
available election pursuant to the Code; PROVIDED, HOWEVER, that the Managing
General Partner shall make the election under Section 754 of the Code in
accordance with applicable regulations thereunder. The Managing General Partner
shall have the right to seek to revoke any such election (including, without
limitation, the election under Section 754 of the Code) upon the Managing
General Partner's determination in its sole discretion that such revocation is
in the best interests of the Limited Partners and Assignees. For purposes of
computing the adjustments under Section 743(b) of the Code, the Managing General
Partner shall be authorized (but not required) to adopt a convention whereby the
price paid by a transferee of Units will be deemed to be the lowest quoted
closing price of the Units on any National Securities Exchange on which such
Units are traded during the calendar month in which such transfer is deemed to
occur pursuant to Section 5.2(g) without regard to the actual price paid by such
transferee.
9.3 TAX CONTROVERSIES. Subject to the provisions hereof, the Managing
General Partner is designated the Tax Matters Partner (as defined in Section
6231 of the Code), and is authorized and
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required to represent the Partnership (at the Partnership's expense) in
connection with all examinations of the Partnership's affairs by tax
authorities, including, without limitation, resulting administrative and
judicial proceedings, and to expend Partnership funds for professional services
and costs associated therewith. Each Partner and Assignee agrees to cooperate
with the Managing General Partner and to do or refrain from doing any or all
things reasonably required by the Managing General Partner to conduct such
proceedings.
9.4 ORGANIZATIONAL EXPENSES. The Partnership shall elect to deduct
expenses, if any, incurred by it in organizing the Partnership ratably over a
60-month period as provided in Section 709 of the Code.
9.5 WITHHOLDING. Notwithstanding any other provision of this Agreement,
the Managing General Partner is authorized to take any action that it determines
in its sole discretion to be necessary or appropriate to cause the Partnership
and the Operating Partnership to comply with any withholding requirements
established under the Code or any other federal, state or local law including,
without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of the Code.
To the extent that the Partnership is required to withhold and pay over to any
taxing authority any amount resulting from the allocation or distribution of
income to any Partner or Assignee (including, without limitation, by reason of
Section 1446 of the Code), the amount withheld may be treated as a distribution
of Available Cash in the amount of such withholding from such Partner.
9.6 ENTITY-LEVEL TAXATION. If legislation is enacted or the interpretation
of existing law is modified or interpreted in a manner that causes the
Partnership or the Operating Partnership to be treated as an association taxable
as a corporation or otherwise subjects the Partnership or the Operating
Partnership to entity-level taxation for federal, state or local income tax
purposes, the Minimum Quarterly Distribution and each Target Distribution, as
the case may be, shall be reduced to an amount equal to the product obtained by
multiplying (a) the amount thereof by (b) one minus the sum of (i) the maximum
effective federal income tax rate to which the Partnership is subject as an
entity plus (ii) any increase that results from such legislation in the
effective overall state and local income tax rate to which the Partnership is
subject as an entity for the taxable year in which such event occurs (after
taking into account the benefit of any deduction allowable for federal income
tax purposes with respect to the payment of state and local income taxes), but
only to the extent of the increase in such rates resulting from such legislation
or interpretation. Such effective overall state and local income tax rate shall
be determined for the taxable year next preceding the first taxable year during
which the Partnership or the Operating Partnership is taxable for federal income
tax purposes as an association taxable as a corporation or is otherwise subject
to entity-level taxation by determining such rate as if the Partnership or the
Operating Partnership had been subject to such state and local taxes during such
preceding taxable year.
9.7 ENTITY-LEVEL ARREARAGE COLLECTIONS. If the Partnership is required by
applicable law to pay any federal, state or local income tax on behalf of, or
withhold such amount with respect to, any Partner or Assignee or any former
Partner or Assignee (a) the Managing General Partner shall cause the Partnership
to pay such tax on behalf of such Partner or Assignee or former Partner or
Assignee from the funds of the Partnership; (b) any amount so paid on behalf of,
or withheld with respect to, any Partner or Assignee shall constitute a
distribution out of Available Cash to such Partner or Assignee pursuant to
Section 5.3; PROVIDED, HOWEVER, in the discretion of the Managing General
Partner, such taxes (if pertaining to all Partners) may be considered to be cash
disbursements of the Partnership which reduce Available Cash, but the payment or
withholding thereof shall not be deemed to be a distribution of Available Cash
to such Partners; and (c) to the extent any such Partner or Assignee (but not a
former Partner or Assignee) is not then entitled to such distribution under this
Agreement, the Managing General Partner shall be authorized, without the
approval of any Partner or Assignee, to amend this Agreement insofar as is
necessary to maintain the uniformity of intrinsic tax characteristics as to all
Units and to make subsequent adjustments to distributions in a manner which, in
the reasonable judgment of the Managing General Partner, will make as little
alteration as practicable in the priority and amount of distributions otherwise
applicable under this Agreement, and will not
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otherwise alter the distributions to which Partners and Assignees are entitled
under this Agreement. If the Partnership is permitted (but not required) by
applicable law to pay any such tax on behalf of, or withhold such amount with
respect to, any Partner or Assignee or former Partner or Assignee, the Managing
General Partner shall be authorized (but not required) to cause the Partnership
to pay such tax from the funds of the Partnership and to take any action
consistent with this Section 9.7. The Managing General Partner shall be
authorized (but not required) to take all necessary or appropriate actions to
collect all or any portion of a deficiency in the payment of any such tax that
relates to prior periods and that is attributable to Persons who were Limited
Partners or Assignees when such deficiencies arose, from such Persons.
9.8 OPINIONS OF COUNSEL. Notwithstanding any other provision of this
Agreement, if the Partnership or the Operating Partnership is treated as an
association taxable as a corporation at any time or is otherwise taxable for
federal income tax purposes as an entity at any time and, pursuant to the
provisions of this Agreement, an Opinion of Counsel would otherwise be required
to the effect that an action will not cause the Partnership or the Operating
Partnership to become so treated as an association taxable as a corporation or
otherwise taxable as an entity for federal income tax purposes, such requirement
for an Opinion of Counsel shall be deemed automatically waived.
ARTICLE X
CERTIFICATES
10.1 CERTIFICATES. Upon the Partnership's issuance of Common Units or
Subordinated Units to any Person, the Partnership shall issue one or more
Certificates in the name of such Person evidencing the number of such Units
being so issued. Certificates shall be executed on behalf of the Partnership by
the Managing General Partner. No Common Unit Certificate shall be valid for any
purpose until it has been countersigned by the Transfer Agent. The Partners
holding Certificates evidencing Subordinated Units may exchange such
Certificates for Certificates evidencing Common Units on or after the date on
which such Subordinated Units are converted into Common Units pursuant to the
terms of Section 5.7.
10.2 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. (a) The Managing
General Partner shall cause to be kept on behalf of the Partnership a register
in which, subject to such reasonable regulations as it may prescribe and subject
to the provisions of Section 10.2(b), the Managing General Partner will provide
for the registration and transfer of Units. The Transfer Agent is hereby
appointed registrar and transfer agent for the purpose of registering Units and
transfers of such Units as herein provided. The Partnership shall not recognize
transfers of Certificates representing Units unless such transfers are effected
in the manner described in this Section 10.2. Upon surrender for registration of
transfer of any Units evidenced by a Certificate, and subject to the provisions
of Section 10.2(b), the Managing General Partner on behalf of the Partnership
shall execute, and the Transfer Agent shall countersign and deliver, in the name
of the holder or the designated transferee or transferees, as required pursuant
to the holder's instructions, one or more new Certificates evidencing the same
aggregate number of Units as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 11.5, the Partnership shall not
recognize any transfer of Units until the Certificates evidencing such Units are
surrendered for registration of transfer and such Certificates are accompanied
by a Transfer Application duly executed by the transferee (or the transferee's
attorney-in-fact duly authorized in writing). No charge shall be imposed by the
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Partnership for such transfer, PROVIDED, that as a condition to the issuance of
any new Certificate under this Section 10.2, the Managing General Partner may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed with respect thereto.
10.3 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES. (a) If any
mutilated Certificate is surrendered to the Transfer Agent, the Managing General
Partner on behalf of the Partnership shall execute, and upon its request the
Transfer Agent shall countersign and deliver in exchange therefor, a new
Certificate evidencing the same number of Units as the Certificate so
surrendered.
(b) The Managing General Partner on behalf of the Partnership shall execute,
and upon its request the Transfer Agent shall countersign and deliver a new
Certificate in place of any Certificate previously issued if the Record Holder
of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to the
Managing General Partner, that a previously issued Certificate has been
lost, destroyed or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the Managing General Partner, delivers to the
Partnership a bond, in form and substance satisfactory to the Managing
General Partner, with surety or sureties and with fixed or open penalty as
the Managing General Partner may reasonably direct, in its sole discretion,
to indemnify the Partnership, the Managing General Partner and the Transfer
Agent against any claim that may be made on account of the alleged loss,
destruction or theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the Managing
General Partner.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Units represented by the Certificate is
registered before the Partnership, the Managing General Partner or the Transfer
Agent receives such notification, the Limited Partner or Assignee shall be
precluded from making any claim against the Partnership, the Managing General
Partner or the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this Section
10.3, the Managing General Partner may require the payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including, without limitation, the fees and
expenses of the Transfer Agent) reasonably connected therewith.
10.4 RECORD HOLDER. In accordance with Section 10.2(b), the Partnership
shall be entitled to recognize the Record Holder as the Limited Partner or
Assignee with respect to any Units and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such Units on the part
of any other Person, whether or not the Partnership shall have actual or other
notice thereof, except as otherwise provided by law or any applicable rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are listed for trading. Without limiting the foregoing, when a
Person (such as a broker, dealer, bank, trust company or clearing corporation or
an agent of any of the foregoing) is acting as nominee, agent or in some other
representative capacity for another Person in acquiring and/or holding Units, as
between the Partnership on the one hand, and such other Persons, on the other,
such representative Person (a) shall be the Limited Partner or Assignee (as the
case may be) of record and beneficially, (b) must execute and deliver a Transfer
Application and (c) shall be bound by this Agreement and shall have the rights
and obligations of a Limited Partner or Assignee (as the case may be) hereunder
and as provided for herein.
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ARTICLE XI
TRANSFER OF INTERESTS
11.1 TRANSFER. (a) The term "transfer," when used in this Article XI with
respect to a Partnership Interest, shall be deemed to refer to a transaction by
which a General Partner assigns its Partnership Interest as a general partner in
the Partnership to another Person, by which the holder of a Unit assigns such
Unit to another Person who is or becomes an Assignee, and includes a sale,
assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any
other disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article XI.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article XI shall be null and void.
(c) Nothing contained in this Article XI, or elsewhere in this Partnership
Agreement, shall preclude the settlement of any transactions involving Common
Units entered into through the facilities of the New York Stock Exchange.
(d) Nothing contained in this Article XI shall be construed to prevent a
disposition by an owner of a General Partner of any or all of the issued and
outstanding capital stock or partnership interests, as the case may be, of such
General Partner.
11.2 TRANSFER OF GENERAL PARTNERS' PARTNERSHIP INTEREST. Except for a
transfer by a General Partner of all, but not less than all, of its Partnership
Interest as a general partner in the Partnership to (a) an Affiliate of such
General Partner or (b) another Person in connection with the merger or
consolidation of such General Partner with or into another Person or the
transfer by such General Partner of all or substantially all of its assets to
another Person, the transfer by a General Partner of all or any part of its
Partnership Interest as a general partner in the Partnership to a Person prior
to December 31, 2004 shall be subject to the prior approval of at least a
majority of the Outstanding Units (excluding, during the Subordination Period,
Units owned by the General Partners and their Affiliates). Notwithstanding
anything herein to the contrary, no transfer by a General Partner of all or any
part of its Partnership Interest as a general partner in the Partnership to
another Person shall be permitted unless (i) the transferee agrees to assume the
rights and duties of such General Partner under this Agreement and, in the case
of the Managing General Partner, the Operating Partnership Agreement and to be
bound by the provisions of this Agreement and, in the case of the Managing
General Partner, the Operating Partnership Agreement, (ii) the Partnership
receives an Opinion of Counsel that such transfer would not result in the loss
of limited liability of any Limited Partner or of any limited partner of the
Operating Partnership or cause the Partnership or the Operating Partnership to
be treated as an association taxable as a corporation or otherwise to be taxed
as an entity for federal income tax purposes, (iii) in the case of a transfer of
the Managing General Partner's Partnership Interest, such transferee also agrees
to purchase all (or the appropriate portion thereof, if applicable) of the
partnership interest of the Managing General Partner as the general partner of
the Operating Partnership and (iv) in the case of a transfer of the Special
General Partner's Partnership Interest, the Managing General Partner consents to
such transfer. In the case of a transfer pursuant to and in compliance with this
Section 11.2, the transferee or successor (as the case may be) shall, subject to
compliance with the terms of Section 12.3, be admitted to the Partnership as a
General Partner immediately prior to the transfer of the Partnership Interest,
and the business of the Partnership shall continue without dissolution.
11.3 TRANSFER OF UNITS. (a) Units may be transferred only in the manner
described in Section 10.2. The transfer of any Units and the admission of any
new Partner shall not constitute an amendment to this Agreement.
(b) Until admitted as a Substitute Limited Partner pursuant to Article XII,
the Record Holder of a Unit shall be an Assignee in respect of such Unit.
Limited Partners may include custodians, nominees, or any other individual or
entity in its own or any representative capacity.
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(c) Each distribution in respect of Units shall be paid by the Partnership,
directly or through the Transfer Agent or through any other Person or agent,
only to the Record Holders thereof as of the Record Date set for the
distribution. Such payment shall constitute full payment and satisfaction of the
Partnership's liability in respect of such payment, regardless of any claim of
any Person who may have an interest in such payment by reason of an assignment
or otherwise.
(d) A transferee who has completed and delivered a Transfer Application
shall be deemed to have (i) requested admission as a Substitute Limited Partner,
(ii) agreed to comply with and be bound by and to have executed this Agreement,
(iii) represented and warranted that such transferee has the right, power and
authority and, if an individual, the capacity to enter into this Agreement, (iv)
granted the powers of attorney set forth in this Agreement and (v) given the
consents and approvals and made the waivers contained in this Agreement.
11.4 RESTRICTIONS ON TRANSFERS. Notwithstanding the other provisions of
this Article XI, no transfer of any Unit or interest therein of any Limited
Partner or Assignee shall be made if such transfer would (a) violate the then
applicable federal or state securities laws or rules and regulations of the
Commission, any state securities commission or any other governmental
authorities with jurisdiction over such transfer, (b) result in the taxation of
the Partnership or the Operating Partnership as an association taxable as a
corporation or otherwise subject the Partnership or the Operating Partnership to
entity-level taxation for federal income tax purposes or (c) affect the
Partnership's or the Operating Partnership's existence or qualification as a
limited partnership under the Delaware Act.
11.5 CITIZENSHIP CERTIFICATES; NON-CITIZEN ASSIGNEES. (a) If the
Partnership or the Operating Partnership is or becomes subject to any federal,
state or local law or regulation that, in the reasonable determination of the
Managing General Partner, creates a substantial risk of cancellation or
forfeiture of any property in which the Partnership or the Operating Partnership
has an interest based on the nationality, citizenship or other related status of
a Limited Partner or Assignee, the Managing General Partner may request any
Limited Partner or Assignee to furnish to the Managing General Partner, within
30 days after receipt of such request, an executed Citizenship Certification or
such other information concerning his nationality, citizenship or other related
status (or, if the Limited Partner or Assignee is a nominee holding for the
account of another Person, the nationality, citizenship or other related status
of such Person) as the Managing General Partner may request. If a Limited
Partner or Assignee fails to furnish to the Managing General Partner within the
aforementioned 30-day period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification or other
requested information the Managing General Partner determines, with the advice
of counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the
Units owned by such Limited Partner or Assignee shall be subject to redemption
in accordance with the provisions of Section 11.6. In addition, the Managing
General Partner may require that the status of any such Limited Partner or
Assignee be changed to that of a Non-citizen Assignee, and, thereupon, the
Managing General Partner shall be substituted for such Non-citizen Assignee as
the Limited Partner, in respect of his Units.
(b) The Managing General Partner shall, in exercising voting rights in
respect of Units held by it on behalf of Non-citizen Assignees, distribute the
votes in the same ratios as the votes of Limited Partners in respect of Units
other than those of Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have
no right to receive a distribution in kind pursuant to Section 14.4 but shall be
entitled to the cash equivalent thereof, and the Managing General Partner shall
provide cash in exchange for an assignment of the Non-citizen Assignee's share
of the distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the Managing General Partner from the
Non-citizen Assignee of his Partnership Interest (representing his right to
receive his share of such distribution in kind).
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(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the Managing General
Partner, request admission as a Substitute Limited Partner with respect to any
Units of such Non-citizen Assignee not redeemed pursuant to Section 11.6, and
upon his admission pursuant to Section 12.2 the General Partner shall cease to
be deemed to be the Limited Partner in respect of the Non-citizen Assignee's
Units.
11.6 REDEMPTION OF INTERESTS. (a) If at any time a Limited Partner or
Assignee fails to furnish a Citizenship Certification or other information
requested within the 30-day period specified in Section 11.5(a), or if upon
receipt of such Citizenship Certification or other information the Managing
General Partner determines, with the advice of counsel, that a Limited Partner
or Assignee is not an Eligible Citizen, the Partnership may, unless the Limited
Partner or Assignee establishes to the satisfaction of the Managing General
Partner that such Limited or Assignee is an Eligible Citizen or has transferred
his Units to a Person who furnishes a Citizenship Certification to the Managing
General Partner prior to the date fixed for redemption as provided below, redeem
the Partnership Interest of such Limited Partner or Assignee as follows:
(i) The Managing General Partner shall, not later than the 30th day
before the date fixed for redemption, give notice of redemption to the
Limited Partner or Assignee, at his last address designated on the records
of the Partnership or the Transfer Agent, by registered or certified mail,
postage prepaid. The notice shall be deemed to have been given when so
mailed. The notice shall specify the Redeemable Units, the date fixed for
redemption, the place of payment, that payment of the redemption price will
be made upon surrender of the Certificate(s) evidencing the Redeemable Units
and that on and after the date fixed for redemption no further allocations
or distributions to which the Limited Partner or Assignee would otherwise be
entitled in respect of the Redeemable Units will accrue or be made.
(ii) The aggregate redemption price for Redeemable Units shall be an
amount equal to the Current Market Price (the date of determination of which
shall be the date fixed for redemption) of Units of the class to be so
redeemed multiplied by the number of Units of each such class included among
the Redeemable Units. The redemption price shall be paid, in the sole
discretion of the Managing General Partner, in cash or by delivery of a
promissory note of the Partnership in the principal amount of the redemption
price, bearing interest at the rate of 10% annually and payable in three
equal annual installments of principal together with accrued interest,
commencing one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Units, duly endorsed in blank or accompanied by an
assignment duly executed in blank, the Limited Partner or Assignee or his
duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Units shall no longer
constitute issued and Outstanding Units.
(b) The provisions of this Section 11.6 shall also be applicable to Units
held by a Limited Partner or Assignee as nominee of a Person determined to be
other than an Eligible Citizen.
(c) Nothing in this Section 11.6 shall prevent the recipient of a notice of
redemption from transferring his Units before the redemption date if such
transfer is otherwise permitted under this Agreement. Upon receipt of notice of
such a transfer, the Managing General Partner shall withdraw the notice of
redemption, provided, the transferee of such Units certifies in the Transfer
Application that he is an Eligible Citizen. If the transferee fails to make such
certification, such redemption shall be effected from the transferee on the
original redemption date.
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ARTICLE XII
ADMISSION OF PARTNERS
12.1 ADMISSION OF INITIAL LIMITED PARTNERS. The Initial Limited Partners
were admitted to the Partnership on the Initial Closing Date.
12.2 ADMISSION OF SUBSTITUTE LIMITED PARTNERS. By transfer of a Unit in
accordance with Article XI, the transferor shall be deemed to have given the
transferee the right to seek admission as a Substitute Limited Partner, subject
to the conditions of, and in the manner permitted under, this Agreement. A
transferor of a Certificate shall, however, only have the authority to convey to
a purchaser or other transferee who does not execute and deliver a Transfer
Application (a) the right to negotiate such Certificate to a purchaser or other
transferee and (b) the right to transfer the right to request admission as a
Substitute Limited Partner, to such purchaser or other transferee who executes
and delivers a Transfer Application in respect of the transferred Units. Each
transferee of a Unit (including, without limitation, any nominee holder or an
agent acquiring such Unit for the account of another Person) who executes and
delivers a Transfer Application shall, by virtue of such execution and delivery,
be an Assignee and be deemed to have applied to become a Substitute Limited
Partner, with respect to the Units so transferred to such Person. Such Assignee
shall become a Substitute Limited Partner, (x) at such time as the Managing
General Partner consents thereto, which consent may be given or withheld in the
Managing General Partner's sole discretion, and (y) when any such admission is
shown on the books and records of the Partnership. If such consent is withheld,
such transferee shall be an Assignee. An Assignee shall have an interest in the
Partnership equivalent to that of a Limited Partner, with respect to allocations
and distributions, including, without limitation, liquidating distributions, of
the Partnership. With respect to voting rights attributable to Units that are
held by Assignees, the Managing General Partner shall be deemed to be the
Limited Partner with respect thereto and shall, in exercising the voting rights
in respect of such Units on any matter, vote such Units at the written direction
of the Assignee who is the Record Holder of such Units. If no such written
direction is received, such Units will not be voted. An Assignee shall have no
other rights of a Limited Partner.
12.3 ADMISSION OF SUCCESSOR GENERAL PARTNERS. A successor General Partner
approved pursuant to Section 13.1, 13.2 or 13.4 or the transferee of or
successor to all of such General Partner's Partnership Interest as a general
partner in the Partnership pursuant to Section 11.2 who is proposed to be
admitted as a successor General Partner shall be admitted to the Partnership as
the Managing General Partner or the Special General Partner, as the case may be,
effective immediately prior to the withdrawal or removal of the Managing General
Partner or the Special General Partner, as the case may be, pursuant to Section
13.1, 13.2 or 13.4 or the transfer of such General Partner's Partnership
Interest as a general partner in the Partnership pursuant to Section 11.2;
PROVIDED, HOWEVER, that no such successor shall be admitted to the Partnership
until compliance with the terms of Section 11.2 has occurred and such successor
has executed and delivered such other documents or instruments as may be
required to effect such admission. Any such successor shall, subject to the
terms hereof, carry on the business of the Partnership and, in the case of the
Managing General Partner, Operating Partnership without dissolution.
12.4 ADMISSION OF ADDITIONAL LIMITED PARTNERS. (a) A Person (other than a
General Partner, an Initial Limited Partner or a Substitute Limited Partner) who
makes a Capital Contribution to the Partnership in accordance with this
Agreement shall be admitted to the Partnership as an Additional Limited Partner
only upon furnishing to the Managing General Partner (i) evidence of acceptance
in form satisfactory to the Managing General Partner of all of the terms and
conditions of this Agreement, including, without limitation, the power of
attorney granted in Section 1.4, and (ii) such other documents or instruments as
may be required in the discretion of the Managing General Partner to effect such
Person's admission as an Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 12.4, no Person
shall be admitted as an Additional Limited Partner without the consent of the
Managing General Partner, which consent
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may be given or withheld in the Managing General Partner's sole discretion. The
admission of any Person as an Additional Limited Partner shall become effective
on the date upon which the name of such Person is recorded as such in the books
and records of the Partnership, following the consent of the Managing General
Partner to such admission.
12.5 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP. To
effect the admission to the Partnership of any Partner, the Managing General
Partner shall take all steps necessary and appropriate under the Delaware Act to
amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practical an amendment of this Agreement and,
if required by law, to prepare and file an amendment to the Certificate of
Limited Partnership and may for this purpose, among others, exercise the power
of attorney granted pursuant to Section 1.4.
ARTICLE XIII
WITHDRAWAL OR REMOVAL OF PARTNERS
13.1 WITHDRAWAL OF THE MANAGING GENERAL PARTNER. (a) The Managing General
Partner shall be deemed to have withdrawn from the Partnership upon the
occurrence of any one of the following events (each such event herein referred
to as an "Event of Withdrawal");
(i) the Managing General Partner voluntarily withdraws from the
Partnership by giving written notice to the other Partners (and it shall be
deemed that the Managing General Partner has withdrawn pursuant to this
Section 13.1(a)(i) if the Managing General Partner voluntarily withdraws as
general partner of the Operating Partnership);
(ii) the Managing General Partner transfers all of its rights as
Managing General Partner pursuant to Section 11.2;
(iii) the Managing General Partner is removed pursuant to Section 13.2;
(iv) the Managing General Partner (A) makes a general assignment for the
benefit of creditors; (B) files a voluntary bankruptcy petition; (C) files a
petition or answer seeking for itself a reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under
any law; (D) files an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against the Managing
General Partner in a proceeding of the type described in clauses (A)-(C) of
this Section 13.1(a)(iv); or (E) seeks, consents to or acquiesces in the
appointment of a trustee, receiver or liquidator of the Managing General
Partner or of all or any substantial part of its properties;
(v) a final and non-appealable judgment is entered by a court with
appropriate jurisdiction ruling that the Managing General Partner is
bankrupt or insolvent, or a final and non-appealable order for relief is
entered by a court with appropriate jurisdiction against the Managing
General Partner, in each case under any federal or state bankruptcy or
insolvency laws as now or hereafter in effect; or
(vi) a certificate of dissolution or its equivalent is filed for the
Managing General Partner, or 90 days expire after the date of notice to the
Managing General Partner of revocation of its charter without a
reinstatement of its charter, under the laws of its state of incorporation.
If an Event of Withdrawal specified in Section 13.1(a)(iv), (v) or (vi)
occurs, the withdrawing Managing General Partner shall give notice to the
Limited Partners within 30 days after such occurrence. The Partners hereby agree
that only the Events of Withdrawal described in this Section 13.1 shall result
in the withdrawal of the Managing General Partner from the Partnership.
(b) Withdrawal of the Managing General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Initial Closing Date and ending at 5:00 p.m., Pacific Standard
Time, on December 31, 2004, the Managing General Partner voluntarily
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withdraws by giving at least 90 days' advance notice of its intention to
withdraw to the Limited Partners, PROVIDED, that prior to the effective date of
such withdrawal the withdrawal is approved by Limited Partners holding at least
two-thirds of the Outstanding Units (excluding Units owned by the General
Partners and their Affiliates) and the Managing General Partner delivers to the
Partnership an Opinion of Counsel ("Withdrawal Opinion of Counsel") that such
withdrawal (following the selection of the successor Managing General Partner)
would not result in the loss of the limited liability of any Limited Partner or
of the limited partner of the Operating Partnership or cause the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal income tax
purposes; (ii) at any time after 5:00 p.m., Pacific Standard Time, on December
31, 2004, the Managing General Partner voluntarily withdraws by giving at least
90 days' advance notice to the Limited Partners, such withdrawal to take effect
on the date specified in such notice; (iii) at any time that the Managing
General Partner ceases to be the Managing General Partner pursuant to Section
13.1(a)(ii) or is removed pursuant to Section 13.2; or (iv) notwithstanding
clause (i) of this sentence, at any time that the Managing General Partner
voluntarily withdraws by giving at least 90 days' advance notice of its
intention to withdraw to the Limited Partners, such withdrawal to take effect on
the date specified in the notice, if at the time such notice is given one Person
and its Affiliates (other than the General Partners and their Affiliates) own
beneficially or of record or control at least 50% of the Outstanding Units. The
withdrawal of the Managing General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall also constitute the withdrawal of the
Managing General Partner as general partner of the Operating Partnership. If the
Managing General Partner gives a notice of withdrawal pursuant to Section
13.1(a)(i), holders of at least a majority of the Outstanding Units (excluding
for purposes of such determination Units owned by the General Partners and their
Affiliates) may, prior to the effective date of such withdrawal, elect a
successor Managing General Partner. If, prior to the effective date of the
Managing General Partner's withdrawal, a successor is selected by the Limited
Partners as provided herein, the Partnership, as the limited partner of the
Operating Partnership, shall cause such Person to become the successor general
partner of the Operating Partnership, as provided in the Operating Partnership
Agreement. If, prior to the effective date of the Managing General Partner's
withdrawal, a successor is not selected by the Limited Partners as provided
herein or the Partnership does not receive a Withdrawal Opinion of Counsel, the
Partnership shall be dissolved in accordance with Section 14.1. Any successor
Managing General Partner elected in accordance with the terms of this Section
13.1 shall be subject to the provisions of Section 12.3.
13.2 REMOVAL OF THE MANAGING GENERAL PARTNER. The Managing General Partner
may be removed if such removal is approved by Limited Partners holding at least
two-thirds of the Outstanding Units (excluding Units owned by the General
Partners and their Affiliates). Any such action by such Limited Partners for
removal of the Managing General Partner must also provide for the election of a
successor Managing General Partner by Limited Partners holding at least a
majority of the Outstanding Units (excluding Units held by the General Partners
and their Affiliates). Such removal shall be effective immediately following the
admission of a successor Managing General Partner pursuant to Article XII. The
removal of the Managing General Partner shall also automatically constitute the
removal of the Managing General Partner as general partner of the Operating
Partnership, as provided in the Operating Partnership Agreement. If a Person is
elected as the successor Managing General Partner in accordance with the terms
of this Section 13.2, the Partnership, as the limited partner of the Operating
Partnership, shall cause such Person to become the successor general partner of
the Operating Partnership, as provided in the Operating Partnership Agreement.
The right of the Limited Partners holding Outstanding Units to remove the
Managing General Partner shall not exist or be exercised unless the Partnership
has received an opinion opining as to the matters covered by a Withdrawal
Opinion of Counsel. Any successor Managing General Partner elected in accordance
with the terms of this Section 13.2 shall be subject to the provisions of
Section 12.3.
13.3 INTEREST OF DEPARTING PARTNER AND SUCCESSOR GENERAL PARTNERS. (a) In
the event of (i) withdrawal of a General Partner under circumstances where such
withdrawal does not violate this Agreement or (ii) removal of a General Partner
by the Limited Partners under circumstances where
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Cause does not exist, if a successor General Partner is elected in accordance
with the terms of Section 13.1, 13.2 or 13.4, the Departing Partner shall have
the option exercisable prior to the effective date of the departure of such
Departing Partner to require its successor to purchase its Partnership Interest
as a general partner in the Partnership and, in case of the Managing General
Partner, its partnership interest as the general partner in the Operating
Partnership (the "Interest") in exchange for an amount in cash equal to the fair
market value of such Interest, such amount to be determined and payable as of
the effective date of its departure. If a General Partner is removed by the
Limited Partners under circumstances where Cause exists or if a General Partner
withdraws under circumstances where such withdrawal violates this Agreement or,
in case of the Managing General Partner, the Operating Partnership Agreement,
and if a successor General Partner is elected in accordance with the terms of
Section 13.1, 13.2 or 13.4, such successor shall have the option, exercisable
prior to the effective date of the departure of such Departing Partner, to
purchase the Interest of the Departing Partner for such fair market value of
such Interest. In either event, the Departing Partner shall be entitled to
receive all reimbursements due such Departing Partner pursuant to Section 6.4,
including, without limitation, any employee-related liabilities (including,
without limitation, severance liabilities), incurred in connection with the
termination of any employees employed by the General Partner for the benefit of
the Partnership or the Operating Partnership. Subject to Section 13.3(b), the
Departing Partner shall, as of the effective date of its departure, cease to
share in any allocations or distributions with respect to its Partnership
Interest as a General Partner of the Partnership and Partnership income, gain,
loss, deduction and credit will be prorated and allocated as set forth in
Section 5.2(g).
For purposes of this Section 13.3(a), the fair market value of a Departing
Partner's Interest shall be determined by agreement between the Departing
Partner and its successor or, failing agreement within 30 days after the
effective date of such Departing Partner's departure, by an independent
investment banking firm or other independent expert selected by the Departing
Partner and its successor, which, in turn, may rely on other experts and the
determination of which shall be conclusive as to such matter. If such parties
cannot agree upon one independent investment banking firm or other independent
expert within 45 days after the effective date of such departure, then the
Departing Partner shall designate an independent investment banking firm or
other independent expert, the Departing Partner's successor shall designate an
independent investment banking firm or other independent expert, and such firms
or experts shall mutually select a third independent investment banking firm or
independent expert, which shall determine the fair market value of the Interest.
In making its determination, such independent investment banking firm or other
independent expert shall consider the then current trading price of Units on any
National Securities Exchange on which Units are then listed, the value of the
Partnership's assets, the rights and obligations of the General Partner and
other factors it may deem relevant.
(b) If the Interest is not purchased in the manner set forth in Section
13.3(a), the Departing Partner shall become a Limited Partner and the Interest
shall be converted into Common Units equal to the fair market value of such
interest pursuant to a valuation made by an investment banking firm or other
independent expert selected pursuant to Section 13.3(a), without reduction in
such Partnership Interest (but subject to proportionate dilution by reason of
the admission of its successor). Any successor General Partner shall indemnify
the Departing Partner as to all debts and liabilities of the Partnership arising
on or after the date on which the Departing Partner becomes a Limited Partner.
For purposes of this Agreement, conversion of a General Partner's Interest to
Common Units will be characterized as if the General Partner contributed its
Interest to the Partnership in exchange for the newly issued Common Units.
(c) If a successor General Partner is elected in accordance with the terms
of Section 13.1, 13.2 or 13.4 and the option described in Section 13.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
capital of the Partnership cash in an amount such that its Capital Account,
after giving effect to such contribution and any adjustments made to the Capital
Accounts of all Partners pursuant to
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Section 4.5(b)(vii), shall be equal to that percentage of the Capital Accounts
of all Partners that is equal to its Percentage Interest as such General
Partner. In such event, such successor General Partner shall, subject to the
following sentence, be entitled to such Percentage Interest of all Partnership
allocations and distributions and any other allocations and distributions to
which the Departing Partner was entitled. In addition, a successor Managing
General Partner shall cause this Agreement to be amended to reflect that, from
and after the date of such successor Managing General Partner's admission, the
successor Managing General Partner's interest in all Partnership distributions
and allocations shall be .99%.
13.4 WITHDRAWAL OR REMOVAL OF SPECIAL GENERAL PARTNER. (a) The Special
General Partner may withdraw from the Partnership in the capacity of Special
General Partner (i) upon 90 days' advance written notice to the Managing General
Partner or (ii) by transferring its general partner interest in the Partnership
pursuant to Section 11.2 hereof. Such withdrawal shall take effect on the date
specified in such notice. Upon receiving such notice, the Managing General
Partner shall select a successor Special General Partner within such 90-day
period. Any withdrawal of the Special General Partner shall not become effective
unless the Partnership has received by the end of such 90-day period an Opinion
of Counsel that such withdrawal will not result in the loss of limited liability
of any Limited Partner or cause the Partnership to be treated as a corporation
or as an association taxable as a corporation for federal income tax purposes.
Following any withdrawal of the Special General Partner, the business and
operations of the Partnership shall be continued by the Managing General
Partner.
(b) In addition to the voluntary withdrawal described above, the Special
General Partner shall be deemed to have withdrawn (i) when and if, the Special
General Partner (A) makes a general assignment for the benefit of creditors, (B)
files a voluntary bankruptcy petition, (C) files a petition or answer seeking
for itself a reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any law, (D) files an answer or
other pleading admitting or failing to contest the material allegations of a
petition filed against the Special General Partner in a proceeding of the type
described in clauses (A)-(C) of this subsection, or (E) seeks, consents to or
acquiesces in the appointment of a trustee, receiver or liquidator of the
Special General Partner or of all or any substantial part of its properties; or
(ii), when a final and non-appealable judgment is entered by a court with
appropriate jurisdiction ruling that the Special General Partner is bankrupt or
insolvent, or a final and non-appealable order for relief is entered by a court
with appropriate jurisdiction against the Special General Partner, in each case
under any federal or state bankruptcy or insolvency laws as now or hereinafter
in effect; or (iii) when a certificate of dissolution or its equivalent is filed
for the Special General Partner, or 90 days expire after the date of notice to
the Special General Partner of revocation of its charter without a reinstatement
of its charter, under the laws of its state of incorporation.
(c) The Special General Partner may be removed only if such removal is
approved by the written consent or affirmative vote of Limited Partners holding
at least 66 2/3% of the Outstanding Units (excluding Units owned by the General
Partners and their Affiliates). Any such action by the Limited Partners for
removal of the Special General Partner must also provide for the approval of a
successor Special General Partner. Such removal shall be effective immediately
following the admission of the successor Special General Partner pursuant to
Article XII hereof. The right of the Limited Partners to remove the Special
General Partner shall not exist or be exercised unless the Partnership has
received an Opinion of Counsel that the removal of the Special General Partner
and the selection of a successor Special General Partner will not result in (i)
the loss of limited liability of any Limited Partner or (ii) the taxation of the
Partnership as a corporation or the treatment of the Partnership as an
association taxable as a corporation for federal income tax purposes unless
already so taxed.
(d) Notwithstanding the other provisions of this Section 13.4, a successor
Special General Partner need not be selected if the Partnership has received an
Opinion of Counsel that the failure to select a successor would not cause the
Partnership to be treated as a corporation or as an association taxable as a
corporation for federal income tax purposes.
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13.5 WITHDRAWAL OF LIMITED PARTNERS. No Limited Partner shall have any
right to withdraw from the Partnership; provided, however, that when a
transferee of a Limited Partner's Units becomes a Record Holder, such
transferring Limited Partner shall cease to be a Limited Partner or with respect
to the Units so transferred.
ARTICLE XIV
DISSOLUTION AND LIQUIDATION
14.1 DISSOLUTION. The Partnership shall not be dissolved by the admission
of Substitute Limited Partners or Additional Limited Partners, by the admission
of a successor Managing General Partner or successor Special General Partner in
accordance with the terms of this Agreement or by the withdrawal of the Special
General Partner pursuant to Section 13.4 hereof. Upon the removal or withdrawal
of the Managing General Partner, if a successor Managing General Partner is
elected pursuant to Section 13.1 or 13.2, the Partnership shall not be dissolved
and such successor Managing General Partner shall continue the business of the
Partnership. The Partnership shall dissolve, and (subject to Section 14.2) its
affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 1.5;
(b) an Event of Withdrawal of the Managing General Partner as provided
in Section 13.1(a) (other than Section 13.1(a)(ii)), unless a successor is
elected and an Opinion of Counsel is received as provided in Section 13.1(b)
or 13.2 and such successor is admitted to the Partnership pursuant to
Section 12.3;
(c) an election to dissolve the Partnership by the Managing General
Partner that is approved by at least a majority of the Outstanding Units
(excluding, during the Subordination Period, Units held by the General
Partners and their Affiliates) (and all Limited Partners hereby expressly
consent that such approval may be effected upon written consent of said
applicable percentage of the Outstanding Units);
(d) entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership and the Operating Partnership taken as a whole.
14.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP AFTER
DISSOLUTION. Upon (a) dissolution of the Partnership following an Event of
Withdrawal caused by the withdrawal or removal of the Managing General Partner
as provided in Section 13.1(a)(i) or (iii) and the failure of the Partners to
select a successor to such Departing Partner pursuant to Section 13.1 or 13.2,
then within 90 days thereafter or (b) dissolution of the Partnership upon an
event constituting an Event of Withdrawal as defined in Section 13.1(a)(iv), (v)
or (vi), then within 180 days thereafter, a majority of the Outstanding Units
(excluding, during the Subordination Period, Units held by the General Partners
and their Affiliates) may elect to reconstitute the Partnership and continue its
business on the same terms and conditions set forth in this Agreement by forming
a new limited partnership on terms identical to those set forth in this
Agreement and having as the successor managing general partner a Person approved
by the holders of a majority of the Outstanding Units (excluding, during the
Subordination Period, Units held by the General Partners and their Affiliates).
Upon any such election by the holders of a majority of the Outstanding Units
(excluding, during the Subordination Period, Units held by the General Partners
and their Affiliates), all Partners shall be bound thereby and shall be deemed
to have approved thereof. Unless such an election is made within the applicable
time period as set forth above, the Partnership shall conduct only activities
necessary to wind up its affairs. If such an election is so made, then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 1.5 unless earlier dissolved in accordance with
this Article XIV;
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(ii) if the successor Managing General Partner is not the former
Managing General Partner, then the interest of the former Managing General
Partner shall be treated thenceforth as the interest of a Limited Partner
and converted into Common Units in the manner provided in Section 13.3(b);
and
(iii) all necessary steps shall be taken to cancel this Agreement and the
Certificate of Limited Partnership and to enter into and, as necessary, to
file a new partnership agreement and certificate of limited partnership, and
the successor managing general partner may for this purpose exercise the
powers of attorney granted the Managing General Partner pursuant to Section
1.4; PROVIDED, that the right of a majority of Outstanding Units (excluding,
during the Subordination Period, Units held by the General Partners and
their Affiliates) to approve a successor Managing General Partner and to
reconstitute and to continue the business of the Partnership shall not exist
and may not be exercised unless the Partnership has received an Opinion of
Counsel that (x) the exercise of the right would not result in the loss of
limited liability of any Limited Partner and (y) neither the Partnership,
the reconstituted limited partnership nor the Operating Partnership would be
treated as an association taxable as a corporation or otherwise be taxable
as an entity for federal income tax purposes upon the exercise of such right
to continue.
14.3 LIQUIDATION. Upon dissolution of the Partnership, unless the
Partnership is continued under an election to reconstitute and continue the
Partnership pursuant to Section 14.2, the Managing General Partner, or in the
event the Managing General Partner has been dissolved or removed, become
bankrupt as set forth in Section 13.1 or withdrawn from the Partnership, a
liquidator or liquidating committee approved by a majority of the Outstanding
Units, shall be the Liquidator. The Liquidator (if other than the Managing
General Partner) shall be entitled to receive such compensation for its services
as may be approved by a majority of the Outstanding Units. The Liquidator shall
agree not to resign at any time without 15 days' prior notice and (if other than
the Managing General Partner) may be removed at any time, with or without cause,
by notice of removal approved by the holders of a majority of the Outstanding
Units. Upon dissolution, removal or resignation of the Liquidator, a successor
and substitute Liquidator (who shall have and succeed to all rights, powers and
duties of the original Liquidator) shall within 30 days thereafter be approved
by a majority of the Outstanding Units. The right to approve a successor or
substitute Liquidator in the manner provided herein shall be deemed to refer
also to any such successor or substitute Liquidator approved in the manner
herein provided. Except as expressly provided in this Article XIV, the
Liquidator approved in the manner provided herein shall have and may exercise,
without further authorization or consent of any of the parties hereto, all of
the powers conferred upon the Managing General Partner under the terms of this
Agreement (but subject to all of the applicable limitations, contractual and
otherwise, upon the exercise of such powers, other than the limitation on sale
set forth in Section 6.3(b)) to the extent necessary or desirable in the good
faith judgment of the Liquidator to carry out the duties and functions of the
Liquidator hereunder for and during such period of time as shall be reasonably
required in the good faith judgment of the Liquidator to complete the winding up
and liquidation of the Partnership as provided for herein. The Liquidator shall
liquidate the assets of the Partnership, and apply and distribute the proceeds
of such liquidation in the following order of priority, unless otherwise
required by mandatory provisions of applicable law:
(a) the payment to creditors of the Partnership, including, without
limitation, Partners who are creditors, in the order of priority provided by
law; and the creation of a reserve of cash or other assets of the
Partnership for contingent liabilities in an amount, if any, determined by
the Liquidator to be appropriate for such purposes;
(b) to all Partners in accordance with, and to the extent of, the
positive balances in their respective Capital Accounts, as determined after
taking into account all Capital Account adjustments pursuant to the
provisions of this Agreement, in accordance with the requirements of
Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2); and
(c) to all Partners in accordance with their respective Percentage
Interests.
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14.4 DISTRIBUTIONS IN KIND. (a) Notwithstanding the provisions of Section
14.3, which require the liquidation of the assets of the Partnership, but
subject to the order of priorities set forth therein, if prior to or upon
dissolution of the Partnership the Liquidator determines that an immediate sale
of part or all of the Partnership's assets would be impractical or would cause
undue loss to the Partners, the Liquidator may, in its absolute discretion,
defer for a reasonable time the liquidation of any assets except those necessary
to satisfy liabilities of the Partnership (including, without limitation, those
to Partners as creditors) and/or distribute to the Partners or to specific
classes of Partners, in lieu of cash, as tenants in common and in accordance
with the provisions of Section 14.3, undivided interests in such Partnership
assets as the Liquidator deems not suitable for liquidation. Any such
distributions in kind shall be made only if, in the good faith judgment of the
Liquidator, such distributions in kind are in the best interest of the Limited
Partners, and shall be subject to such conditions relating to the disposition
and management of such properties as the Liquidator deems reasonable and
equitable and to any agreements governing the operation of such properties at
such time. The Liquidator shall determine the fair market value of any property
distributed in kind using such reasonable method of valuation as it may adopt.
(b) In accordance with Section 704(c)(1)(B) of the Code, in the case of any
deemed distribution occurring as a result of a termination of the Partnership
pursuant to Section 708(b)(1)(B) of the Code, to the maximum extent possible
consistent with the priorities of Section 14.3, the Managing General Partner
shall have sole discretion to treat the deemed distribution of Partnership
assets to Partners as occurring in a manner that will not cause a shift of the
Book-Tax Disparity attributable to a Partnership asset existing immediately
prior to the deemed distribution to another asset upon the deemed contribution
of assets to the reconstituted Partnership, including, without limitation,
deeming the distribution of any Partnership assets to be made either to the
Partner who contributed such assets or to the transferee of such Partner.
14.5 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP. Upon the
completion of the distribution of Partnership cash and property as provided in
Sections 14.3 and 14.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
14.6 REASONABLE TIME FOR WINDING UP. A reasonable time shall be allowed
for the orderly winding up of business and affairs of the Partnership and the
liquidation of its assets pursuant to Section 14.3 or distributions in kind
pursuant to Section 14.4 in order to minimize any losses otherwise attendant
upon such winding up, and the provisions of this Agreement shall remain in
effect between the Partners during the period of liquidation.
14.7 RETURN OF CAPITAL. No General Partner shall be personally liable for,
nor shall have any obligation to contribute or loan any monies or property to
the Partnership to enable it to effectuate, the return of the Capital
Contributions of the Limited Partners, or any portion thereof, it being
expressly understood that any such return shall be made solely from Partnership
assets.
14.8 CAPITAL ACCOUNT RESTORATION. No Limited Partner shall have any
obligation to restore any negative balance in its Capital Account upon
liquidation of the Partnership. Each General Partner shall be obligated to
restore any negative balance in its Capital Account upon liquidation of its
interest in the Partnership by the end of the taxable year of the Partnership
during which such liquidation occurs, or, if later, within 90 days after the
date of such liquidation.
14.9 WAIVER OF PARTITION. Each Partner hereby waives any right to
partition of the Partnership property.
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ARTICLE XV
AMENDMENT OF PARTNERSHIP AGREEMENT;
MEETINGS; RECORD DATE
15.1 AMENDMENT TO BE ADOPTED SOLELY BY MANAGING GENERAL PARTNER. Each
Limited Partner agrees that the Managing General Partner (pursuant to its powers
of attorney from the Limited Partners and Assignees), without the approval of
any Limited Partner or Assignee, may amend any provision of this Agreement, and
execute, swear to, acknowledge, deliver, file and record whatever documents may
be required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the Managing General
Partner, is necessary or appropriate to qualify or continue the
qualification of the Partnership as a limited partnership or a partnership
in which the limited partners have limited liability under the laws of any
state or that is necessary or advisable in the opinion of the Managing
General Partner to ensure that the Partnership and the Operating Partnership
will not be treated as associations taxable as a corporation or otherwise
taxed as an entity for federal income tax purposes;
(d) a change (i) that, in the sole discretion of the Managing General
Partner, does not adversely affect the Limited Partners in any material
respect, (ii) that is necessary or desirable to satisfy any requirements,
conditions or guidelines contained in any opinion, directive, order, ruling
or regulation of any federal or state agency or judicial authority or
contained in any federal or state statute (including, without limitation,
the Delaware Act) or that is necessary or desirable to facilitate the
trading of the Units (including, without limitation, the division of
Outstanding Units into different classes to facilitate uniformity of tax
consequences within such classes of Units) or comply with any rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are or will be listed for trading, compliance with any of
which the Managing General Partner determines in its sole discretion to be
in the best interests of the Partnership and the Limited Partners or (iii)
that is necessary or desirable to implement certain tax-related provisions
of the Partnership Agreement, or (iv) that is required to effect the intent
of the provisions of this Agreement or is otherwise contemplated by this
Agreement;
(e) a change in the fiscal year and taxable year of the Partnership and
any changes that, in the sole discretion of the Managing General Partner,
are necessary or appropriate as a result of a change in the fiscal year and
taxable year of the Partnership including, without limitation, if the
Managing General Partner shall so determine, a change in the definition of
"Quarter" and the dates on which distributions are to be made by the
Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to
prevent the Partnership or either of the General Partners (or any general
partner thereof) or their directors, officers or managers acting on their
behalf (or on behalf of any general partner thereof) from in any manner
being subjected to the provisions of the Investment Company Act of 1940, as
amended, the Investment Advisers Act of 1940, as amended, or "plan asset"
regulations adopted under the Employee Retirement Income Security Act of
1974, as amended, whether or not substantially similar to plan asset
regulations currently applied or proposed by the United States Department of
Labor;
(g) subject to the terms of Section 4.3, an amendment that, in the sole
discretion of the Managing General Partner, is necessary or desirable in
connection with the authorization for issuance of any class or series of
Partnership Securities pursuant to Section 4.3;
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(h) any amendment expressly permitted in this Agreement to be made by
the Managing General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 16.3;
(j) an amendment that, in the sole discretion of the Managing General
Partner, is necessary or desirable to reflect, account for and deal with
appropriately the formation by the Partnership of, or investment by the
Partnership in, any corporation, partnership, joint venture, limited
liability company or other entity other than the Operating Partnership, in
connection with the conduct by the Partnership of activities permitted by
the terms of Section 3.1; or
(k) any other amendments substantially similar to the foregoing.
15.2 AMENDMENT PROCEDURES. Except as provided in Sections 15.1 and 15.3,
all amendments to this Agreement shall be made in accordance with the following
requirements. Amendments to this Agreement may be proposed only by or with the
consent of the Managing General Partner. A proposed amendment shall be effective
upon its approval by the holders of at least a majority of the Outstanding
Units, unless a greater or different percentage is required under this
Agreement. Each proposed amendment that requires the approval of the holders of
a specified percentage of Outstanding Units shall be set forth in a writing that
contains the text of the proposed amendment. If such an amendment is proposed,
the Managing General Partner shall seek the written approval of the requisite
percentage of Outstanding Units or call a meeting of the Limited Partners to
consider and vote on such proposed amendment. The Managing General Partner shall
notify all Record Holders upon final adoption of any such proposed amendments.
15.3 AMENDMENT REQUIREMENTS. (a) Notwithstanding the provisions of
Sections 15.1 and 15.2, no provision of this Agreement that establishes a
percentage of Outstanding Units required to take any action shall be amended,
altered, changed, repealed or rescinded in any respect that would have the
effect of reducing such voting requirement unless such amendment is approved by
the written consent or the affirmative vote of holders of Outstanding Units
whose aggregate Outstanding Units constitute not less than the voting
requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 15.1 and 15.2, no amendment
to this Agreement may (i) enlarge the obligations of any Limited Partner without
its consent, (ii) enlarge the obligations of either of the General Partners
without its consent, which may be given or withheld in its sole discretion,
(iii) modify the amounts distributable, reimbursable or otherwise payable to the
General Partners by the Partnership or the Operating Partnership, (iv) change
Section 14.1(a) or (c), (v) restrict in any way any action by or rights of the
Managing General Partner as set forth in this Agreement or (vi) change the term
of the Partnership or, except as set forth in Section 14.1(c), give any Person
the right to dissolve the Partnership.
(c) Except as otherwise provided, and without limitation of the Managing
General Partner's authority to adopt amendments to this Agreement as
contemplated in Section 15.1, any amendment that would have a material adverse
effect on the rights or preferences of any class of Outstanding Units in
relation to other classes of Units must be approved by the holders of not less
than a majority of the Outstanding Units of the class affected (excluding,
during the Subordination Period, Units owned by the General Partners and their
Affiliates).
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 6.3 or 15.1 and except as otherwise provided by
Section 16.3(b), no amendments shall become effective without the approval of
the holders of at least 95% of the Outstanding Units unless the Partnership
obtains an Opinion of Counsel to the effect that (a) such amendment will not
cause the Partnership or the Operating Partnership to be treated as an
association taxable as a corporation or otherwise taxable as an entity for
federal income tax purposes and (b) such amendment will not affect the limited
liability of any Limited Partner or any limited partner of the Operating
Partnership under applicable law.
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(e) This Section 15.3 shall only be amended with the approval of the holders
of not less than 95% of the Outstanding Units.
15.4 MEETINGS. All acts of Limited Partners to be taken pursuant to this
Agreement shall be taken in the manner provided in this Article XV. Meetings of
the Limited Partners may be called by the Managing General Partner or by Limited
Partners owning 20% or more of the Outstanding Units of the class or classes for
which a meeting is proposed. Limited Partners shall call a meeting by delivering
to the Managing General Partner one or more requests in writing stating that the
signing Limited Partners, wish to call a meeting and indicating the general or
specific purposes for which the meeting is to be called. Within 60 days after
receipt of such a call from Limited Partners or within such greater time as may
be reasonably necessary for the Partnership to comply with any statutes, rules,
regulations, listing agreements or similar requirements governing the holding of
a meeting or the solicitation of proxies for use at such a meeting, the Managing
General Partner shall send a notice of the meeting to the Limited Partners,
either directly or indirectly through the Transfer Agent. A meeting shall be
held at a time and place determined by the Managing General Partner on a date
not more than 60 days after the mailing of notice of the meeting. Limited
Partners shall not vote on matters that would cause the Limited Partners to be
deemed to be taking part in the management and control of the business and
affairs of the Partnership so as to jeopardize the limited liability of the
Limited Partners under the Delaware Act or the law of any other state in which
the Partnership is qualified to do business.
15.5 NOTICE OF A MEETING. Notice of a meeting called pursuant to Section
15.4 shall be given to the Record Holders in writing by mail or other means of
written communication in accordance with Section 18.1. The notice shall be
deemed to have been given at the time when deposited in the mail or sent by
other means of written communication.
15.6 RECORD DATE. For purposes of determining the Limited Partners
entitled to notice of or to vote at a meeting of the Limited Partners or to give
approvals without a meeting as provided in Section 15.11, the Managing General
Partner may set a Record Date, which shall not be less than 10 nor more than 60
days before (a) the date of the meeting (unless such requirement conflicts with
any rule, regulation, guideline or requirement of any National Securities
Exchange on which the Units are listed for trading, in which case the rule,
regulation, guideline or requirement of such exchange shall govern) or (b) in
the event that approvals are sought without a meeting, the date by which Limited
Partners are requested in writing by the Managing General Partner to give such
approvals.
15.7 ADJOURNMENT. When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting and a new Record Date need not
be fixed, if the time and place thereof are announced at the meeting at which
the adjournment is taken, unless such adjournment shall be for more than 45
days. At the adjourned meeting, the Partnership may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than 45 days or if a new Record Date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given in accordance with this Article
XV.
15.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES. The
transactions of any meeting of Limited Partners, however called and noticed, and
whenever held, shall be as valid as if had at a meeting duly held after regular
call and notice, if a quorum is present either in person or by proxy, and if,
either before or after the meeting, Limited Partners representing such quorum
who were present in person or by proxy and entitled to vote, sign a written
waiver of notice or an approval of the holding of the meeting or an approval of
the minutes thereof. All waivers and approvals shall be filed with the
Partnership records or made a part of the minutes of the meeting. Attendance of
a Limited Partner at a meeting shall constitute a waiver of notice of the
meeting, except when the Limited Partner does not approve, at the beginning of
the meeting, of the transaction of any business because the meeting is not
lawfully called or convened; and except that attendance at a meeting is not a
waiver of any right to disapprove the consideration of matters required to be
included in the notice of the meeting, but not so included, if the disapproval
is expressly made at the meeting.
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15.9 QUORUM. The holders of two-thirds of the Outstanding Units of the
class or classes for which a meeting has been called, represented in person or
by proxy shall constitute a quorum at a meeting of Limited Partners of such
class or classes, unless any such action by the Limited Partners requires
approval by holders of a majority in interest of such Units, in which case the
quorum shall be a majority of such Outstanding Units (excluding, if such are to
be excluded from the vote, Outstanding Units owned by the General Partners and
their Affiliates). At any meeting of the Limited Partners duly called and held
in accordance with this Agreement at which a quorum is present, the act of
Limited Partners holding Outstanding Units that in the aggregate represent a
majority of the Outstanding Units entitled to vote and be present in person or
by proxy at such meeting shall be deemed to constitute the act of all Limited
Partners, unless a greater or different percentage is required with respect to
such action under the provisions of this Agreement, in which case the act of the
Limited Partners holding Outstanding Units that in the aggregate represent at
least such greater or different percentage shall be required. The Limited
Partners present at a duly called or held meeting at which a quorum is present
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Limited Partners to leave less than a quorum, if any action
taken (other than adjournment) is approved by the required percentage of
Outstanding Units specified in this Agreement. In the absence of a quorum, any
meeting of Limited Partners may be adjourned from time to time by the
affirmative vote of a majority of the Outstanding Units represented either in
person or by proxy, but no other business may be transacted, except as provided
in Section 15.7.
15.10 CONDUCT OF MEETING. The Managing General Partner shall have full
power and authority concerning the manner of conducting any meeting of the
Limited Partners or solicitation of approvals in writing, including, without
limitation, the determination of Persons entitled to vote, the existence of a
quorum, the satisfaction of the requirements of Section 15.4, the conduct of
voting, the validity and effect of any proxies and the determination of any
controversies, votes or challenges arising in connection with or during the
meeting or voting. The Managing General Partner shall designate a Person to
serve as chairman of any meeting and shall further designate a Person to take
the minutes of any meeting. All minutes shall be kept with the records of the
Partnership maintained by the Managing General Partner. The Managing General
Partner may make such other regulations consistent with applicable law and this
Agreement as it may deem advisable concerning the conduct of any meeting of the
Limited Partners or solicitation of approvals in writing, including, without
limitation, regulations in regard to the appointment of proxies, the appointment
and duties of inspectors of votes and approvals, the submission and examination
of proxies and other evidence of the right to vote, and the revocation of
approvals in writing.
15.11 ACTION WITHOUT A MEETING. Any action that may be taken at a meeting
of the Limited Partners may be taken without a meeting if an approval in writing
setting forth the action so taken is signed by Limited Partners owning not less
than the minimum percentage of the Outstanding Units that would be necessary to
authorize or take such action at a meeting at which all the Limited Partners
were present and voted. Prompt notice of the taking of action without a meeting
shall be given to the Limited Partners who have not approved in writing. The
Managing General Partner may specify that any written ballot submitted to
Limited Partners for the purpose of taking any action without a meeting shall be
returned to the Partnership within the time period, which shall be not less than
20 days, specified by the Managing General Partner. If a ballot returned to the
Partnership does not vote all of the Units held by the Limited Partner, the
Partnership shall be deemed to have failed to receive a ballot for the Units
that were not voted. If approval of the taking of any action by the Limited
Partners is solicited by any Person other than by or on behalf of the Managing
General Partner, the written approvals shall have no force and effect unless and
until (a) they are deposited with the Partnership in care of the Managing
General Partner, (b) approvals sufficient to take the action proposed are dated
as of a date not more than 90 days prior to the date sufficient approvals are
deposited with the Partnership and (c) an Opinion of Counsel is delivered to the
Managing General Partner to the effect that the exercise of such right and the
action proposed to be taken with respect to any particular matter (i) will not
cause the Limited Partners to be deemed to be taking part in the management and
control of the business and affairs of the Partnership so as to jeopardize the
Limited
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Partners' limited liability, (ii) will not jeopardize the status of the
Partnership as a partnership under applicable tax laws and regulations and (iii)
is otherwise permissible under the state statutes then governing the rights,
duties and liabilities of the Partnership and the Partners.
15.12 VOTING AND OTHER RIGHTS. (a) Only those Record Holders of Units on
the Record Date set pursuant to Section 15.6 (and also subject to the
limitations contained in the definition of "Outstanding") shall be entitled to
notice of, and to vote at, a meeting of Limited Partners or to act with respect
to matters as to which the holders of the Outstanding Units have the right to
vote or to act. All references in this Agreement to votes of, or other acts that
may be taken by, the Outstanding Units shall be deemed to be references to the
votes or acts of the Record Holders of such Outstanding Units.
(b) With respect to Units that are held for a Person's account by another
Person (such as a broker, dealer, bank, trust company or clearing corporation,
or an agent of any of the foregoing), in whose name such Units are registered,
such broker, dealer or other agent shall, in exercising the voting rights in
respect of such Units on any matter, and unless the arrangement between such
Persons provides otherwise, vote such Units in favor of, and at the direction
of, the Person who is the beneficial owner, and the Partnership shall be
entitled to assume it is so acting without further inquiry. The provisions of
this Section 15.12(b) (as well as all other provisions of this Agreement) are
subject to the provisions of Section 10.4.
ARTICLE XVI
MERGER
16.1 AUTHORITY. The Partnership may merge or consolidate with one or more
corporations, business trusts or associations, real estate investment trusts,
common law trusts or unincorporated businesses, including, without limitation, a
general partnership or limited partnership, formed under the laws of the State
of Delaware or any other state of the United States of America, pursuant to a
written agreement of merger or consolidation ("Merger Agreement") in accordance
with this Article XVI.
16.2 PROCEDURE FOR MERGER OR CONSOLIDATION. Merger or consolidation of the
Partnership pursuant to this Article XVI requires the prior approval of the
Managing General Partner. If the Managing General Partner shall determine, in
the exercise of its sole discretion, to consent to the merger or consolidation,
the Managing General Partner shall approve the Merger Agreement, which shall set
forth:
(a) The names and jurisdictions of formation or organization of each of
the business entities proposing to merge or consolidate;
(b) The name and jurisdictions of formation or organization of the
business entity that is to survive the proposed merger or consolidation (the
"Surviving Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partnership interests, rights, securities or
obligations of the Surviving Business Entity; and (i) if any general or
limited partnership interests, securities or rights of any constituent
business entity are not to be exchanged or converted solely for, or into,
cash, property or general or limited partnership interests, rights,
securities or obligations of the Surviving Business Entity, the cash,
property or general or limited partnership interests, rights, securities or
obligations of any limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity) which the holders of such general
or limited partnership interests, securities or rights are to receive in
exchange for, or upon conversion of, their general or limited partnership
interests, securities or rights, and (ii) in the case of securities
represented by certificates, upon the surrender of such certificates, which
cash,
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property or general or limited partnership interests, rights, securities or
obligations of the Surviving Business Entity or any general or limited
partnership, corporation, trust or other entity (other than the Surviving
Business Entity), or evidences thereof, are to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership or other similar charter or governing
document) of the Surviving Business Entity to be effected by such merger or
consolidation;
(f) The effective time of the merger, which may be the date of the
filing of the certificate of merger pursuant to Section 16.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall be
fixed no later than the time of the filing of the certificate of merger and
stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the Managing General
Partner.
16.3 APPROVAL BY LIMITED PARTNERS OF MERGER OR CONSOLIDATION. (a) The
Managing General Partner of the Partnership, upon its approval of the Merger
Agreement, shall direct that the Merger Agreement be submitted to a vote of
Limited Partners whether at a meeting or by written consent, in either case in
accordance with the requirements of Article XV. A copy or a summary of the
Merger Agreement shall be included in or enclosed with the notice of a meeting
or the written consent.
(b) The Merger Agreement shall be approved upon receiving the affirmative
vote or consent of the holders of at least a majority of the Outstanding Units
(excluding for the purpose of such determination during the Subordination Period
Units owned by the General Partners and their Affiliates) unless the Merger
Agreement contains any provision which, if contained in an amendment to this
Agreement, the provisions of this Agreement or the Delaware Act would require
the vote or consent of a greater percentage of the Outstanding Units or of any
class of Limited Partners, in which case such greater percentage vote or consent
shall be required for approval of the Merger Agreement; PROVIDED that, in the
case of a merger or consolidation in which the surviving entity is a corporation
or other entity intended to be treated as an association taxable as a
corporation or otherwise taxable as an entity for federal income tax purposes,
if in the opinion of the Managing General Partner it is necessary to effect, in
contemplation of such merger or consolidation, an amendment that would otherwise
require a vote pursuant to Section 15.3(d), no such vote pursuant to Section
15.3(d) shall be required unless such amendment by its terms will be applicable
to the Partnership in the event the merger or consolidation is abandoned or
unless such amendment will be applicable to the Partnership during a period in
excess of ten days prior to the merger or consolidation.
(c) After such approval by vote or consent of the Limited Partners, and at
any time prior to the filing of the certificate of merger pursuant to Section
16.4, the merger or consolidation may be abandoned pursuant to provisions
therefor, if any, set forth in the Merger Agreement.
16.4 CERTIFICATE OF MERGER. Upon the required approval by the Managing
General Partner and the Limited Partners of a Merger Agreement, a certificate of
merger shall be executed and filed with the Secretary of State of the State of
Delaware in conformity with the requirements of the Delaware Act.
16.5 EFFECT OF MERGER. (a) At the effective time of the certificate of
merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all other
things and causes of action belonging to each of those business entities
shall be vested in the Surviving Business Entity and after the merger or
consolidation shall be the property of the Surviving Business Entity to the
extent they were of each constituent business entity;
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(ii) the title to any real property vested by deed or otherwise in any
of those constituent business entities shall not revert and is not in any
way impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity, and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not be
deemed to result in a transfer or assignment of assets or liabilities from one
entity to another having occurred.
ARTICLE XVII
RIGHT TO ACQUIRE UNITS
17.1 RIGHT TO ACQUIRE UNITS. (a) Notwithstanding any other provision of
this Agreement, if at any time not more than 10% of the total Units of any class
then Outstanding are held by Persons other than the General Partners and their
Affiliates, the Managing General Partner shall then have the right, which right
it may assign and transfer to the Partnership or any Affiliate of the Managing
General Partner, exercisable in its sole discretion, to purchase all, but not
less than all, of the Units of such class then Outstanding held by Persons other
than the General Partners and their Affiliates, at the greater of (x) the
Current Market Price as of the date three days prior to the date that the notice
described in Section 17.1(b) is mailed, and (y) the highest cash price paid by a
General Partner or any of its Affiliates for any such Unit purchased during the
90-day period preceding the date that the notice described in Section 17.1(b) is
mailed. As used in this Agreement, (i) "Current Market Price" as of any date of
any class of Partnership Interests listed or admitted to trading on any National
Securities Exchange means the average of the daily Closing Prices (as
hereinafter defined) for Partnership Interests of such class for the 20
consecutive Trading Days (as hereinafter defined) immediately prior to such
date; (ii) "Closing Price" for any day means the last sale price on such day,
regular way, or in case no such sale takes place on such day, the average of the
closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal National Securities Exchange on which the
Partnership Interests of such class are listed or admitted to trading or if the
Partnership Interests of such class are not listed or admitted to trading on any
National Securities Exchange, the last quoted price on such day or, if not so
quoted, the average of the high bid and low asked prices on such day in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or such other system then in use, or if
on any such day the Partnership Interests of such class are not quoted by any
such organization, the average of the closing bid and asked prices on such day
as furnished by a professional market maker making a market in the Partnership
Interests of such class selected by the Managing General Partner, or if on any
such day no market maker is making a market in the Partnership Interests of such
class, the fair value of such Partnership Interests on such day as determined
reasonably and in good faith by the Managing General Partner; and (iii) "Trading
Day" means a day on which the principal National Securities Exchange on which
the Partnership Interests of any class are listed or admitted to trading is open
for the transaction of business or, if Partnership Interests of a class are not
listed or admitted to trading on any National Securities Exchange, a day on
which banking institutions in New York City generally are open.
(b) If the Managing General Partner, any Affiliate of the Managing General
Partner or the Partnership elects to exercise the right to purchase Units
granted pursuant to Section 17.1(a), the Managing General Partner shall deliver
to the Transfer Agent notice of such election to purchase (the "Notice of
Election to Purchase") and shall cause the Transfer Agent to mail a copy of such
Notice of
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Election to Purchase to the Record Holders of Units (as of a Record Date
selected by the Managing General Partner) at least 30, but not more than 60,
days prior to the Purchase Date. Such Notice of Election to Purchase shall also
be published for a period of at least three consecutive days in at least two
daily newspapers of general circulation printed in the English language and
published in the Borough of Manhattan, New York. The Notice of Election to
Purchase shall specify the Purchase Date and the price (determined in accordance
with Section 17.1(a) at which Units will be purchased and state that the
Managing General Partner, its Affiliate or the Partnership, as the case may be,
elects to purchase such Units, upon surrender of Certificates representing such
Units in exchange for payment, at such office or offices of the Transfer Agent
as the Transfer Agent may specify, or as may be required by any National
Securities Exchange on which the Units are listed or admitted to trading. Any
such Notice of Election to Purchase mailed to a Record Holder of Units at his
address as reflected in the records of the Transfer Agent shall be conclusively
presumed to have been given whether or not the owner receives such notice. On or
prior to the Purchase Date, the Managing General Partner, its Affiliate or the
Partnership, as the case may be, shall deposit with the Transfer Agent cash in
an amount sufficient to pay the aggregate purchase price of all of the Units to
be purchased in accordance with this Section 17.1. If the Notice of Election to
Purchase shall have been duly given as aforesaid at least 10 days prior to the
Purchase Date, and if on or prior to the Purchase Date the deposit described in
the preceding sentence has been made for the benefit of the holders of Units
subject to purchase as provided herein, then from and after the Purchase Date,
notwithstanding that any Certificate shall not have been surrendered for
purchase, all rights of the holders of such Units (including, without
limitation, any rights pursuant to Articles IV, V and XIV) shall thereupon
cease, except the right to receive the purchase price (determined in accordance
with Section 17.1(a)) for Units therefor, without interest, upon surrender to
the Transfer Agent of the Certificates representing such Units, and such Units
shall thereupon be deemed to be transferred to the Managing General Partner, its
Affiliate or the Partnership, as the case may be, on the record books of the
Transfer Agent and the Partnership, and the Managing General Partner or any
Affiliate of the General Partner, or the Partnership, as the case may be, shall
be deemed to be the owner of all such Units from and after the Purchase Date and
shall have all rights as the owner of such Units (including, without limitation,
all rights as owner of such Units pursuant to Articles IV, V and XIV).
(c) At any time from and after the Purchase Date, a holder of an Outstanding
Unit subject to purchase as provided in this Section 17.1 may surrender his
Certificate, as the case may be, evidencing such Unit to the Transfer Agent in
exchange for payment of the amount described in Section 17.1(a), therefor,
without interest thereon.
ARTICLE XVIII
GENERAL PROVISIONS
18.1 ADDRESSES AND NOTICES. Any notice, demand, request, report or proxy
materials required or permitted to be given or made to a Partner or Assignee
under this Agreement shall be in writing and shall be deemed given or made when
delivered in person or when sent by first class United States mail or by other
means of written communication to the Partner or Assignee at the address
described below. Any notice, payment or report to be given or made to a Partner
or Assignee hereunder shall be deemed conclusively to have been given or made,
and the obligation to give such notice or report or to make such payment shall
be deemed conclusively to have been fully satisfied, upon sending of such
notice, payment or report to the Record Holder of such Unit at his address as
shown on the records of the Transfer Agent or as otherwise shown on the records
of the Partnership, regardless of any claim of any Person who may have an
interest in such Unit or the Partnership Interest of a General Partner by reason
of any assignment or otherwise. An affidavit or certificate of making of any
notice, payment or report in accordance with the provisions of this Section 18.1
executed by the Managing General Partner, the Transfer Agent or the mailing
organization shall be prima facie evidence of the giving or making of such
notice, payment or report. If any notice, payment or report addressed to a
Record Holder at the address of such Record Holder appearing on the books and
records of the Transfer Agent
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or the Partnership is returned by the United States Post Office marked to
indicate that the United States Postal Service is unable to deliver it, such
notice, payment or report and any subsequent notices, payments and reports shall
be deemed to have been duly given or made without further mailing (until such
time as such Record Holder or another Person notifies the Transfer Agent or the
Partnership of a change in his address) if they are available for the Partner or
Assignee at the principal office of the Partnership for a period of one year
from the date of the giving or making of such notice, payment or report to the
other Partners and Assignees. Any notice to the Partnership shall be deemed
given if received by the Managing General Partner at the principal office of the
Partnership designated pursuant to Section 1.3. The Managing General Partner may
rely and shall be protected in relying on any notice or other document from a
Partner, Assignee or other Person if believed by it to be genuine.
18.2 REFERENCES. Except as specifically provided otherwise, references to
"Articles" and "Sections" are to Articles and Sections of this Agreement.
18.3 PRONOUNS AND PLURALS. Whenever the context may require, any pronoun
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
18.4 FURTHER ACTION. The parties shall execute and deliver all documents,
provide all information and take or refrain from taking action as may be
necessary or appropriate to achieve the purposes of this Agreement.
18.5 BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their heirs, executors, administrators,
successors, legal representatives and permitted assigns.
18.6 INTEGRATION. This Agreement constitutes the entire agreement among
the parties hereto pertaining to the subject matter hereof and supersedes all
prior agreements and understandings pertaining thereto.
18.7 CREDITORS. None of the provisions of this Agreement shall be for the
benefit of, or shall be enforceable by, any creditor of the Partnership.
18.8 WAIVER. No failure by any party to insist upon the strict performance
of any covenant, duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon a breach thereof shall constitute waiver of
any such breach or any other covenant, duty, agreement or condition.
18.9 COUNTERPARTS. This Agreement may be executed in counterparts, all of
which together shall constitute an agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the original or the
same counterpart. Each party shall become bound by this Agreement immediately
upon affixing its signature hereto or, in the case of a Person acquiring a Unit,
upon accepting the certificate evidencing such Unit or executing and delivering
a Transfer Application as herein described, independently of the signature of
any other party.
18.10 APPLICABLE LAW. This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware, without regard to the
principles of conflicts of law.
18.11 INVALIDITY OF PROVISIONS. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein shall not be
affected thereby.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
MANAGING GENERAL PARTNER:
CROWN PACIFIC MANAGEMENT
LIMITED PARTNERSHIP
By: __________________________________
Roger L. Krage, Secretary,
HS Corp. of Oregon,
a general partner
SPECIAL GENERAL PARTNER:
CROWN PACIFIC, LTD.
By: __________________________________
Roger L. Krage, Secretary
LIMITED PARTNERS:
All Limited Partners now and
hereafter admitted as limited
partners of the Partnership,
pursuant to Powers of Attorney now
and hereafter executed in favor
of, and granted and delivered to,
the Managing General Partner.
By: CROWN PACIFIC MANAGEMENT
LIMITED PARTNERSHIP
Managing General Partner, as
attorney-in-fact for all Limited
Partners pursuant to the Powers of
Attorney granted pursuant to Section
1.4.
By: __________________________________
Roger L. Krage, Secretary,
HS Corp. of Oregon,
a general partner
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EXHIBIT A
TO THE SECOND AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF
CROWN PACIFIC PARTNERS, L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
CROWN PACIFIC PARTNERS, L.P.
No. _________ Common Units
CROWN PACIFIC MANAGEMENT LIMITED PARTNERSHIP, a Delaware limited
partnership, as the Managing General Partner of CROWN PACIFIC PARTNERS, L.P., a
Delaware limited partnership (the "Partnership"), hereby certifies that
(the "Holder") is the registered owner of Common Units representing limited
partner interests in the Partnership (the "Common Units") transferable on the
books of the Partnership, in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed and accompanied by a properly
executed application for transfer of the Common Units represented by this
Certificate. The rights, preferences and limitations of the Common Units are set
forth in, and this Certificate and the Common Units represented hereby are
issued and shall in all respects be subject to the terms and provisions of, the
Agreement of Limited Partnership of CROWN PACIFIC PARTNERS, L.P., as amended,
supplemented or restated from time to time (the "Partnership Agreement"). Copies
of the Partnership Agreement are on file at, and will be furnished without
charge on delivery of written request to the Partnership at, the principal
office of the Partnership located at 121 S.W. Morrison Street, Suite 1500,
Portland, Oregon 97204. Capitalized terms used herein but not defined shall have
the meaning given them in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement, (ii)
represented and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the Partnership
Agreement, (iii) granted the powers of attorney provided for in the Partnership
Agreement and (iv) made the waivers and given the consents and approvals
contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated:
<TABLE>
<S> <C>
CROWN PACIFIC MANAGEMENT
LIMITED PARTNERSHIP,
as Managing General Partner
Countersigned and Registered by:
, By:
as Transfer Agent and Registrar PRESIDENT
By: By:
Authorized Signature SECRETARY
</TABLE>
A-76
<PAGE>
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as follows according to applicable laws or
regulations:
<TABLE>
<S> <C> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT-
TEN ENT- as tenants by the entireties Custodian
JT TEN- as joint tenants with right of (Cust)(Minor)
survivorship and not as under Uniform Gifts to Minors
tenants in common Act
State
</TABLE>
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
CROWN PACIFIC PARTNERS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF CROWN PACIFIC PARTNERS, L.P.
You have acquired an interest in Crown Pacific Partners, L.P., 121 S.W.
Morrison Street, Portland, Oregon 97204, whose taxpayer identification number is
93-1154285. The Internal Revenue Service has issued Crown Pacific Partners, L.P.
the following tax shelter registration number: .
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY INCOME
BY REASON OF YOUR INVESTMENT IN CROWN PACIFIC PARTNERS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of Crown Pacific Partners, L.P. on Form 8271. FORM 8271
MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT,
OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN CROWN
PACIFIC PARTNERS, L.P.
If you transfer your interest in Crown Pacific Partners, L.P. to another
person, you are required by the Internal Revenue Service to keep a list
containing (a) that person's name, address and taxpayer identification number,
(b) the date on which you transferred the interest and (c) the name, address and
tax shelter registration number of Crown Pacific Partners, L.P. If you do not
want to keep such a list, you must (1) send the information specified above to
the Partnership, which will keep the list for this tax shelter, and (2) give a
copy of this notice to the person to whom you transfer your interest. Your
failure to comply with any of the above-described responsibilities could result
in the imposition of a penalty under Section 6707(b) or 6708(a) of the Internal
Revenue Code of 1986, as amended, unless such failure is shown to be due to
reasonable cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
A-77
<PAGE>
FOR VALUE RECEIVED, ______ hereby assigns, conveys, sells and transfers unto
<TABLE>
<S> <C>
(Please print or typewrite name (Please insert Social Security or other
and address of Assignee) identifying number of Assignee)
Common Units representing limited partner interests evidenced by this Certificate, subject
to the Partnership Agreement, and does hereby irrevocably constitute and appoint as its
attorney-in-fact with full power of substitution to transfer the same on the books of Crown
Pacific Partners, L.P.
Date: NOTE: The signature to any endorsement hereon
must correspond with the name as written upon
the face of this Certificate in every
particular, without alteration, enlargement
or change.
SIGNATURE(S) MUST BE GUARANTEED BY A MEMBER --------------------------------------------
FIRM OF THE NATIONAL ASSOCIATION OF (Signature)
SECURITIES DEALERS, INC. OR BY A COMMERCIAL
BANK OR TRUST COMPANY
--------------------------------------------
(Signature)
</TABLE>
SIGNATURE(S) GUARANTEED
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
A-78
<PAGE>
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substitute Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Agreement of
Limited Partnership of Crown Pacific Partners, L.P. (the "Partnership"), as
amended, supplemented or restated to the date hereof (the "Partnership
Agreement"), (b) represents and warrants that the Assignee has all right, power
and authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (c) grants the powers of attorney provided for in the
Partnership Agreement and (d) makes the waivers and gives the consents and
approvals contained in the Partnership Agreement.
Capitalized terms not defined herein have the meanings assigned to such
terms in the Partnership Agreement.
<TABLE>
<S> <C>
Date:
------------------------------------- -------------------------------------------
Signature of Assignee
- ------------------------------------------- -------------------------------------------
Social Security or other identifying Name and Address of Assignee
number of Assignee
- -------------------------------------------
Purchase Price
including commissions, if any
</TABLE>
Type of Entity (check one)
<TABLE>
<S> <C> <C> <C> <C> <C>
Individual Partnership Corporation
- --------- --------- ---------
Trust Other (specify)
- --------- ---------
</TABLE>
Nationality (check one):
____ U.S. Citizen, Resident or Domestic Entity
____ Foreign Corporation, or ____ Non-resident alien
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interest holder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interest holder).
A-79
<PAGE>
Complete Either A or B:
A. Individual Interest Holder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identifying number (Social Security Number) is
____________________________________________________________________.
3. My home address is
____________________________________________________________________.
B. Partnership, Corporate or Other Interest-Holder
1. ________________________ is not a foreign corporation, foreign
partnership, foreign
(Name of interest-holder)
trust or foreign estate (as those terms are defined in the Code and
Treasury Regulations).
2. The interest-holder's U.S. employer identification number is
____________________________________________________________________.
3. The interest-holder's office address and place of incorporation (if
applicable) is
____________________________________________________________________.
The interest-holder agrees to notify the Partnership within 60 days of the
date the interest-holder becomes a foreign person.
The interest-holder understands that this certificate may be disclosed to
the Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of
--------------------------------------
(Name of Interest-Holder)
--------------------------------------
Signature and Date
--------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-80
<PAGE>
APPENDIX B
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing such Common Units is
surrendered for registration of transfer and an Application for Transfer of
Common Units has been executed by a transferee either (a) on the form set forth
below or (b) on a separate application that the Partnership will furnish on
request without charge. A transferor of the Common Units shall have no duty to
the transferee with respect to execution of the transfer application in order
for such transferee to obtain registration of the transfer of the Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the interests evidenced hereby.
The Assignee (a) requests admission as a Substitute Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Crown Pacific Partners, L.P. (the
"Partnership"), as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the Managing General Partner
and, if a Liquidator shall be appointed, the Liquidator of the Partnership as
the Assignee's attorney-in-fact to execute, swear to, acknowledge and file any
document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the Partnership
and any amendment thereto, necessary or appropriate for the Assignee's admission
as a Substitute Limited Partner and as a party to the Partnership Agreement, (d)
gives the powers of attorney provided for in the Partnership Agreement and (e)
makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined herein have the meanings
assigned to such terms in the Partnership Agreement.
<TABLE>
<S> <C>
Date:
Signature of Assignee
Social Security or other identifying Name and Address of Assignee
number of Assignee
Purchase Price, including commissions,
if any
</TABLE>
<TABLE>
<S> <C> <C>
Type of Entity (Check One):
/ /
/ / Individual / / Partnership Corporation
/ / Trust / / Other (specify)
Nationality (Check One):
/ / U.S. Citizen, Resident or Domestic Entity
/ / Foreign Corporation, or / / Non-resident
Alien
</TABLE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
B-1
<PAGE>
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete either A or B:
<TABLE>
<C> <S>
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is .
3. My home address is .
B. Partnership, Corporation or Other Interestholder
1. is not a foreign corporation, foreign partnership,
(Name of Interestholder)
foreign trust or foreign estate (as those terms are defined in the Code
and Treasury Regulations).
2. The interestholder's U.S. employer identification number is
.
3. The interestholder's office address and place of incorporation (if
applicable) is
.
</TABLE>
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of
<TABLE>
<S> <C> <C>
(Name of Interestholder)
Signature and Date
Title (if applicable)
</TABLE>
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, the above
certification as to any Person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
B-2
<PAGE>
APPENDIX C
GLOSSARY
INDUSTRY TERMS
"6/4 lumber" means lumber having a nominal thickness of 1 1/2".
"BBF" means one billion board feet.
"Board" (BD) means yard lumber, a term generally applied to lumber when the
size is 1 inch thick or 2 or more inches wide.
"Board Foot" (BF) means a unit of lumber measurement 1 foot square and 1"
thick.
"Board Lumber" means a piece of lumber less than two inches in nominal
thickness and one inch or more in width, e.g., 1" x 2" or 1" x 4".
"Bone Dry Unit" means a ton of lumber or derivatives of lumber that is free
of moisture.
"Chips" means wood generated either in a whole log chip mill or as a
by-product of the manufacture of lumber and plywood and used in the manufacture
of pulp and paper and various composite panel products such as medium density
fiberboard, particle board and oriented strand board.
"Common" means the ordinary grades of knotty lumber.
"DBH" means "diameter breast height," a term frequently used to describe a
tree measurement taken 4 1/2 feet above ground level.
"Dimension Lumber" means framing lumber sawed to a nominal size of 2" thick
and 2" or more wide.
"Even age harvesting" means a timber management practice in which trees
planted in a stand of uniform age are harvested at the time of maximum growth.
Even age harvesting is practiced by Crown Pacific in the Washington Region and
involves the use of clear-cutting.
"Fee Timber" means timber which is located on property owned in fee, as
opposed to timber that is located on lands owned by other parties and is
acquired pursuant to cutting contracts.
"Finger-joint" means pieces of lumber machined on the ends and bonded
together with glue. The joint is similar to slipping the fingers of two hands
together.
"Hardwoods" means trees that usually have broad leaves and are deciduous
(losing leaves every year).
"Joist" means pieces (dimensions 2" to 4" in thickness by 5" and wider) of
rectangular cross section graded with respect to strength in bending when loaded
on the narrow face (edge); used as supporting members under a floor or roof.
"Logs" means the stem of the tree after it has been felled. The raw material
from which lumber, plywood and other wood products are processed.
"MBF" means one thousand board feet. A common unit of measure for pricing
standing timber as well as lumber.
"MMBF" means one million board feet.
"MMSF" means one million surface feet on 3/8" basis.
"Merchantable Timber" means timber for which there is a commercial market.
Timber may be merchantable even if it has not reached its optimum sale value.
C-1
<PAGE>
"Millwork" means generally wood remanufactured to produce such items as
inside and outside doors, windows and door frames, blinds, porch-work, mantels,
panel work, stairways, mouldings and interior trim. This term does not include
flooring, ceiling or siding.
"Non-fee Timber" means timber that is acquired by contract or by conveyance
of timber rights rather than by virtue of its location on lands owned in fee.
"Plywood" means a flat panel made up of a number of thin sheets or veneers
of wood in which the grain direction of each ply, or layer, is at right angles
to the one adjacent to it. The veneer sheets are united under pressure by a
bonding agent.
"Remanufacture" means reworking larger pieces of lumber into smaller pieces.
"Salvage" means logging or removing dead or high-risk trees.
"Second Growth" means timber that has regrown after a virgin stand was
logged or burned.
"Shop Lumber" means lumber intended to be cut up for use in further
manufacture.
"Silviculture" means the practice of cultivating forest crops based on the
knowledge of forestry; more particularly, controlling the establishment,
composition and growth of forests.
"Softwoods" means coniferous trees, usually evergreen and having needles or
scalelike leaves, such as Ponderosa pine, Douglas fir, white pine and spruce.
"Stand" means an area of trees possessing sufficient uniformity of age, size
and composition to be distinguished from adjacent areas so as to form a
management unit. The term is usually applied to forests of commercial value.
"Studs" means lumber used for framing interior or exterior wall sections,
usually measuring 2" x 4" x 8 feet.
"Stumpage" means standing timber (timber as it stands uncut in the woods).
"Thinning" means removal of selected trees, usually to eliminate
overcrowding, to remove dead, dying, deformed or diseased trees and to promote
more rapid growth of desired trees. "Pre-commercial thinning" refers to thinning
that does not directly produce merchantable timber. "Commercial thinning"
results directly in merchantable timber.
"Timber" means standing trees not yet harvested.
"Timber Cruise" means the procedure for calculating the volume (MBF) of
timber on a tract, involving field inspections and systematic data collection.
"Veneer" means wood peeled, sawn or sliced into thin sheets of a given
thickness and used in the production of plywood.
OFFERING TERMS
"Act" means the Securities Act of 1933, as amended.
"Available Cash" means, generally, with respect to any quarter and without
duplication:
(i) the sum of all cash receipts of the Partnership during such quarter
from all sources;
(ii) any reductions in cash reserves either by reversal or utilization;
and
(iii) any utilization with respect to such quarter of the Working Capital
Reserve
LESS the sum of:
(i) all cash disbursements of the Partnership during such quarter, and
C-2
<PAGE>
(ii) any cash reserves established with respect to such quarter, and any
increase in cash reserves established with respect to prior quarters, in
such amounts as the Managing General Partner determines in its reasonable
discretion to be necessary or appropriate.
Taxes paid by the Partnership on behalf of, or amounts withheld with respect
to, all or less than all of the Partners shall not be considered cash
disbursements of the Partnership that reduce Available Cash, but the payment or
withholding thereof shall be deemed to be a distribution of Available Cash to
such Partners. Alternatively, in the discretion of the Managing General Partner,
such taxes (if pertaining to all Partners) may be considered to be cash
disbursements of the Partnership which reduce Available Cash, but the payment or
withholding thereof shall not be deemed to be a distribution of Available Cash
to such Partners.
"Cash from Interim Capital Transactions" means on any distribution date,
amounts of Available Cash distributed by the Partnership in excess of the
aggregate amount of all Cash from Operations generated by the Partnership since
December 22, 1994 through the close of the immediately preceding quarter.
"Cash from Operations" means, generally, at the close of any quarter on a
cumulative basis and without duplication,
(a) the sum of all cash receipts of the Partnership and the Operating
Partnership since December 22, 1994 (including the cash balance of the
Partnership on December 22, 1994, but excluding any Cash from Interim
Capital Transactions),
(b) LESS the sum of:
(i) all cash operating expenditures of the Partnership and the
Operating Partnership during such period, including, without limitation,
taxes, if any, and amounts owed to the General Partners as reimbursement
pursuant to the Partnership Agreement,
(ii) with certain exceptions, all cash debt service payments of the
Partnership and the Operating Partnership during such period,
(iii) all cash capital expenditures (as described in the Partnership
Agreement) of the Partnership and the Operating Partnership during such
period, except those relating to acquisitions, capital additions and
improvements and Interim Capital Transactions,
(iv) any cash reserves of the Partnership and the Operating
Partnership that the Managing General Partner deems in its reasonable
discretion to be necessary or appropriate to provide funds for the future
cash payment of items of the type referred to in clauses (i) through
(iii) above, and
(v) any other cash reserves of the Partnership or the Operating
Partnership outstanding as of such date that the Managing General Partner
deems in its reasonable discretion to be necessary or appropriate to
provide funds for distributions with respect to Units and any general
partner interests in the Partnership in respect of any one or more of the
next four quarters,
all as determined on a consolidated basis and after taking into account the
Managing General Partner's interest therein attributable to its general partner
interest in the Operating Partnership. Taxes paid by the Partnership on behalf
of, or amounts withheld with respect to, all or less than all of the Partners
shall not be considered cash operating expenditures of the Partnership that
reduce Cash from Operations, but the payment or withholding thereof shall be
deemed to be a distribution of Available Cash to such Partners. Alternatively,
in the discretion of the Managing General Partner, such taxes (if pertaining to
all Partners) may be considered to be cash operating expenditures of the
Partnership which reduce Cash from Operations, but the payment or withholding
thereof shall not be deemed to be a distribution of Available Cash to such
Partners.
"Cavenham" means Cavenham Forest Industries, Inc.
C-3
<PAGE>
"Cavenham Acquisition" means the Partnership's purchase of approximately
207,000 acres of timberlands in Oregon and Washington containing approximately
1,485 MMBF of merchantable timber from Cavenham on May 15, 1996.
"Commission" means the Securities and Exchange Commission.
"Common Unit Arrearage" means as to any quarter within the Subordination
Period, the amount by which the Minimum Quarterly Distribution in such quarter
exceeds the amount of Available Cash actually distributed on a Common Unit for
such quarter. Common Unit Arrearages are calculated on a cumulative basis for
all quarters during the Subordination Period. Common Unit Arrearages do not
accrue interest.
"Common Units" means common limited partner interests in the Partnership.
"Conversion Date" means the first day of any quarter beginning on or after
January 1, 2000 in respect of which (a) distributions of Available Cash on all
Units equaled or exceeded the Second Target Distribution for each of the
preceding three consecutive non-overlapping four-quarter periods immediately
preceding such date and (b) there are no arrearages on the Common Units.
"CPL" means Crown Pacific, Ltd., an Oregon corporation and the Special
General Partner of the Partnership.
"Crown Pacific" means the Partnership and its predecessors, together with
its subsidiaries.
"Current Market Price" means with respect to a limited partner interest as
of any date the average of the daily Closing Prices (as hereinafter defined) for
the 20 consecutive Trading Days (as hereinafter defined) immediately prior to
such date. "Closing Price" for any day means the last sale price on such day,
regular way, or in case no such sale takes place on such day, the average of the
closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the principal national securities
exchange on which the limited partner interests of such class are listed or
admitted to trading or, if the limited partner interests of such class are not
listed or admitted to trading on any national securities exchange, the last
quoted price on such day, or, if not so quoted, the average of the high bid and
low asked prices on such day in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System or
such other system then in use, or if on any such day the limited partner
interests of such class are not quoted by any such organization, the average of
the closing bid and asked prices on such day as furnished by a professional
market maker making a market in the interests of such class selected by the
Managing General Partner, or if on any such day no market maker is making a
market in the interests of such class, the fair value of such limited partner
interests on such day as determined reasonably and in good faith by the Managing
General Partner. "Trading Day" means a day on which the principal national
securities exchange on which such limited partner interests are listed or
admitted to trading is open for the transaction of business or, if the limited
partner interests of such class are not listed or admitted to trading on any
national securities exchange, a day on which banking institutions in New York
City generally are open.
"DAW" means DAW Forest Products Company, L.P.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act.
"Fifth Target Distribution" means $0.904 per Unit.
"First Target Distribution" means $0.524 per Unit.
"Fourth Target Distribution" means $0.679 per Unit.
"Fremont" means Fremont Investors, Inc., a Nevada corporation (formerly
known as Fremont Group, Inc.).
"General Partners" means the Managing General Partner and the Special
General Partner.
C-4
<PAGE>
"Initial Unit Price" means $21.50 per Unit.
"Interim Capital Transactions" means (a) borrowings, refinancings or
refundings of indebtedness and sales of debt securities (other than for working
capital purposes and other than for items purchased on open account in the
ordinary course of business) by the Partnership or the Operating Partnership,
(b) sales of equity interests by the Partnership or the Operating Partnership
and (c) sales or other voluntary or involuntary dispositions of any assets of
the Partnership or the Operating Partnership (other than (x) sales or other
dispositions of inventory, accounts receivable and other assets in the ordinary
course of business, including land exchanges, and (y) sales or other
dispositions of assets as a part of normal retirements or replacements), in each
case prior to the liquidation date.
"IRS" means the Internal Revenue Service.
"Managing General Partner" means Crown Pacific Management Limited
Partnership, a Delaware limited partnership.
"Manufacturing Facilities" means the Partnership's sawmills, remanufacturing
facility and chipping facility.
"Minimum Quarterly Distribution" means $0.51 per Unit.
"NYSE" means the New York Stock Exchange.
"Operating Partnership" means Crown Pacific Limited Partnership, a Delaware
limited partnership and other subsidiary operating partnerships and
corporations.
"Partnership" means Crown Pacific Partners, L.P., a Delaware limited
partnership.
"Partnership Agreement" means the agreement of limited partnership of the
Partnership, as amended.
"SAU" means a special allocation limited partner interest in the Partnership
that will be redeemed upon the closing of this offering.
"Second Target Distribution" means $0.538 per Unit.
"Special General Partner" means CPL, in its capacity as the special general
partner of the Partnership.
"Subordinated Units" means subordinated limited partner interests in the
Partnership.
"Subordination Period" means the period beginning on December 22, 1994 and
ending on the Conversion Date. In addition, the Subordination Period ends if the
Managing General Partner is removed other than for cause.
"Third Target Distribution" means $0.566 per Unit.
"Timberlands" means the timber properties of the Partnership.
"Transfer Application" means the Application for Transfer of Common Units, a
form of which is included in the Prospectus as Appendix B, which must be
executed and delivered by all purchasers of Common Units in this offering or in
the open market (or subsequent transferees of Common Units) who wish to become
holders of record.
"Unitholders" means holders of outstanding Units.
"Units" means the Common Units and the Subordinated Units.
"Unrecovered Initial Unit Price" means the amount by which the Initial Unit
Price exceeds the aggregate per Unit distributions of Cash from Interim Capital
Transactions on the Units and any distributions of cash in connection with the
dissolution or liquidation of the Partnership theretofore made in respect of a
Unit, as adjusted to give effect to any split, combination or other similar
change to the Units.
C-5
<PAGE>
"W-I" means W-I Forest Products Limited Partnership.
"Working Capital Reserve" means the amount available to be borrowed at the
time of determination under the Partnership's or the Operating Partnership's
working capital facility, subject in any case to a maximum amount of $40
million.
C-6
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE PARTNERSHIP SINCE THE DATE HEREOF, OR
THAT INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Available Information............................. 5
Incorporation of Certain Documents................ 5
Prospectus Summary................................ 7
Risk Factors...................................... 20
Use of Proceeds................................... 30
Capitalization.................................... 31
Price Range of Common Units and Distributions..... 31
Cash Distribution Policy.......................... 32
Selected Historical Financial and Operating
Data............................................. 41
Management's Discussion and Analysis of Financial
Condition and Results of
Operations....................................... 43
Business and Properties........................... 55
Management........................................ 73
Selling Unitholders and Security Ownership........ 75
Conflicts of Interest and Fiduciary
Responsibility................................... 76
Description of Common Units....................... 80
The Partnership Agreement......................... 81
Tax Considerations................................ 92
Investment in the Partnership by Employee Benefit
Plans............................................ 109
Underwriting...................................... 110
Validity of the Common Units...................... 111
Experts........................................... 111
Index to Financial Statements..................... F-1
Form of Second Amended and Restated Agreement of
Limited Partnership.............................. A-1
Form of Application for Transfer of Common
Units............................................ B-1
Glossary.......................................... C-1
</TABLE>
[LOGO]
CROWN PACIFIC PARTNERS, L.P.
10,102,800 COMMON UNITS
REPRESENTING
LIMITED PARTNER INTERESTS
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PROSPECTUS
July 31, 1996
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SMITH BARNEY INC.
LEHMAN BROTHERS
DEAN WITTER REYNOLDS INC.
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
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