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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION OCTOBER 3, 1997
REGISTRATION NO.: 333-27269
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CROWN PACIFIC PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
DELAWARE 0800 93-1161833
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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121 S.W. MORRISON STREET, SUITE 1500
PORTLAND, OREGON 97204
(503) 274-2300
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
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ROGER L. KRAGE
121 S.W. MORRISON STREET, SUITE 1500
PORTLAND, OREGON 97204
(503) 274-2300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
ANDREWS & KURTH L.L.P. BAKER & BOTTS, L.L.P.
4200 TEXAS COMMERCE TOWER 910 LOUISIANA
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 220-4200 (713) 229-1234
ATTENTION: ROBERT V. JEWELL ATTENTION: JOSHUA DAVIDSON
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE, AS
DETERMINED BY MARKET CONDITIONS.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
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TITLE OF EACH CLASS AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER UNIT(1) AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Units representing limited
partner interests 7,500,000 23-1/8 $173,906,250 $52,698.86
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(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) based on the average of the high
and low prices as reported on the New York Stock Exchange on May 13, 1997.
</TABLE>
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS
CROWN PACIFIC PARTNERS, L.P.
7,500,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
Crown Pacific Partners, L.P. (the "Partnership") may from time to time
offer up to 7,500,000 of its Common Units in amounts, at prices and on terms to
be determined at the time of offering and set forth in a supplement to this
Prospectus (the "Prospectus Supplement").
The public offering price of the Common Units offered hereunder will be set
forth in the applicable Prospectus Supplement. The Prospectus Supplement may
contain additional information regarding the terms on which the Common Units are
offered and about certain United States federal income tax considerations
relating to the Common Units offered by such Prospectus Supplement.
The Common Units may be offered directly, through agents designated from
time to time by the Partnership, or to or through underwriters or dealers. If
any agents or underwriters are involved in the sale of any of the Common Units,
their names and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable from
the information set forth in the applicable Prospectus Supplement. See "Plan of
Distribution." No Common Units may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
Common Units.
Purchasers of Common Units should consider each of the factors described
under "Risk Factors" beginning on page 4 in evaluating an investment in the
Common Units.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS OCTOBER , 1997.
<PAGE>
AVAILABLE INFORMATION
The Partnership has filed a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the Common Units offered by this Prospectus. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information, exhibits and undertakings contained in the Registration
Statement. For further information pertaining to the securities offered hereby,
reference is made to the Registration Statement, including the exhibits filed as
a part thereof.
The Partnership is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by the
Partnership can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549; and at its Regional Offices located at Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661; and 7 World Trade Center, New York, New York
10048 or may be obtained on the Internet at http:\\www.sec.gov. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common
Units are traded on the New York Stock Exchange ("NYSE") and such reports, proxy
statements and other information concerning the Partnership can be inspected at
the offices of the NYSE, 20 Broad Street, New York, New York 10005.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR INCORPORATED IN IT BY
REFERENCE, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES
OFFERED BY THIS PROSPECTUS, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER, OR SOLICITATION OF AN OFFER, IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF
THE SECURITIES OFFERED PURSUANT TO THIS PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE PARTNERSHIP SINCE THE DATE OF THIS PROSPECTUS.
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<PAGE>
INFORMATION INCORPORATED BY REFERENCE
IN THIS PROSPECTUS
The following documents filed with the Commission by the Partnership
pursuant to the Exchange Act are hereby incorporated by reference in this
Prospectus:
(a) The Partnership's Annual Report on Form 10-K (File No. 0-24976) for
the fiscal year ended December 31, 1996, as amended by the Form 10-K/A dated
March 28, 1997;
(b) The Partnership's Quarterly Report on Form 10-Q (File No. 0-24976) for
the quarter ended March 31, 1997; and
(c) The Partnership's Quarterly Report on Form 10-Q (File No. 0-24976) for
the quarter ended June 30, 1997.
All documents filed by the Partnership pursuant to Sections 13 (a), 13 (c),
14 and 15 (d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Common Units shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from the
date of filing such documents.
Any statement contained herein or in a document incorporated by reference
or deemed to be incorporated by reference herein 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 in this Prospectus modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
All documents that are incorporated by reference in this Prospectus but
which are not delivered herewith are available without charge (other than
exhibits to such documents which are not specifically incorporated by reference
therein) upon request from Crown Pacific Partners, L.P., 121 S.W. Morrison
Street, Suite 1500, Portland, Oregon 97204, Attention: Mr. Mark Conan,
Controller and Treasurer, telephone (503) 274-2300.
FORWARD-LOOKING STATEMENTS
This Prospectus and the accompanying Prospectus Supplement contain or
incorporate by reference forward-looking statements. Where any such
forward-looking statement includes a statement of the assumptions or bases
underlying such forward-looking statement, the Partnership cautions that,
while such assumptions or bases are believed to be reasonable and are made in
good faith, assumed facts or bases almost always vary from actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, the Partnership expresses an expectation or belief as to future
results, such expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or
accomplished. The words "believe", "expect", "estimate" and "anticipate" and
similar expressions identify forward-looking statements.
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THE PARTNERSHIP
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
738,000 acres of timberland in the Pacific Northwest (the "Timberlands"),
containing a total merchantable timber inventory of approximately 4,723 million
board feet ("MMBF"). In addition to its Timberlands, the Partnership has
significant manufacturing assets consisting of five lumber mills in Oregon,
Washington and Idaho and a chip mill in Oregon (collectively, the "Manufacturing
Facilities").
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.
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. 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 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.
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 logs 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
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<PAGE>
agencies, which historically have been major suppliers of timber to the United
States forest products industry. 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 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.
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.
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 738,000 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.
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 5.1% of its revenues during the year ended
December 31, 1996 from the sale of logs for export. 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
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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 in other regions. 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 November 1996, the plaintiffs and the
Federal government as defendant reached a settlement agreement whereby Crown
Pacific's previously-approved sourcing areas would be remanded for review by
the United States Forest Service ("USFS"). In addition, a new, more
restrictive federal regulation regarding sourcing areas has been promulgated
by the USFS. There can be no assurance that a review of the Partnership's
sourcing areas by the USFS using this more restrictive regulation will be
favorable to the Partnership. If such review is not favorable it may have a
material adverse effect on the Partnership's operations.
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 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.
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,
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
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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 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
(as defined in the Partnership Agreement), 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. As of March 31,
1997, the Partnership had approximately $392 million in long-term indebtedness
and the amount of such indebtedness as a percentage of total capitalization was
63%. As a result, the Partnership has long-term 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
long-term 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.
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 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 Common
Units and Subordinated Units
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(collectively, the "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 to 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. Prior to the end
of the Subordination Period (as defined in the Partnership Agreement), however,
the Partnership may not issue in excess of 20,029,250 Common Units (including
the 7,500,000 Common Units subject to this Prospectus but 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."
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 additional Common Units effectively reduces 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 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 or her Common Units purchased even
though he or she 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 such 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
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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.
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.
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. 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 a conflict of
interest 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) 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 (as defined in the Partnership Agreement) 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 Common 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
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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 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, it is possible that a holder of Common Units could 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.
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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% profit 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.
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 these 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."
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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.
USE OF PROCEEDS
Except as otherwise provided in the applicable Prospectus Supplement,
proceeds to the Partnership from the sale of the Common Units will be used for
the acquisition of properties as suitable opportunities arise and the repayment
of indebtedness outstanding at such time.
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 Partnership Agreement 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 Partnership Agreement and generally
refers to all cash generated by the operations of the Partnership's business,
after deducting related cash expenditures, reserves, debt service and certain
other items.
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Cash from Interim Capital Transactions is also defined in the Partnership
Agreement 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 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 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.
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 made, 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 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.
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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 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), a total of $0.538 for such quarter in
respect of each Unit (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, an amount equal to the Second Target Distribution for
such quarter; 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, 1997.
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;
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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
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 with respect to any
quarter 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
For any quarter in 1998 and thereafter for which Available Cash
constituting Cash from Operations has been distributed in respect of both the
Common Units and the Subordinated Units in an amount equal to the Minimum
Quarterly Distribution and, for any such quarter during the Subordination
Period, Available Cash constituting Cash from Operations has been distributed in
respect of the 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");
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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");
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.
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
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
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(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 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;
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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
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 Common Unit 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.
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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,
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 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.
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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 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) it is 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
that 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 that 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 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; 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 activity in competition with the Partnership.
Notwithstanding the foregoing, Fremont, Sequoia Ventures Inc. ("Sequoia"),
an affiliate of Fremont, 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
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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 owns 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 to 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 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) 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
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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.
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 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 A to this
Prospectus. Purchasers of Common Units may hold the 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.
Generally, the Common 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.
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
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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 which is set forth as Appendix A 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."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of certain provisions of the
Partnership Agreement. The Partnership will provide prospective investors with a
copy of the Partnership Agreement and 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." 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 hold 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
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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 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.
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.
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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.
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
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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.
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 A 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 substituted 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 substituted 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
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transfer the right to request admission as a substitute limited partner or a
substituted 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
substituted 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 other
limitations on the rights of an assignee who is not a substituted 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
Unitholders. On the date of this Prospectus and prior to the end of the
Subordination Period, however, the Partnership may not issue (a) in excess of
20,029,250 Common Units (including the 7,500,000 Common Units subject to this
Prospectus but 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.
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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
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 that 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 neither the
Partnership nor the Operating Partnership will be treated as an association
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
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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 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
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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 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
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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.
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, California 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
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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
(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.
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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 Unitholder'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 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 or other Unitholders subject to specialized tax treatment (such as REITS,
tax exempt persons or mutual funds). 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"), (iv) whether the Partnership's method for
depreciating Section 743 adjustments will be recognized for federal income tax
purposes (see "-- Uniformity of Units") and (v) whether the allocations of
recapture contained in the Partnership Agreement will be respected for federal
income tax purposes (see - "Allocation of Partnership Income, Gain, Loss and
Deduction").
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 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
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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
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.
In rendering its opinion as to periods before 1997, 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:
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(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.
Because of the adoption of certain simplifying regulations (known as the
"check the box regulations") Counsel has rendered its opinion as to taxable
years beginning after 1996 relying on the accuracy of the following factual
matters as to which the General Partners have made representations:
(a) None of the Partnership, the Operating Partnership or any Subsidiary
Partnership will elect to be treated as an association or corporation;
(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.
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 logs, the transportation of
logs 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 qualifying income 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 qualifying
income. The Managing General Partner believes that less than 5% of the
Partnership's gross income will not be qualifying income. The Managing General
Partner will use its best efforts to ensure that more than 90% of the
Partnership's gross income will be qualifying 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.
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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 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 may execute and deliver Transfer Applications, but who
fail to do so, Counsel's opinion does not extend to them. 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 those 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 any 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 his share of nonrecourse liabilities of the Partnership,
and thus could result in a corresponding deemed distribution of cash to him. 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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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 such as the 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 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, a 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
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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. Regulations
under Section 704(c) of the Code permit a Partnership to make reasonable
allocations to reduce or eliminate such differences.
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 under current law. Under recently issued regulations, which are not
yet final, the allocations of depreciation recapture should be respected but the
Partnership may not be able to identify the Common Units to which such
depreciation recapture is to be allocated if Common Units are issued by it at
different times. 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.
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
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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 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.
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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.
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 is 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 (which was December, 1994) 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. 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.
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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 generally permits 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 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 may 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 apparent 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 Code. 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.
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
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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 minimum tax rate
applicable to non-corporate Unitholders is 26% on the first $175,000 of
alternative minimum taxable income in excess of the exemption amount and 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 basis, of the assets
of the Partnership. Although the Managing General Partner may from time to time
consult with 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. The Taxpayer Relief
Act of 1997 (the "TRA of 1997") also contains provisions affecting the
taxation of certain financial products and securities, including partnership
interest, by treating a taxpayer as having sold an "appreciated" partnership
interest (one in which gain would be recognized if it were sold, assigned or
otherwise terminated at its fair market value) if the taxpayer or related
persons enter into a short sale of, an offsetting notional principal contract
with respect to or a futures or forward contract to deliver the same or
substantially identical property, or in the case of an appreciated financial
position that is a short sale or offsetting notional principal or futures or
forward contract, the taxpayer or related persons acquire, the same or
substantially identical property. The Secretary of Treasury is also
authorized to issued regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
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
"inventory items" owned by the Partnership. The term "unrealized receivables"
includes potential recapture items, including depreciation recapture.
Ordinary income attributable to unrealized receivables, inventory items 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
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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
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. 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.
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 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. 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. A termination of the
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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 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.
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. In the absence of uniformity, it may be
difficult to comply with a number of federal income tax requirements, both
statutory and regulatory. A lack of uniformity can result from a literal
application of Proposed Treasury Regulation Section 1.168-2(n) and Treasury
Regulation Section 1.167(c)-1(a)(6) of the legislative history of Section 197.
Any non-uniformity could have a negative impact on the value of the Units.
The Partnership may 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 difference
between the tax basis and book value of such property) 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, or treat
that portion as nonamortizable, despite its apparent 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 and gain from the
sale of Units might be increased without the benefit of additional deductions.
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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 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
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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 TRA of 1997, partners in electing large
partnerships, such as the Partnership, would be required to treat all
partnership items in a manner consistent with the partnership return.
The TRA of 1997 also makes a number of changes to the tax compliance and
administrative rules relating to partnerships that elect large partnership
treatment. One provision requires that each partner in an electing large
partnership take into account his share of any adjustments to partnership
items in the year such adjustments are made. Alternatively, under the
TRA of 1997, a partnership can elect to or, in some circumstances, can be
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. The Partnership has not determined at this time
whether it will make the election to be treated as a large partnership.
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 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
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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 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, Montana and
California. 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
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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.
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,
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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.
PLAN OF DISTRIBUTION
The Partnership may sell the Common Units to one or more underwriters for
public offering and sale or may sell the Common Units to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Common Units will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Common Units at a fixed price or
prices, which may be changed, at prices related to the prevailing market prices
at the time of sale or at negotiated prices. The Partnership also may, from
time to time, authorize underwriters acting as the Partnership's agents to offer
and sell the Common Units upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of Common Units,
underwriters may be deemed to have received compensation from the Partnership in
the form of underwriting discounts or commissions and may also receive
commissions from purchasers of the Common Units for whom they may act as agent.
Underwriters may sell the Common Units to or through dealers, and such dealers
may receive compensation in the form of discounts, concessions or commissions
from the underwriters and/or commissions from the purchasers for whom they may
act as agent.
Any underwriting compensation paid by the Partnership to underwriters or
agents in connection with the offering of the Common Units, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Common Units may be
deemed to be underwriters, and any discounts and commissions received by them
and any profit realized by them on resale of the Common Units may be deemed to
be underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Partnership, to indemnification against the contribution toward certain
civil liabilities, including liabilities under the Securities Act.
If so indicated in a Prospectus Supplement, the Partnership will authorize
agents, underwriters or dealers to solicit offers by certain institutional
investors to purchase the Common Units to which such Prospectus Supplement
relates, providing for payment and delivery on a future date specified in such
Prospectus Supplement. There may be limitations on the minimum amount which may
be purchased by any such institutional investor or on the portion of the
aggregate number of the Common Units which may be sold pursuant to such
arrangements. Institutional investors to which such offers may be made, when
authorized, include commercial and savings banks, insurance companies, pension
funds, investment companies, educational and charitable institutions and such
other institutions as may be approved by the Partnership. The obligations of
any such purchasers pursuant to such delayed delivery and payment arrangements
will not be subject to any conditions except that (i) the purchase by an
institution of the Common Units shall not at the time of delivery be prohibited
under the laws of any jurisdiction in the United States to which such
institution is subject and (ii) if the Common Units are being sold to
underwriters, the Company shall have sold to such underwriters the total number
of such Common Units less the number thereof covered by such arrangements.
Underwriters will not have any
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responsibility in respect of the validity of such arrangements or the
performance of the Partnership or such institutional investors thereunder.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Partnership in the
ordinary course of business.
LEGAL MATTERS
The validity of the Common Units will be passed upon for the Partnership by
Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on 10-K of Crown Pacific Partners, L.P. for the year ended
December 31, 1996 have been so incorporated in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
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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.
---------------------
TABLE OF CONTENTS
Available Information........................................................ 2
Information Incorporated by Reference........................................ 3
Forward-Looking Statements................................................... 3
The Partnership.............................................................. 4
Risk Factors................................................................. 4
Use of Proceeds.............................................................. 12
Cash Distribution Policy..................................................... 12
Conflicts of Interest and Fiduciary Duty..................................... 19
Description of the Common Units.............................................. 22
The Partnership Agreement.................................................... 24
Tax Considerations........................................................... 34
Investment in the Partnership by Employee Benefit Plans...................... 49
Plan of Distribution......................................................... 50
Legal Matters................................................................ 51
Experts...................................................................... 51
CROWN PACIFIC PARTNERS, L.P.
7,500,000 COMMON UNITS
REPRESENTING
LIMITED PARTNER INTERESTS
---------------------
PROSPECTUS
---------------------
OCTOBER , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table set forth the costs and expenses, other than selling
or underwriting discounts and commissions, to be incurred by the Partnership
in connection with the issuance and distribution of the Common Units being
registered. All amounts shown are estimated except the Commission
registration fee.
Securities and Exchange Commission
registration fee . . . . . . . . . . . . . . . . . . . . $ 52,699
Blue Sky expenses, including legal fees. . . . . . . . . . 10,000
Printing and engraving expenses. . . . . . . . . . . . . . 25,000
Legal fees and expenses. . . . . . . . . . . . . . . . . . 35,000
Accounting fees and expenses . . . . . . . . . . . . . . . 10,000
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . 10,000
----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $142,699
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subject to the terms, conditions or restrictions set forth in the
Partnership Agreement, the Delaware Revised Uniform Limited Partnership Act
empowers Delaware limited partnerships to indemnify and hold harmless any
partner or other person from and against claims and demands incurred in its
capacity as a partner or other representative of the Partnership.
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.
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ITEM 16. EXHIBITS
Exhibit No. Exhibits
---------- --------
1.1* -- Form of Underwriting Agreement
3.1+ -- Form of Second Amended and Restated Agreement of
Limited Partnership of Crown Pacific Partners, L.P.
(filed as Appendix A, pages A-1 through A-80, in the
Registrant's Registration Statement on Form S-3,
Registration No. 333-05099)
3.2+ -- Form of First Amendment to the Second Amended and
Restated Agreement of Limited Partnership of
Crown Pacific Partners, L.P. (filed as Exhibit 3.1
to the Registrant's Report on Form 10Q for the
quarter ended March 31, 1997)
5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality
of the Common Units being registered
8.1 -- Opinion of Andrews & Kurth relating to Tax Matters
23.1++ -- Consent of Price Waterhouse LLP
23.2 -- Consent of Andrews & Kurth L.L.P.
(included in Exhibit 5.1)
23.3 -- Consent of Andrews & Kurth L.L.P.
(included in Exhibit 8.1)
* To be filed by post effective amendment or incorporated by reference
from a current Report on Form 8-K
+ Incorporated by reference to the indicated filing
++ Previously filed
ITEM 17. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement.
(a) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(b) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(c) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in this Registration
Statement;
PROVIDED, HOWEVER, that paragraphs A(1)(a) and A(1)(b) above do not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
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<PAGE>
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
B. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
C. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the provisions described in Item 15
above, or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Portland, Oregon, on the 3rd of
October, 1997.
CROWN PACIFIC PARTNERS, L.P.
By: Crown Pacific Management Limited
Partnership, as Managing General
Partner
By: /s/ Peter W. Stott
-------------------------------------
Peter W. Stott
President of HS Corp. of Oregon,
a general partner of Crown Pacific
Management Limited Partnership
By: /s/ Robert Jaunich II
-------------------------------------
Robert Jaunich II
President of Fremont Timber, Inc.,
a general partner of Crown Pacific
Management Limited Partnership
Each person whose signature appears below appoints Peter W. Stott and
Roger L. Krage and each of them, any of whom may act without joinder of the
other, as his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the
same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, granted unto said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or would do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their
or his substitute and substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THE 3RD OF OCTOBER.
Signature Title
--------- -----
/s/ Peter W. Stott President, Chief Executive
----------------------------------- Officer and Board of Control Member,
Peter W. Stott Crown Pacific Management Limited
Partnership (Principal Executive
Officer)
/s/ Richard D. Snyder Vice President and Chief Financial
----------------------------------- Officer, Crown Pacific Management
Richard D. Snyder Limited Partnership (Principal
Financial and Accounting Officer)
/s/ Robert Jaunich II Member, Board of Control
-----------------------------------
Robert Jaunich II
/s/ James Bondoux Member, Board of Control
-----------------------------------
James Bondoux
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/s/ Richard B. Keller Member, Board of Control
-----------------------------------
Richard B. Keller
/s/ John W. Larson Member, Board of Control
-----------------------------------
John W. Larson
/s/ Christopher G. Mumford Member, Board of Control
-----------------------------------
Christopher G. Mumford
/s/ William L. Smith Member, Board of Control
-----------------------------------
William L. Smith
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<PAGE>
Exhibit 5.1
October 3, 1997
Crown Pacific Partners, L.P.
121 S. W. Morrison
Portland, Oregon 97204
Ladies and Gentlemen:
We have acted as counsel in connection with the Registration Statement on
Form S-3 (the "Registration Statement") of Crown Pacific Partners, L.P. (the
"Partnership") relating to registration under the Securities Act of 1933, as
amended, of the offering and sale of by the Partnership of up to 7,500,000
common units representing limited partner interests (the "Common Units") of
the Partnership.
As the basis for the opinion hereinafter expressed, we have examined such
statutes, regulations, partnership records and documents, certificates of
partnership and public officials and other instruments as we have deemed
necessary or advisable for the purposes of this opinion. In such examination,
we have assumed the authenticity of all documents submitted to us as
originals and the conformity with the original documents of all documents
submitted to us as copies.
Based on the foregoing and on such legal considerations as we deem
relevant, we are of the opinion that the up to 7,500,000 Common Units to be
issued by the Partnership, when issued and sold by the Partnership as
contemplated by the Registration Statement, will constitute legally issued,
fully paid and non-assessable Common Units of the Partnership, with no
personal liability attaching to the ownership thereof, except with respect to
the matters described under the caption "The Partnership Agreement--Limited
Liability" in the Registration Statement.
We hereby consent to the reference to our firm under the heading "Validity
of the Common Units" in the Registration Statement and the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
AMDREWS & KURTH L.L.P.
<PAGE>
[LETTERHEAD]
October 3, 1997
Crown Pacific Partners, L.P.
121 S.W. Morrison Street
Suite 1500
Portland, Oregon 97204
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have acted as counsel in connection with the Registration
Statement on Form S-3, Registration No.: 333-27269 (the "Registration
Statement") of Crown Pacific Partners, L.P. (the "Partnership"), relating
to the registration of the offering and sale (the "Offering") of up to
7,500,000 common units representing limited partner interests of the
Partnership (the "Common Units"). In connection therewith, we have
participated in the preparation of the discussion set forth under the caption
"Tax Considerations" (the "Discussion") in the Registration Statement.
Capitalized terms used and not otherwise defined herein are used as defined
in the Registration Statement.
The Discussion, subject to the qualifications stated therein,
constitutes our opinion as to the material United States federal income tax
consequences for purchasers of Common Units pursuant to the Offering.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the use of our name in the Discussion. The
issuance of such consent does not concede that we are an "expert" for the
purposes of the Securities Act of 1933.
Very truly yours,
Andrews & Kurth L.L.P.
