Filed Pursuant to Rule 424(b)(2)
Registration No. 333-56424
INITIAL PUBLIC OFFERING PROSPECTUS
[Logo with the words "The Forest Bank,
Protecting Our Working Forests"]
THE FOREST BANK, LLC
Maximum of
8,000,000 Class A-1 Membership Units
3,500,000 Class A-2 Membership Units
3,500,000 Class A-3 Membership Units
No Minimum Offering
We are offering three different types of class A membership units in exchange
for contributions of rights to manage and cut standing timber. We will issue to
each contributor a whole number of units of class A membership interests in our
company equal to the appraised dollar value of the timber rights contributed.
Each type of class A units will have differing rights with respect to dividends
and redemption.
All of the proceeds from this offering will be rights to manage and cut standing
timber. We will not receive cash proceeds from this offering. We are not a bank
and are not insured by the Federal Deposit Insurance Corporation or any other
similar entity.
This investment involves a high degree of risk. You should consider carefully
the information set forth in "Risk Factors" beginning on page 8 for a discussion
of material risk factors relevant to an investment in our membership units.
By contributing your timber rights in exchange for membership units, you will be
giving up forever the right to develop the land on which the timber is growing.
Our membership units are not traded on any market, exchange or quotation system.
Other than your limited rights to redeem your class A membership units as
described in this Prospectus, an investment in our membership units will be
highly illiquid.
Our primary objective is to conserve forest land and maintain ecological
features and natural processes. Our limited liability company agreement
expressly requires that if there is a conflict among our conservation objectives
on one hand and any of our economic objectives on the other hand, our
conservation objectives must take priority.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
There is no underwriter for this offering. No person other than The Nature
Conservancy is authorized to offer the membership units or deliver a copy of
this prospectus.
We will sell membership units in exchange for contribution rights until June 27,
2003 or until we sell the maximum number of units offered.
The Date of this Prospectus is June 27, 2001
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with any additional or different
information. We are not making an offer of these securities in any state where
the offer is not permitted.
TABLE OF CONTENTS
SUMMARY......................................................... 1
FREQUENTLY ASKED QUESTIONS...................................... 5
RISK FACTORS.................................................... 8
RISKS RELATING TO YOUR INVESTMENT
IN OUR MEMBERSHIP UNITS....................................... 8
RISKS RELATED TO OUR COMPANY.................................. 11
CONFLICTS OF INTEREST RISKS................................... 13
RISKS RELATED TO THE TIMBER INDUSTRY.......................... 14
RISKS RELATED TO TAX CONSEQUENCES............................. 17
FORWARD-LOOKING STATEMENTS...................................... 19
DISTRIBUTION POLICY............................................. 19
USE OF PROCEEDS................................................. 20
DETERMINATION OF THE VALUE OF YOUR TIMBER RIGHTS................ 20
The Appraisal Process......................................... 20
Our Appraisal Experience...................................... 21
Revaluations.................................................. 21
CAPITALIZATION.................................................. 22
OUR BUSINESS.................................................... 23
Our Mission and Core Objectives............................... 23
Our Goal of Sustainable Development........................... 24
The Problems of Owners of The Non-Industrial Private Forest... 24
The Forest Bank Solution...................................... 24
Our Plan of Operation......................................... 25
Forest Certification.......................................... 27
INDUSTRY AND MARKETS............................................ 28
Our Nation's Forests.......................................... 28
The Clinch Valley Forest...................................... 28
Clinch Valley Products and Markets............................ 29
Advantages for Clinch Valley Certified Hardwoods.............. 30
Hardwood Demand, Supply and Prices............................ 30
OUR MANAGER..................................................... 31
Our Manager's Virginia Operations............................. 32
The Management Agreement...................................... 32
Board of Managers and Officers of The Forest Bank............. 33
Information on Our Key Personnel.............................. 33
THE OFFERING.................................................... 37
Generally..................................................... 37
Subscription Process.......................................... 38
The Subscription Agreement.................................... 38
The Forest Conservation and Management Easement............... 39
Contributing Timber Rights Encumbered by Mortgage Loans....... 40
DESCRIPTION OF MEMBERSHIP UNITS................................. 40
Class M Membership Units...................................... 41
Class A Membership Units...................................... 41
Distributions................................................. 42
Revaluations of Class A Units................................. 42
Redemptions................................................... 43
Priority of Distributions and Redemption Payments 45
Voting Rights................................................. 45
Restrictions on Transfer...................................... 46
Allocations................................................... 46
Liquidation................................................... 47
PLAN OF DISTRIBUTION............................................ 48
MATERIAL PROVISIONS OF OUR LIMITED LIABILITY COMPANY AGREEMENT.. 48
Formation and Term............................................ 48
The Purposes of The Forest Bank, LLC.......................... 48
Factors that Might Prevent or Delay a Change of Control....... 49
Exculpation and Indemnification............................... 49
Tax Matters................................................... 49
Information Rights............................................ 49
Amendments of the Limited Liability Company Agreement......... 49
FEDERAL INCOME TAX CONSIDERATIONS............................... 50
Summary of Tax Opinions....................................... 50
Classification of The Forest Bank as a
Partnership................................................... 51
Treatment of Members as Partners.............................. 52
Contribution of Timber Rights................................. 53
Tax Basis in Your Units....................................... 55
Character of Gain or Loss from Harvesting Activities.......... 56
Allocations of Our Income, Gain, Loss, and Deductions......... 56
Cash Distributions............................................ 57
Redemption of Your Units...................................... 57
Sale of Your Units............................................ 57
Basis Limitations on the Deduction of Losses.................. 58
Passive Activity Losses....................................... 58
Limitations on Deductibility of Interest...................... 58
Deductibility of Certain Expenses by Individual Members....... 59
Section 754 Election.......................................... 59
Anti-Abuse Regulation......................................... 59
Information Reporting and Tax Returns......................... 59
Audits........................................................ 60
State and Local Taxation...................................... 60
OTHER REGULATORY MATTERS........................................ 61
Endangered Species Laws....................................... 62
Laws Relating to Clean Air, Clean Water and Wetlands.......... 62
Regulation of Insecticides and Herbicides..................... 63
Laws Governing Hazardous Wastes............................... 63
Other Regulatory Matters...................................... 63
EXPERTS......................................................... 63
LEGAL MATTERS................................................... 63
WHERE YOU CAN FIND MORE
INFORMATION..................................................... 63
Index to Financial Statements................................... F-1
i
SUMMARY
This section summarizes information contained in other parts of this prospectus.
This summary does not contain all of the information you should consider, and
you should read the entire prospectus carefully before investing in our
membership units.
Our Company
Our manager, The Nature Conservancy, formed The Forest Bank, LLC as a Delaware
limited liability company in January of 2001. We seek to acquire from owners of
forest land the rights to maintain, conserve, selectively cut, manage, sell,
retain the proceeds from and regenerate the trees located on each owner's
property in exchange for units of membership interest in our company. Our
membership units will entitle the holder to preferred annual distributions based
on the value of the timber rights contributed to us and will allow the holder
the limited right to withdraw the initial value of the timber rights contributed
to us for cash, subject to restrictions. As of the date of this prospectus, we
do not own any timber rights.
We are not a bank and are not insured by the Federal Deposit Insurance
Corporation or any other similar entity.
Our principal operational offices will be our manager's Clinch Valley office at:
c/o The Nature Conservancy, 146 East Main Street, Abingdon, Virginia 24210,
(540) 623-4007. Our principal executive offices will be our manager's regional
office in upstate New York at: c/o The Nature Conservancy, 339 East Avenue,
Suite 300, Rochester, New York 14604, (716) 232-3530.
The Forest Bank Concept
We believe that small, non-industrial owners of forest land often sell the
rights to harvest their timber to raise funds to meet pressing cash flow needs,
without a long-term forest management plan. This random harvesting jeopardizes
the long term conservation of forests, threatens the environment and may damage
the long-term economic productivity of the landowner's forest. We seek to
eliminate as much as possible the random cutting of forests that occurs because
of landowner cash needs by:
. acquiring permanent rights to manage standing timber;
. developing sustainable forest management plans for each contribution of
timber rights;
. providing the landowner with a regular source of income in the form of
preferred annual distributions from us; and
. providing the landowner with the right to withdraw the initial value of
the timber rights contributed to us in cash without having to harvest
that particular timber.
The Forest Bank Objectives
We have two primary objectives. First, we will seek to conserve the forests,
lands and watersheds of the regions in which we acquire timber rights. Second,
we will seek to maximize the sustainable financial return to our members who
contribute timber rights to us. Our limited liability company agreement
expressly requires that if there is a conflict among our forest conservation
objectives on one hand and any of our economic objectives on the other hand, our
forest conservation objectives will take priority.
1
Our Manager, The Nature Conservancy
Pursuant to a management agreement, our manager, The Nature Conservancy, will
control our day-to-day operations. Our manager has the right to appoint, remove
and replace the members of our board of managers.
Our manager has extensive experience in the procurement and transfer of timber
and land rights and has conducted thousands of transactions involving more than
twelve million acres in the United States during its 50 year history. Since
1951, our manager has pursued a mission of preserving the plants, animals, and
natural communities that represent the biological diversity of life on earth by
protecting the lands and waters they need to survive. The Nature Conservancy
has pursued this mission through a range of innovative protection strategies
that ensure conservation-oriented stewardship of ecologically sensitive places.
The Forest Bank is the latest of our manager's innovative techniques to
accomplish this mission. You should note that our manager has limited
experience harvesting and selling timber. See "Our Manager."
Our Offering of Class A Membership Units
We are offering up to 15,000,000 class A membership units to owners of land in
exchange for contributions of timber rights only. As of the date of this
prospectus, our manager has approved the issuance of up to 5,000,000 membership
units and the acquisition of timber rights on up to 10,000 acres of land. We
cannot assure you that we will authorize any more than 5,000,000 membership
units in this offering or that we will authorize the purchase of any additional
timber rights. If you have owned for more than one year 20 or more acres of
land in a project area designated by our manager, you are eligible to contribute
timber rights to us in exchange for one of the following three types of class A
membership units:
Up to 8,000,000 Class A-1 Membership Units. Class A-1 membership units will
provide for preferred annual distributions equal to 4% per year of the initial
value of the contributed timber rights less the amount of any prior withdrawals;
will permit withdrawal after the second year subject to penalties; will permit
withdrawal without penalty in connection with certain foreclosure redemptions
and certain allocations of built-in gain; and will permit withdrawal without
penalty after the sixth year.
Up to 3,500,000 Class A-2 Membership Units. Class A-2 membership units will
provide for preferred annual distributions of 4.5% of the initial value of the
contributed timber rights less the amount of any prior withdrawals; will permit
withdrawal of up to 20% of the value of the timber rights every three years
beginning on the fourth anniversary of the contribution; will permit withdrawal
without penalty in connection with certain foreclosure redemptions and certain
allocations of built-in gain; and will permit withdrawal of the full amount
after the fifteenth anniversary of contribution.
Up to 3,500,000 Class A-3 Membership Units. Class A-3 membership units will
provide for preferred annual distributions of 4.5% of the initial value of the
contributed timber rights less the amount of any prior withdrawals. Beginning
with the second anniversary of the initial contribution, the owner of the class
A-3 membership units will be entitled to withdraw up to 5% of the initial value
of the contributed timber rights for each year that he or she has held the
units. For example, the owner will be able to withdraw up to 10% of the initial
value of the timber on the second anniversary of his or her initial
contribution, up to 40%, less prior withdrawals, on the eighth anniversary and
up to 100% on the twentieth anniversary of the initial contribution. In
addition, owners of class A-3 membership units will be permitted to make
withdrawals in connection with certain foreclosure redemptions and certain
allocations of built-in gain.
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If we do not pay the full preferred distribution in any year, the amount of the
distribution not paid will cumulate, without interest, and be payable at the
time of the next annual preferred distribution or sooner at the discretion of
our board of managers if we have positive cash flow.
The allocations of built-in gain referred to above may occur when we harvest the
timber on your land if the fair market value of your timber rights at the time
of contribution exceeded the adjusted tax basis of your timber rights at that
time.
Rights to Transfer Your Class A Units. You may transfer your class A units as
long as you transfer at least 10,000 units and, in the discretion of our board
of managers, the transfer will not adversely affect our company or the other
class A members. For example, we intend that class A members will be able to
pledge their class A units as collateral for loans. For a more complete
description of the restrictions on transfer of the class A units, see
"Description of Membership Units--Restrictions on Transfer," and for a more
complete description of pledging class A units as collateral for loans, see "The
Offering-- Contributing Timber Rights Encumbered by Mortgage Loans."
There can be no assurance that we will have cash available to make distributions
to you on any particular distribution date.
Forest Conservation and Management Easement
A contributor will convey timber rights to us by means of a forest conservation
and management easement. This easement gives us the right to manage your
timber, including the right to maintain, conserve, selectively cut, sell, retain
the proceeds from and regenerate the trees located on your property, or on a
designated portion of your property. In addition, the forest management and
conservation easement will permanently prohibit any development of the land on
which the contributed timber rights reside for commercial purposes or in any way
that is inconsistent with our conservation objectives. These restrictions will
run with the underlying land, which means that they permanently restrict use of
the underlying land by all current and future owners.
Summary of Federal Income Tax Considerations
Acquiring, holding, and disposing of our membership units involves significant
federal income tax considerations. Those considerations are summarized in the
section entitled "Federal Income Tax Considerations," which you should read
carefully. The discussion below is a summary of the most significant federal
income tax consequences of acquiring, holding, and disposing of our membership
units. You should consult with a tax advisor before contributing your timber
rights to us.
Taxation as a Partnership. For federal income tax purposes, we will be
classified as a partnership and each owner of a membership unit will be treated
as a partner of The Forest Bank. As a partnership, we will not be subject to
tax at the entity level, and you will be required to take into account in
computing your federal income tax liability your allocable share of our income,
gains, losses, deductions, and other items, regardless of whether cash
distributions are made. Generally, you will not be subject to tax on our
distributions and redemptions of your membership units, except to the extent
that any cash distribution exceeds the adjusted basis in your membership units.
Contribution of Timber Rights. You will not recognize gain or loss upon the
contribution of your timber rights to us in exchange for our membership units.
Your initial basis in your membership units generally should equal the portion
of your adjusted tax basis in your forest land at the time of contribution that
is apportioned to the timber rights you contributed.
3
Built-In Gain Allocations. When we harvest your timber, federal income tax law
requires that we allocate gain to you to the extent of your built-in gain (i.e.,
the excess of the fair market value of the timber over the tax basis of the
timber at the time of contribution). In addition, you will be allocated your
pro rata share of profit other than built-in gain. As a result, you could
recognize a significant amount of taxable gain, even though little or no cash is
distributed to you. To prevent you from being in a position where your tax
liability for a taxable year exceeds your cash distributions for that year as a
result of an allocation of built-in gain, you will be permitted to redeem
without penalty an amount of membership units that, when combined with any
distributions you receive, equals your presumed tax rate times the profit
(including built-in gain) allocated to you for that year. Your allocable share
of our gain from harvesting timber should be treated as long term capital gain.
Although you will be permitted to redeem a number of your class A units without
penalty to pay these taxes, such a redemption would result in a permanent
reduction in the number of class A units owned by you and, consequently, the
annual distributions to you from that point forward. You will not be entitled
to purchase any additional units with cash after any redemption.
Sale of Your Units. If you sell your membership units, you will be required to
recognize gain or loss equal to the difference between the amount realized from
the transaction and the adjusted tax basis in your membership units at the time
of sale.
Limitations on Losses and Deductions. Your ability to use losses and deductions
related to your membership units could be subject to basis limitations and
limitations on passive activity losses.
State and Local Taxes. You also should consider the state and local tax
considerations of acquiring, holding, and disposing of our membership units.
4
FREQUENTLY ASKED QUESTIONS
Who is eligible to participate in The Forest Bank?
You are eligible to participate if you own twenty or more acres of forest land
in a project area designated by our manager, The Nature Conservancy, as an area
in which to promote sustainable development. In addition, you must have owned
the land to which your timber rights pertain for at least one year prior to your
contribution. Our mission is to acquire a sufficiently large pool of timber
rights to enable us to manage forests to provide an economic return to our
members, but still ensure the health of the forest and the maintenance of the
forest's ecological processes.
What areas has The Nature Conservancy designated to promote The Forest Bank's
sustainable development mission?
Initially, our manager has designated the Clinch Valley region in Virginia and
Tennessee as the first area in which to promote our sustainable development
mission. For our purposes, the Clinch Valley region includes Russell, Tazewell,
Buchanan, Dickinson, Lee, Wise, Scott, Washington and Smyth counties in Virginia
and Hancock, Claiborne and Hawkins counties in Tennessee.
What rights with respect to my timber and land will I be giving up to The Forest
Bank?
When you acquire class A membership units in exchange for your timber rights,
you will be transferring to us the rights to cut and manage the standing timber
on your land forever. In addition, you will be granting us a forest management
and conservation easement, which will prohibit you and your heirs from ever
using the land in a manner that is inconsistent with forest conservation.
Generally, this means you cannot do anything to or on your trees or your
property that would diminish the value of the timber - no cutting or destroying
trees in any way for any reason, other than trees designated by us for you to
cut for firewood. See "The Offering--The Forest Conservation and Management
Easement." For example, neither you nor your heirs will ever be able to build a
house, operate a business or otherwise develop the portion of your property
relating to the timber rights contributed to us. However, we will work with you
to design your contribution of timber rights to exclude portions of your
property you want to reserve for unrestricted future use. See "Determination of
the Value of Your Timber Rights--The Appraisal Process."
What are the benefits I will receive as a participant in The Forest Bank?
First, you will be entitled to receive a preferred annual distribution based on
the initial value of timber rights contributed to us and the withdrawal rights
you selected. Second, you will have limited ability to withdraw the initial
value of your timber rights for cash four times each year beginning on the
second anniversary of your contribution. You will not, however, be able to sell
or harvest the timber and negotiate with foresters, loggers, or mills even after
you withdraw the initial value of your timber rights. Third, you will know that
the land will be managed as a working forest in a way that promotes wildlife and
nature conservation coupled with sustained economic productivity.
What can I do with my land after I contribute my timber rights to The Forest
Bank?
Even though you have contributed your timber rights to us and signed a forest
conservation and management easement, you will continue to own the underlying
land. You will continue to enjoy hunting, fishing, hiking and other activities
on the land, including cutting firewood from trees designated by us. In
addition, you can sell the land or transfer it to your heirs. However, you will
not be able to develop or use the land in any manner that is inconsistent with
forest conservation.
5
Can I ever get my timber rights back?
No. The contribution of your timber rights is permanent and irrevocable. This
irrevocable contribution allows us to develop and implement long term forest
management plans to ensure the long term health of the forest. Poor forest
management is often the result of short term decisions prompted by the need for
cash. Through The Forest Bank, you have limited access to the cash value of
your contributed timber rights, and we have the ability to ensure permanent,
working forests managed to promote long term health and conservation.
When will you cut my trees down?
We will work with you to create a management plan for your standing timber. The
management plan will state when and how we intend to cut your trees and how many
trees will be cut down. However, the management plans will be updated
periodically and unforeseen circumstances may require us to operate differently
than described in the management plan. Although we are not obligated to follow
the management plan, we must harvest your timber in a manner that is consistent
with our conservation objectives.
What will my distribution payments be and how often will I be paid?
As an owner of class A membership units, you will be entitled to a preferred
annual distribution equal to 4% or 4.5% of the initial value of the timber
rights you contribute to us, depending on the contribution option you select.
We intend to make preferred annual distributions within sixty days after the end
of each fiscal year. However, there is no guaranty that we will have cash
available to make the preferred annual distribution in any given year. If we do
not pay the full preferred distribution in any year, the amount of the
distribution not paid will cumulate, without interest, and be payable at the
time of the next annual preferred distribution or sooner at the discretion of
our board of managers if we have positive cash flow.
Can my income from The Forest Bank ever increase or decrease?
The distribution rate paid by us is the preferred annual distribution you will
receive. If the timber contributed by you burns or blows down, you still have a
right to that preferred annual distribution. In addition, in years in which our
operations produce excess cash flow, we may make distributions to you in excess
of the preferred amount. Although the preferred annual distribution is required
and accrues and accumulates if it is not paid, there can be no guaranty that the
preferred annual distribution will be paid on each payment date.
In addition, we will reappraise the value of the timber rights you contribute
every tenth anniversary of the original contribution. If the new value plus the
value of any timber that has been harvested in the intervening period exceeds
certain thresholds, we will issue additional units to you to reflect the
increased valuation. Any additional units will effectively increase your
preferred annual distributions and the amount you can withdraw. If the
reappraisal results in a value less than your original appraised value, there
will be no change to your number of units or preferred distribution. See
"Description of Membership Units--Revaluations of Class A Units."
When and how often can I withdraw the cash value of my timber rights?
You generally will not be able to withdraw funds prior to the second anniversary
of your contribution of timber rights. After the second year, the restrictions
on your ability to withdraw the initial value of the timber rights you
contributed depend on which contribution option you select. In addition, you
will be permitted to withdraw funds in the event that we make an allocation of
built-in gain to you in connection
6
with the harvesting of the timber on your land. In that event, you will be
permitted to redeem without penalty an amount of membership units that, when
combined with any distributions you receive relating to the year in question,
equals your presumed tax rate times the profit (including built-in gain)
allocated to you for that year.
If your account balance ever drops below 25% of the original value of the timber
rights you contribute to us, we may choose to pay you your remaining balance and
redeem your outstanding membership units. Redemptions will occur only on each
March 31, June 30, September 30 and December 31 of each year. See "Description
of Membership Units--Redemptions."
What if I only need part of the cash value of my contributed timber rights but
want to leave the rest in The Forest Bank?
The Forest Bank is designed to allow partial withdrawals of the initial value of
the timber rights you contribute to us, depending on the terms of the class of
membership units you acquire.
What are the tax implications of my contributing timber rights to The Forest
Bank?
We have received an opinion from our counsel that your initial contribution of
timber rights to The Forest Bank will not result in a taxable event for you.
The opinion is based on certain assumptions described in "Federal Income Tax
Considerations - Summary of Tax Opinions." However, you will be subject to tax
when you redeem your membership units. As a member of The Forest Bank, you will
be allocated your share of The Forest Bank's income (including income associated
with the preferred annual distributions). In addition, you will be allocated
built-in gain when we harvest timber on your land. In that event, you will be
permitted to redeem without penalty an amount of membership units that, when
combined with any distributions you receive relating to the year in question,
equals your presumed tax rate times the profit (including built-in gain)
allocated to you for that year. The tax implications of contributing timber
rights to The Forest Bank are summarized in more detail in "Federal Income Tax
Considerations." We have structured The Forest Bank to take into account the
tax consequences to you of acquiring, holding and disposing of class A
membership units. Nevertheless, we recommend that you seek the advice of an
accountant, tax manager or tax counsel with respect to your investment in The
Forest Bank.
How do I know The Forest Bank will manage my timber consistent with accepted
conservation principles?
Sustainable forest management will be the core value of our management plans.
Our staff will work closely with you to develop a management plan for your
property. Prior to contributing your timber rights, you will know what our
plans are for the future management of your forest. In addition, we intend to
engage a third-party forest certification entity to audit our forest management
operations as a check that we are being true to our conservation and sustainable
development objectives. Finally, you can rely on the reputation of our manager,
The Nature Conservancy, which is the largest conservation organization in the
United States and has been a leader in forest conservation since 1951.
7
RISK FACTORS
Contributing your timber rights in exchange for our class A membership units
involves risk. You should carefully consider the following material risk
factors, as well as the other information presented in this prospectus, in
deciding whether to contribute your timber rights to us in exchange for our
membership units.
RISKS RELATING TO YOUR INVESTMENT IN OUR MEMBERSHIP UNITS
You should read this entire prospectus carefully and should not consider any
particular piece of information in this prospectus or in any other materials
concerning the Forest Bank without carefully considering the risk factors
discussed below and the other detailed information contained in this prospectus.
From February through September of 2000, our manager, The Nature Conservancy,
mailed information concerning the Forest Bank to certain landowners in the
Clinch Valley. In addition, there have been numerous news stories and articles
published on the Forest Bank, including stories in Clinch Valley publications
and one article in the March, 2000 issue of the Journal of Forestry. If you
received any of the mailings from our manager or read any of the news stories,
you should not consider that information alone in making any decision regarding
a potential contribution of timber rights in exchange for our units. Rather,
you should review the information contained in this prospectus when making your
investment decision. None of the statements in this prospectus or in any other
information provided to you should be considered in isolation. You should make
your investment decision only after reading this entire prospectus carefully,
especially the information under the heading "Risk Factors."
Some of the prior information you may have seen concerning the Forest Bank
contained statements regarding the annual distributions and withdrawal rights
with respect to our units. Because both the concept and the particular details
on the Forest Bank structure have evolved and changed continuously over the 18
months prior to the commencement of this offering, any information provided
prior to the effective date of the registration statement of which this
prospectus is a part is now likely to be inaccurate or incomplete. The
information in this prospectus supercedes all prior information. Please review
the information contained in this prospectus, particularly the information
described under "Risk Factors," before making any decision with respect to our
units.
We have received, and may continue to receive, a high degree of local and
national media coverage, including coverage that may not be directly
attributable to us. Such information may be inconsistent with the information
contained in this prospectus or may relate to information not contained in this
prospectus. The media coverage should not be considered in isolation when
making any decision with respect to contributing timber rights in exchange for
our units, without also reviewing this prospectus.
Your transfer of timber rights to us is permanent and irrevocable and will
permanently and significantly reduce the value of your land.
When you acquire class A membership units in exchange for your timber rights,
you will be transferring to us the rights to cut and manage the standing timber
on your land forever. In addition, you will be granting us or our manager a
forest conservation and management easement, which will prohibit you and your
heirs from ever using the land in a manner that is inconsistent with forest
conservation. Generally, this means you cannot do anything to or on your trees
or your property that would diminish the value of the timber - no cutting or
harming of your trees for any reason, other than trees designated by us for you
to cut for firewood. See "The Offering--The Forest Conservation and Management
Easement." For example, neither you nor your heirs will ever be able to build a
house, operate a business or otherwise develop the portion of your property
relating to the timber rights contributed to us. These restrictions will run
with the underlying land, which means that they will also apply to anyone who
inherits or buys this land. If the land on which the contributed timber is
growing was otherwise conducive to development, now or in the future, the value
and marketability of your
8
land will be permanently and significantly reduced by contributing your timber
rights to us. In addition, you should be aware the easement states that it
should be liberally construed to effect its conservation objectives, which means
that any ambiguities in terms of what you can and cannot do on your land may be
interpreted against you and in favor of The Forest Bank.
Our elevation of forest conservation objectives over our economic objectives
will impair our ability to generate revenue and make distributions to you.
Our core mission is to manage forest land to promote conservation and provide a
return to our members. However, our limited liability company agreement
provides that our conservation objectives take priority over our economic
objectives in every instance. As a result, we will not be as profitable as a
company that pursues solely economic objectives. A company that pursues solely
economic objectives may have a better ability to make distributions to its
members. If you do not share our priority on conservation over economic
objectives, you may want to reconsider contributing your timber rights to us.
The absence of a market for our membership units will make it difficult for you
to sell your units.
There is no public or private market for our membership units and we have no
plans to encourage the development of any market. Other than the redemption
provisions described in this prospectus, it may be difficult for you to find a
buyer to pay cash for your membership units if you decide to sell them. You may
not be able to resell your membership units promptly or at a price that is equal
to the value of your timber right contribution. The value of the timber rights
that you contribute in exchange for your membership units may not be indicative
of either the price at which you could sell them or the proceeds that you would
receive if our company were liquidated or dissolved.
Your investment in our membership units will not appreciate in value in the
manner that the timber rights or the underlying land may appreciate.
Prior to contributing your timber rights to The Forest Bank, your timber rights
or land were relatively easily salable. As disclosed in the prior risk factor,
the membership units you will receive in exchange for your timber rights may not
be as easily salable, if they are salable at all. Due to potential factors such
as shortages in timber or increased demand for timber, the value of your timber
rights could result in an increase in value beyond historical trends. However,
the value of your membership units will not be subject to similar market
conditions and increases in underlying value. As a result of the contribution
of your timber rights to us, you will be forfeiting possible gain to which you
would otherwise be entitled that could result from the increase in the value of
your timber, your timber rights and the underlying land. If your land was not
encumbered by your transfer of timber rights to us and the forest management and
conservation easement, you could sell your timber rights or land or realize that
value in some other way.
We cannot guarantee that we will be able to make the preferred annual
distributions or withdrawal payments to you.
We are obligated to pay you a preferred annual distribution with respect to your
class A membership units. In addition, we are obligated to pay you certain
amounts on redemption of your class A membership units. We cannot assure you
that we will have cash available to distribute to you at the time the preferred
annual distribution or redemption payments are required. Our manager, The
Nature Conservancy, has a limited obligation to contribute or loan cash to us to
make such payments, but we cannot guarantee that our manager will fulfill its
obligations or that we will have cash available to make these payments after our
manager's obligation to provide cash terminates.
9
As an owner of our membership units, you will have little or no rights to manage
our company.
We will be managed by the board of managers appointed by our manager, The Nature
Conservancy. Owners of our membership units will have little or no ability to
control the operations or affairs of our company. Our limited liability company
agreement provides that owners of class A membership units will not be able to
vote on any matter concerning our company, other than the sale, merger or
consolidation of our company to or with another person or entity, which also
requires the approval of our manager. As a result,
. you will not have any control regarding our day-to-day operations;
. you will not have any control regarding when or how the trees on your
property are harvested; and
. you will not have any control regarding The Forest Bank's forest
management or timber sale decisions.
Although we will work with you as a landowner to develop a management plan for
your property, we will not be bound to adhere to that plan. The control you
exert in developing that plan may not have any lasting effect on the way we
manage your timber. We intend to follow the management plan developed in
cooperation with you, but are not obligated to do so and may need to diverge
from that plan to address unforeseen circumstances, such as fires, severe
weather, infestations or other natural disasters affecting the standing timber
on your property or other properties.
Most of our major policies described in this prospectus, including policies
intended to protect you as a member, can be changed at any time without a vote
of our members or notice to you as a member, except as required by law.
Therefore, these policies and limitations may not be meaningful to protect your
interests as a member.
There may be disputes with landowners regarding the rights they have transferred
to us.
We seek to employ a new, innovative concept in forest management and
conservation. The newness of this concept may result in some disputes with
landowners regarding the way we manage timber rights or their rights as holders
of class A membership units. Such disputes may result in the disruption of our
activities and may cause the depletion of certain of our resources. Any
dispute, disruption of our activities or depletion of our resources could have a
material adverse effect on the results of operations and financial condition of
our company and could cause you to experience a loss with respect to your
membership units.
Our marketing activities prior to distribution of this prospectus may allow
three landowners to request their timber rights be returned, if they are ever
contributed to us in exchange for our units.
In early 2000, our manager began discussions with landowners in the Clinch
Valley regarding contributing timber rights to the Forest Bank. Although those
landowners have not agreed to contribute timber rights to us, in the summer of
2000 they entered into letters of intent that prevent each landowner from taking
any action that might harm their timber for one year in exchange for a one time
cash payment of $100. In addition, if those landowners eventually contribute
timber rights to us, we will pay them an amount equal to 4% per year of the
appraised value of their timber rights on the date of the contribution from the
date of the letter of intent. The total value of the timber rights that are
subject to letters of intent as of the date of this prospectus is approximately
$678,000. If: (1) these letters of intent are deemed to be offers of class A
units prior to our filing of the registration statement of which this prospectus
is a part, (2) the landowners who are subject to letters of intent eventually
decide to contribute timber rights to us in exchange for our units, (3) the
landowners subsequently decide that they would rather own their timber rights
than our units, then we may be forced to refund those timber rights to those
landowners in cancellation of the units issued to such landowners for a period
of one year.
10
RISKS RELATED TO OUR COMPANY
We do not have any operating history and our concept has not been tested.
The Nature Conservancy began researching the feasibility of a forest bank
program in 1996 as an internal project through its Center for Compatible
Economic Development, which is now called the Compatible Ventures Group. We
were organized as a Delaware limited liability company in January of 2001. As
such, we do not have any operating history. Furthermore, our concept of
operating a for-profit business that places a priority on conserving the
ecological productivity of working forests over economic productivity in all
instances is a relatively new concept. We have no record of whether we can be
successful as both a conservation tool and a revenue generator. You should
evaluate an investment in us in light of these risks, expenses and difficulties
frequently encountered by companies in their early stages of development. As a
result of these risks and difficulties, you may experience a loss with respect
to your investment in the membership units and you may not be able to recoup
this loss.
No landowners have committed their timber rights to us.
We will be relying on landowners to contribute their timber rights to us and, as
of the date of this prospectus, no landowner has agreed to contribute timber
rights to us and no timber rights have been contributed. Contributions of
timber rights in exchange for membership units will represent the resource base
for our sales of timber. Without these contributions, we will not be able to
meet our economic objectives, which may adversely affect our financial condition
and results of operations and impair our ability to make distributions to you.
Our failure to acquire a sufficiently large pool of timber rights will also
impair availability to meet our conservation objectives.
We cannot be sure that landowners will share our unique approach to forest
conservation and economic return as much as we intend or as rapidly as we
intend.
We are implementing a relatively new approach to forest management based on a
blending of economic incentives and returns on one hand and forest conservation
principles on the other hand, but elevating the conservation principles over the
economic incentives. Our success will depend on our ability to convince
landowners to contribute their timber rights to us in perpetuity. There can be
no assurances that we will be able to attract a sufficiently large amount of
timber rights to effectively balance the conservation principles and economic
incentives and still produce sufficient cash flow to pay a return to our
members.
We will be competing for the right to access the best timber in the area with a
number of different competitors. These competitors include small-scale loggers,
forest consultants, and medium to large sawmills. Some landowners will prefer
working with our competitors who do not share our conservation mission and who
focus solely on economic objectives and generating returns to their
shareholders.
Our management has limited experience operating a for-profit or public company.
Although some of our management team has substantial experience in the timber
industry and managing timberlands held for investment, they have limited prior
experience operating a for-profit company. None of them have experience
operating a timber company pursuing both conservation and economic objectives.
The lack of the management team's experience in managing a for-profit entity
could adversely affect our results of operations and financial condition and
ability to make distributions to our members. See "Our Manager--Information on
Our Key Personnel."
We may be required to distribute cash to numerous membership unit holders at one
time.
It is currently planned that our members who have contributed timber rights will
have, at various intervals, the right to withdraw cash equal to the initial
value of the contributed timber rights by redeeming their units for
11
$1.00 per unit. Initially we anticipate having capital reserves and
contributions of capital from our manager. As operations progress, however, we
anticipate having capital reserves equal to only a fraction of the total value
of timber rights contributions, if at all. It is possible that many of our
members could choose to redeem their units at the same time and thereby
materially deplete, or even exhaust, our cash reserves, in which case we would
not have enough cash to make preferred annual distributions to our members. For
example, if there is a recession in a region where we have acquired a
significant amount of timber rights, the members in that region may all seek to
withdraw the value of their timber rights at the same time.
We may not be able to achieve our intended growth.
Our business plan depends on our ability to acquire timber rights in exchange
for membership units. If we are unable to acquire a sufficient amount of timber
rights, we will not be able to achieve our economic and conservation objectives.
Our ability to acquire any timber rights will be subject to a number of factors
beyond our control, such as:
. landowners' willingness to give up the right to ever develop their land
on which their contributed timber rights reside;
. competition from other purchasers of timber rights who may offer a
greater immediate financial reward to landowners; and
. landowners' understanding and agreement with our economic and
conservation objectives.
We compete with traditional paper and forest products companies, other public
and private timber investment firms, governmental entities and other
conservation groups for timber properties. Many of our competitors have
substantially greater financial resources than we do. Competition for these
properties may increase prices and may make it difficult for us to acquire
timber rights in light of the higher cash prices that may be paid by our
competitors.
Our ability to generate economic returns to you will be impaired if we are
unable to acquire a sufficient number of acres of timber rights.
A lack of diversity in the timber rights we acquire could increase your risk in
acquiring our membership units. If we are unable to acquire a number of
contributions of timber rights relatively quickly, our ability to generate
revenue will suffer and we may not be able to pay the preferred annual
distributions to you. If we only acquire a limited number of acres of timber
rights, adverse conditions on those properties would have a direct negative
impact on our ability to generate revenues to make distributions to you as a
member. If we are not able to acquire a sufficient number of acres of timber
rights quickly to begin generating revenue, we may be forced to close our
operations and begin to liquidate the Forest Bank's assets, including the timber
rights contributed by you. See "Description of Membership Units--Liquidation"
for a description of how our timber rights and other assets will be distributed
on liquidation.
During our liquidation or dissolution, it is possible that your timber rights
will be transferred to an unrelated third party creditor of The Forest Bank.
In the event of our dissolution or liquidation for any reason, including
bankruptcy or our inability to acquire a sufficient number of timber rights as
described above, our assets, including the timber rights you contribute to us,
will be distributed as provided under "Description of Membership Units--
Liquidation." Our limited liability company agreement requires only that we and
our manager use reasonable best efforts to ensure that (1) the timber rights are
transferred to their original contributor in redemption of their class A units,
or (2) the timber rights are distributed to our manager and the contributor's
class A units are redeemed in for cash. It is possible that your timber rights
may be transferred to a third party with no affiliation to us, you or our
manager. That third party transferee would have all the rights to your timber
that we will have and as are described throughout this prospectus.
12
A concentration of timber rights in one geographic area could adversely impact
our ability to maximize economic returns.
Timber rights contributed to us will be limited to a specific geographic region,
initially and possibly permanently. We will focus initially on the Clinch
Valley region of southwestern Virginia and northeastern Tennessee. As a result,
we will be highly susceptible to any adverse conditions in that area such as
weaker regional economic conditions, implementation of laws or regulations that
could restrict our activities, natural disasters and conditions in the local
timber industry. As a result of the occurrence of any of these adverse
conditions, we could experience an adverse impact on our results of operations
and financial condition and you could experience a loss on your investment.
We may experience a loss of key personnel.
The individuals our manager designates to operate our company are key to our
success. Our manager may remove these individuals from our company at any time.
In addition, none of these individuals has an employment contract with our
manager and may be terminated or quit at any time. For example, Steve Lindeman
will lead the process of acquiring timber rights in the Clinch Valley region and
managing the initial day-to-day operations of The Forest Bank. Mr. Lindeman
also has the significant task of building trust and interest in our unique goals
among the landowners in the Clinch Valley. Land transactions and management
depend on individual relationships and trust, and the loss of Mr. Lindeman or
other key management personnel could significantly disrupt our operations and
growth opportunities and adversely impact our financial condition and results of
operations. We do not intend to purchase key-person insurance policies with
respect to any of our employees. See "Our Manager--Information on Our Key
Personnel."
Our financial results and cash flow will change from season to season.
Varying weather conditions throughout the year, and the related fluctuations in
construction activity and demand for timber, will affect the harvesting of our
timber and the price we receive upon sale of harvested timber. These seasonal
limitations will reduce our revenues during those periods, and may restrict our
ability to distribute cash to you. If we acquire additional properties in other
locations, the seasonality of our operating results may change.
CONFLICTS OF INTEREST RISKS
We will not have our own employees and will be totally reliant on the employees
of our manager.
We will not have any employees and will rely entirely on the employees of our
manager to manage our business and assets. A management agreement obligates our
manager to appoint its employees to serve as our board of managers and officers,
but our manager may remove those officers at any time. Our board of managers or
officers will make all decisions with respect to the management of our company.
Thus, the success of our business will depend on the ability of our manager's
personnel to manage our day-to-day operations. Any adversity experienced by our
manager or problems in our relationship with our manager could adversely impact
the operation of our properties and, consequently, our cash flow and ability to
make distributions to our members. Our management agreement with our manager is
described under "Our Manager."
Our management team will have competing obligations for their time and may not
devote enough time to our company.
Our management team will consist entirely of employees of our manager and those
employees will have duties and responsibilities to our manager other than
controlling the operations of our company. Our manager is only obligated to
provide the equivalent of three full time employees to manage our company. Most
of the employees designated by our manager will have competing time commitments
and other obligations to our
13
manager. As a result, our management team may not devote enough time to managing
our company, and our ability to maximize distributions to you while still
placing a priority on our conservation purposes may be adversely impacted.
The absence of arm's-length bargaining may mean that our agreements are not as
favorable to you as a member in our company as they otherwise might have been.
Any existing or future agreements between us and our manager, including the
management agreement, were not and will not be reached through arm's-length
negotiations. As a result, these agreements may not reflect your best interests
as a member in our company. The compensation and other terms of the management
agreement and potential future agreements may be overly favorable to the other
party to such agreements, including our manager.
If our manager and its employees do not successfully manage their conflicts of
interest, we may not meet our investment objectives, which could reduce our
expected cash available for distribution to our members.
Our manager has a conflict of interests in determining the value of your timber
rights.
Our manager will play a major role in the appraisal of the value of the timber
rights you contribute to us. The value of your timber rights determines the
amount of the preferred annual distribution to you as a holder of class A units.
Because we may pay distributions to all unit holders, including our manager, if
we have cash flow in excess of the cash needed to pay the preferred
distributions, it is in our manager's best interest to place a lower value on
timber rights contributed for class A units. In addition, our manager may
contribute timber rights it owns in exchange for class A units or purchase class
A-1 units for cash. As a result, our manager has an interest in valuing your
timber rights at a lower value and the timber rights it contributes, if any, at
a higher value. You should be aware that our manager is subject to this
conflict of interest.
RISKS RELATED TO THE TIMBER INDUSTRY
Losses of timber from fire and other causes are not insured and could cause
substantial economic losses for us.
Fire, insect infestation, severe weather, disease, natural disasters and other
causes beyond our control may reduce the volume and value of timber that can be
harvested from our timberlands and hurt our financial results and cash flow. We
do not maintain insurance for any loss to our timber, including losses due to
these causes. We will have to bear the entire risk of loss resulting from
natural disasters or other similar events beyond our control. We believe that
it is typical in our industry to not maintain insurance for those potential
losses.
The volatility of timber prices may reduce our revenues.
The timber market is very volatile, and the proper timing of sales or the
harvest of certain types of trees to maximize revenues is important. Because we
place a priority on conservation objectives over economic return, we may not
always be able to effectively time sales to maximize revenues or avoid selling
when timber prices are depressed. Our inability to effectively time harvests
and sales could have a materially adverse impact on our results of operations
and ability to make intended payments to you.
Changes in supply and demand affect timber prices and our revenues.
The market price for timber can change substantially, based on changes in supply
and demand, especially for a particular species of timber or in a particular
geographic area, which could negatively affect our revenues. Decreases in
demand, increases in supply, or both, may reduce prices for our timber, which in
turn could reduce our revenues and negatively affect our financial results.
14
The number of timber sellers and the volume of timber they have available for
sale determine the supply of timber. Historically, increases in timber prices
have caused harvesters of timber to cut more trees. This increase in supply may
reduce the amount of price increases. Some government agencies, principally the
United States Forest Service and the Bureau of Land Management, own large
amounts of timberlands. If these agencies choose to sell more timber than they
have been selling in recent years, timber prices could fall. The supply of
timber available for harvest is also affected by, among other things,
environmental and other legal restrictions on harvesting, self-imposed
restrictions on harvesting attributable to timberland management decisions, and
natural events that destroy trees or entire forests, such as insect infestation,
severe weather and fire.
Adverse conditions in the construction industry could adversely impact the
prices we receive for our timber.
The industries that use wood products drive the demand for timber. The demands
of these industries depend on the level of construction, repair and remodeling
activity. Interest rates and other local, national and international economic
conditions affect the level of construction, repair and remodeling activity. A
slowdown in construction is likely to reduce demand for our timber, which would
reduce our revenues. Wood substitutes and products made from lower quality wood
may also reduce demand for our timber. Other companies may seek to harvest and
sell more timber to compensate for lower prices, but doing so would be
inconsistent with our conservation objectives.
Weak export markets may reduce demand for our timber.
Weak overseas markets for wood and wood products, including major overseas
crises such as the Asian slowdown in the late 1990s, may reduce timber demand
and exportation to those markets and increase domestic supply. This type of
supply and demand imbalance would reduce the prices that we can obtain for our
timber, and could adversely impact our ability to make intended distributions to
you.
Forestry, environmental and endangered species regulations restrict timber
harvesting and may cause us to alter our business as currently planned.
Even though our environmental goals take priority over economic goals, and
though we seek to prevent current practices that jeopardize the long term
ecological well-being of our forests and their surrounding landscapes, the fact
that we will permit harvesting on our timberlands will subject us to numerous
environmental laws and regulations. There may be instances where environmental
laws or regulations prevent us from harvesting on our timberlands. If we are
unable to harvest our timber as planned, our ability to make distributions to
you would be adversely affected.
Environmental groups and interested individuals may seek to delay or prevent us
from harvesting the timber.
We may encounter other environmental groups and interested individuals who would
seek to intervene or impair our ability to harvest timber. These challenges
could materially delay or prevent harvesting of our timber or cause damage to
the timber itself in a way that would reduce its value or marketability. Groups
and individuals may stage protests that would physically prevent or delay our
harvesting plans or may file or threaten to file lawsuits that seek to prevent
us from implementing our timber harvesting plans. Any delay in or restriction
on harvesting due to the intervention of environmental groups or interested
individuals could have an adverse effect on our operating results and financial
condition and adversely affect our ability to make distributions to you.
15
The presence of endangered or threatened species restricts harvesting.
Federal, state and local laws and regulations intended to protect threatened and
endangered species limit and may prevent our timber harvesting, road building
and other activities. These threatened and endangered species restrictions
apply to activities that would kill, injure or harass a protected species or
significantly degrade its habitat. The habitat of a protected species includes
areas in which it lives, nests, shelters, breeds, forages or feeds or areas that
are for some other reason necessary for the conservation of the protected
species. The size of the area subject to restriction will vary depending on the
protected species at issue, the time of year and other factors beyond our
control, but can range from less than one acre to hundreds of acres. We will be
aware of many of the endangered species on a property prior to acquiring the
timber rights. However, we could discover new endangered populations in the
course of operations which would require us to alter or limit our timber
harvesting with respect to the affected land. Any additional protection of
endangered or threatened species that restrict our ability to harvest timber
could have an adverse impact on our financial condition and results of
operations and adversely effect our ability to make distributions to you.
Additional regulations and environmental risks may adversely affect us.
Our operations and the properties on which we will conduct our operations will
also be subject to laws and regulations governing forestry operations, the
environment, and health and safety. Some of these laws and regulations could
impose significant costs, penalties and liabilities on us for violations or
existing conditions whether or not we caused or knew about them. Your lands may
also be subject to laws and regulations designed to protect wetlands and water
courses. These laws and regulations may restrict future harvesting, road
building and other activities to the extent that these activities cause water
pollution or change a wetland area. Compliance with, or damages or penalties
for violating, current and future laws and regulations could result in
significant expense and losses for which we will not be insured. The presence
of hazardous substances on lands on which we acquire an interest may require
remediation of such contamination, thereby adversely impacting our revenues and
the value of our membership units.
Regulation is likely to become more restrictive and reduce the amount of timber
that is available for harvesting.
Laws, regulations and related judicial decisions and administrative
interpretations affecting our business are subject to change and new laws and
regulations that may affect our business are frequently introduced. These laws
and regulations may relate to, among other things:
. the protection of timberlands;
. endangered species;
. environmental protection;
. air and water quality; and
. timber harvesting practices.
During the last ten years, the number of environmental, endangered species and
forestry laws and regulations has increased markedly and the enforcement of such
regulations has generally intensified. This has resulted in an increase in the
number of acres subject to harvest restrictions. Based on historic trends, we
believe that these laws and regulations will become more restrictive over time,
possibly resulting in a significant decrease in the number of harvestable acres.
In general, changes in existing laws or regulations, which could be made by the
United States Congress, legislatures in states where we own timber rights, or
federal or state administrative agencies, could result in new or additional
restrictions on harvesting. We cannot assess the likelihood that one or more of
these measures will be adopted, and, if so, what effect this might have on our
operations.
16
Nevertheless, it is our plan to fully adhere to and support all such laws and
regulations which seek to protect habitat and threatened species. In addition,
we anticipate that our timber management and harvesting practices will exceed
legal requirements. However, we cannot guarantee that all of your land
contributed will be available for harvesting or that additional laws and
regulations that prevent harvesting or make harvesting more expensive will not
reduce the value of your membership units or have a negative impact on our
financial condition or results of operations. See "Other Regulatory Matters."
The targeted timberlands vary significantly in timber quality.
We initially plan to target timber rights in the Clinch Valley region. While
there is some excellent quality timber in some of its areas, other areas vary
from modestly productive to poor. Our viability is premised on our ability to
benefit from a mix of excellent and modest timber quality. There can be no
assurance that we will be able to maintain a mix of excellent and modest timber
and our failure to do so could adversely effect our results of operations and
ability to make intended distributions to you as a member.
Lack of access to quality timber could reduce land productivity.
Our management will attempt to cluster contributed timber rights to take
advantage of localized economies of scale in harvesting and to facilitate
forest access. If this clustering does not occur, given the local topography,
there may be access difficulties that preclude the full management of some
lands. This would result in overall lower productivity for the land rights
contributed.
RISKS RELATED TO TAX CONSEQUENCES
The contribution of your timber rights may be recharacterized as a taxable
exchange.
We have received an opinion from our counsel that each member of The Forest Bank
will be treated as a partner for federal income tax purposes and that you will
not recognize gain or loss on your contribution of timber rights for our
membership units. If your membership units are classified as debt instead of
equity or if you otherwise are not entitled to nonrecognition treatment on the
contribution of your timber rights to us, you would have to recognize gain, if
any, on that contribution transaction, which could result in a substantial tax
expense to you without a cash distribution from us to enable you to pay those
taxes.
You will be allocated gain when we harvest your timber.
When we harvest your timber, you will be allocated gain to the extent of your
built-in gain at the time of your contribution to The Forest Bank. "Built-in
gain" is the excess of the fair market value of the timber over the tax basis of
the timber at the time of contribution. To prevent you from being in a position
where your tax liability for a taxable year exceeds your cash distributions from
us for that year, you will be permitted to redeem without penalty an amount of
membership units that, when combined with any distributions made to you, equals
your presumed tax rate times the profit (including the built-in gain) allocated
to you for that year. However, there can be no complete assurance that we will
have sufficient cash to redeem all of the membership units you submit for
redemption. As a result, you could recognize a significant amount of taxable
gain, even though little or no cash is distributed to you.
Our allocations of income, gain, loss, and deductions may not be respected.
We have received an opinion from our counsel that our allocations of income,
gain, loss, and deductions should have "substantial economic effect" under
section 704(b) of the Internal Revenue Code of 1986, as amended, and the
Treasury regulations thereunder. The Internal Revenue Service may determine
that an allocation made pursuant to our limited liability company agreement does
not comply with Code section 704(b), and the IRS may reallocate such items in
accordance with their determination of the economic interest
17
of each partner in the partnership. Such a reallocation could cause you to be
allocated more of our income or gain.
We may fail to be taxed as a partnership.
We have received an opinion from our counsel that we will be taxed as a
partnership for federal income tax purposes. However, if we are taxed as a
corporation, we would be subject to tax on our net income (without any
deductions for cash distributed to the owners of our membership units). In
addition, you would be subject to tax on cash distributions regardless of your
adjusted tax basis in your membership units. Such distributions would be
ordinary income to the extent of our earnings and profits.
Your losses and deductions may be subject to limitations.
Your ability to use losses and deductions related to your membership units could
be subject to limitations. Specifically, any net loss for a year allocated by
The Forest Bank to you for tax purposes may be deducted by you only to the
extent of the adjusted tax basis of your membership units. Moreover, any income
or loss allocated to you by us will be treated as "passive activity" loss and
income, and any losses allocated to you by us generally may be used only to
offset income from other passive activities. Further, if we were treated as a
"publicly traded partnership," you would not be able to use your income (or
losses) from us to offset your passive activity losses (or income) from any
other passive activity.
The Forest Bank and you may be subject to state and local taxation.
The rules of some states and localities for computing and reporting taxable
income differ from the federal rules. In addition, under the tax laws of
certain states, we may be subject to state income or franchise tax or other
taxes. Such taxes will decrease the amount of income available to be
distributed to you. Furthermore, we may be required to withhold and pay over to
state income tax authorities income allocated or cash distributed to members
that are not residents of those states, and nonresident members may be required
to file tax returns to those states even though you have no other contact
whatsoever with that state.
Federal tax law changes may be unfavorable.
The tax benefits associated with owning membership units in The Forest Bank
could be lost because of future changes to the federal tax laws. The
statements, conclusions, and opinions contained in this prospectus are based on
existing law as contained in the Code, the Treasury regulations thereunder,
administrative rulings, and court decisions as of the date of this prospectus.
You should recognize that those authorities could be modified by legislative,
administrative, or judicial action at any time and in a manner that would
adversely affect the tax consequences of owning our membership units.
18
FORWARD-LOOKING STATEMENTS
Some statements in this prospectus represent our expectations for The Forest
Bank and our membership units. These forward-looking statements are made only
as of the date of this prospectus. You can generally identify these forward-
looking statements by the use of the words "may," "will," "expects," "intends,"
"estimates," "anticipates" or "believes" or similar language.
We believe the expectations expressed in all forward-looking statements are
reasonable and accurate based on information we currently have. However, our
expectations may not prove to be correct. Important factors that could cause
actual results to differ from our expectations are disclosed under "Risk
Factors," "Our Business" and in other parts of this prospectus.
DISTRIBUTION POLICY
We will pay distributions to our members in accordance with the terms of our
limited liability company agreement. The limited liability company agreement
will provide for a preferred annual distribution to the class A members based on
the value of the timber rights you contributed to us, calculated at the time of
original contribution. In addition, in any year in which our operations produce
cash flow in excess of our preferred annual distributions and redemption
payments, our manager, in its discretion, may pay additional distributions to
holders of our membership units, including our manager, pro rata in accordance
to the total number of membership units owned by each member. The aggregate
amount of any such additional distributions will be determined by our board of
managers in its sole discretion but will not exceed the amount of our cash flow
in excess of our costs of operation and preferred distributions.
The preferred annual distribution for each class of class A membership units is
different. The preferred annual distributions for each class of class A
membership units are:
Class Preferred Annual Distribution
----- -----------------------------
A-1 $.04 per unit
A-2 $.045 per unit
A-3 $.045 per unit
See "Description of Membership Units--Distributions."
We will pay distributions annually or more frequently subject to the discretion
of our board of managers. If we do not pay the full preferred distribution in
any year, the amount of the distribution not paid will cumulate, without
interest, and be payable at the time of the next annual preferred distribution
or sooner at the discretion of our board of managers if we have positive cash
flow. In addition, if we do not pay the full preferred distributions for two
consecutive calendar years, each member of our board of managers can be removed
or replaced by a vote of holders of a majority of the outstanding class A units.
There can be no assurance that we will have cash available to make distributions
to you on any particular distribution date.
In the event the preferred annual distribution due on the outstanding membership
units is not paid in full for any two consecutive calendar years, the owners of
at least two-thirds of the outstanding class A membership units may vote to
replace the manager, subject to identifying a suitable replacement manager in
compliance with our limited liability company agreement.
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USE OF PROCEEDS
The proceeds of our offering of membership units will be the rights to manage,
conserve and cut the standing timber contributed to us. We will manage,
conserve and cut the timber rights as described in this prospectus. See "Our
Business."
There will be no cash proceeds received from this offering. In order to carry
on our business as we propose, we will rely on the capital contributions and
loans from our manager described in this prospectus to pay operating costs until
we begin to cut the standing timber and generate revenues.
DETERMINATION OF THE VALUE OF YOUR TIMBER RIGHTS
We will issue one class A membership unit to you in exchange for every $1.00 in
value of the timber rights you contribute to us, based on our appraisal of the
timber rights you contribute.
The Appraisal Process
Our appraisal of the timber rights you will contribute involves the measurement
of the standing timber and a series of judgments regarding its quality and
value. Each appraisal will be based on a complete timber inventory. We
anticipate that the actual appraisal will be performed by our manager in
reliance on timber inventories conducted by forest consultants or in limited
cases, our manager.
The timber inventory involves an estimation of the timber volume on a particular
parcel by measuring a set of sample forest plots within the target parcel, which
we believe is consistent with industry inventory practices. Forest types are
generally aggregated to create stands with similar species, ages and growing
conditions. Tree volumes by species within the stands are based on the
measurement of tree diameters at breast height (dbh) within sample plots. The
sample plots are then averaged across the stand to get a volume per acre by
species within the stand. This volume per acre multiplied by the stand acreage
gives a species-by-species volume for each stand. All stands can then be
aggregated to determine a total timber inventory.
Once an inventory is taken, the value of the timber is based on a survey of the
current timber markets by species. The predominant type of timber in the Clinch
Valley region, our initial region of focus, is hardwood. The hardwood timber
market can be extremely volatile and prices are often driven by the particular
needs of individual mills for particular species. The survey therefore is a
rough averaging of prices at local mills based on sales in the two to three
month period prior to the appraisal. This can usually be roughly confirmed with
published market results in industry publications such as the Hardwood Market
Report. However, we will not adhere to any precise formula or method to average
contemporaneous market prices.
In addition to mill data, valuation is highly dependent on an assessment of the
relative quality of the timber and the issues surrounding its potential harvest,
such as ease of access, distance to markets and the steepness of the slope.
Lack of access and the need to build roads would require a downgrading of the
value because of the additional costs involved in logging. A higher than
average percentage of high quality timber, such as veneer timber or high quality
sawtimber, would, in contrast, create a higher timber valuation.
The Clinch Valley is a demanding area in which to operate, and we anticipate
that portions of the land contributed will be physically impossible to harvest
due to steep slopes, proximity to water courses, and other reasons. Timber
located within an area that could not be harvested within industry-accepted
standards will not be valued. However, even very steep slopes can sometimes be
harvested using extraordinary means such as helicopter logging, and these will
be included in inventory. We believe that our judgments to include or not
include in our inventory non-accessible timber stands will be in accordance with
industry standards for calculating timber inventories.
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You will not be required to contribute timber rights with respect to all the
timber on your property. Rather, we will work with you to designate the precise
forested portion of your property that you wish to contribute and to leave
forested or unforested portions of your land free for unrestricted use, as long
as the contributed/restricted portion meets the size and access requirements.
We will attempt to designate the contributed portion using global positioning
system devices, maps and perhaps aerial photography. In limited cases, we may
need to survey the property in order to designate the contributed portion. The
cost incurred in designating the contributed portion of your property will be
borne by us. We do not anticipate that this apportioning of contributed
property will impair our ability to meet our conservation or economic
objectives.
Despite all the factors mentioned above that contribute to the ultimate
valuation of your timber rights, the appraisal of standing timber can be
somewhat subjective. It is our experience that every timber company will value
your timber rights differently for several reasons, including that company's
proposed markets for your timber, view of market conditions, valuation methods,
proposed harvesting techniques and their commitment to environmentally friendly
forest management.
The appraisal process will occur before you commit to contributing your timber
rights to us. We encourage you to seek other appraisals or quotes from timber
companies for your timber rights prior to contributing your timber rights to us.
If you disagree with our appraised valuation of your timber rights, you will not
be obligated to contribute your timber rights to us in any way. Only if you
agree with our valuation should you execute the documents necessary to
contribute your timber rights to us. Even if other appraisals are not
consistent with our appraisal, we do not intend to change our appraisal or
negotiate the acquisition value of your timber rights. However, the timber
market is volatile, and the appraisals we conduct will only be valid for a
limited time, which will be stated in the appraisal. After that period, we may
need to re-appraise the property in light of changing market conditions.
In addition, our manager may contribute timber rights which it acquires in
exchange for class A units. We anticipate hiring an independent third party to
appraise any timber rights contributed by our manager. Although our manager
currently owns forested property in the Clinch Valley, it does not currently own
any property in the Clinch Valley that it intends to contribute to The Forest
Bank. However, in the future, it will seek to acquire, by purchase or
charitable contribution, timber rights suitable for contribution to The Forest
Bank.
Our Appraisal Experience
Our manager, The Nature Conservancy, will oversee the timber rights appraisal
process. Our manager routinely oversees timber appraisals conducted by third
party contractors in the context of valuing conservation easements and
charitable contributions, but does not conduct those appraisals directly. As a
result, our manager has no direct experience in conducting timber rights
appraisals directly. However, our Vice President of Operations, Steve Lindeman,
has extensive experience appraising and acquiring timber as a procurement
forester for Georgia-Pacific for approximately ten years and as a resource
manager for Tall Timbers Research Station for approximately five years. We
anticipate that Mr. Lindeman will oversee most of the timber appraisals
conducted by our manager in the Clinch Valley. At this time, we do not have any
other employee with significant appraisal experience. If for any reason Mr.
Lindeman is unable to conduct the appraisal, we intend to hire an independent
third party to conduct the appraisal.
Revaluations
Given the volatility of timber prices and the potential for appreciation
significantly over inflation, we will revalue the timber rights contributed to
us every tenth anniversary of the original contribution. At each revaluation
interval, our manager will re-appraise the timber rights contributed by each
member to ascertain the new fair market value. If the new fair market value
shows that those particular timber rights appreciated at a compounded rate of
9.5% per year or less, then the original valuation will not change. If the new
appraisal shows that those particular timber rights appreciated at a compounded
rate greater than 9.5% per year, then the
21
original valuation will be increased by the amount by which the new fair market
value exceeds the assumed 9.5% compounded annual appreciation.
The revaluation is conditioned on a 9.5% compound appreciation to protect our
ability to generate cash flow to make our required distributions to our members.
We roughly estimate that our cost of operation, annual preferred distributions,
distributions to fund withdrawals and our creation of a reserve for future
redemptions will amount to approximately 9.5% of the total value of our timber
rights in any given year. As a result, we are willing to revalue the timber
rights every ten years only if the timber rights appreciate at a rate in excess
of an 9.5% annual compound rate. This is a rough estimate made for purposes of
triggering a ten-year revaluation only and should not be relied on as an
indication of our expected expenses or costs of operations.
Each revaluation process will account for any partial redemptions of class A
membership units relating to a particular timber rights contribution so that the
number of new units to be issued to the member, if any, after revaluation will
be reduced by the same percentage as the percentage of original class A
membership units issued for that contribution that were redeemed by that member
prior to the revaluation.
If the original value of your timber rights is increased as a result of any
revaluation, we will issue you additional class A membership units to reflect
the revaluation and:
. the amount of your aggregate preferred annual distribution will be based
on your new total number of units; and
. the amount of cash you may receive on redemption will also increase to
reflect your new total amount of units.
If the reappraisal results in a value less than your original appraised value,
there will be no change to your number of units or preferred distribution.
CAPITALIZATION
Our manager formed The Forest Bank, LLC on January 17, 2001. As of the
commencement of this offering, the manager is the sole member of The Forest
Bank.
Shortly after formation of The Forest Bank, our manager acquired 1,500,000 class
M membership units in exchange for:
. an initial capital contribution of $500,000 in cash;
. an obligation to provide an additional capital contribution of $250,000
in cash on an as-needed basis; and
. an obligation to provide management and administrative services pursuant
to a management agreement for five years without cost to us.
If we need additional cash in excess of the initial $750,000 from our manager,
our manager has an option, but is not obligated, to:
. purchase additional class M membership units from us for cash equal to
$1.00 per unit;
. purchase class A-1 membership units from us for cash at a price of $1.00
per unit; or
. loan cash to us pursuant to a promissory note.
If our manager purchases class A-1 units from us for cash, it would be entitled
to the same preferred distribution and redemption rights afforded to members who
contributed timber rights in exchange for class A-1 units. There are no
preferred distribution or redemption rights with respect to the class M units.
Our manager may chose to purchase class A-1 units rather than class M units in
order to receive a preferred distribution and the ability to redeem the units as
described in this prospectus.
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The note issued to our manager will be a two year note with interest payable
quarterly and the principal due on maturity. The interest rate and other terms
of the note will be no more favorable to our manager than terms we could obtain
from a disinterested third party lender at the time of the loan. At this time,
we do not expect to borrow money from any source other than our manager.
OUR BUSINESS
Over the last several years, our manager, The Nature Conservancy, has observed
that individuals who own forest land will often sell the rights to harvest their
timber to raise funds to meet pressing cash flow needs. This random harvesting
of forests jeopardizes the long term conservation of forests and threatens the
environment.
To address this concern, our manager created The Forest Bank, LLC to work for
the long term conservation of individually owned forest land by eliminating as
much as possible the random cutting of forests that occurs because of landowner
cash needs.
We seek to acquire a sufficiently large pool of timber rights so that the forest
will be managed in a more environmentally compatible manner to ensure the
maintenance of ecological processes and the health of the ecosystem. We will do
this by acquiring from individual owners of forest land the rights to maintain,
conserve, selectively cut, manage, sell, retain the proceeds from and regenerate
the trees located on each owner's property.
Our Mission and Core Objectives
Our mission is to work in partnership with private landowners to promote the
economic productivity of working forests while protecting the ecological health
and natural diversity of the landscapes in which they occur. In this mission,
our primary objective is to conserve the forest lands and watersheds of the
forests we identify. In furtherance of this conservation objective, we will
seek to:
. permit harvesting of timber only in a manner that does not damage the
local ecosystem;
. emulate the natural processes and patterns of the forest and minimize
the negative impacts of our harvests;
. maintain and enhance the health of the forest and the plants and animals
that depend on it for habitat;
. protect soil productivity and the water quality of the streams and
rivers; and
. ensure that our efforts comply with principles of sustainable forest
management to enhance the environment and forest health.
Our secondary, but also very important, objective is to maximize the sustainable
return to our members. In furtherance of this economic objective, we intend to:
. actively manage the forest system to enhance timber growth to produce
higher quality timber, which will command higher prices over the long
term;
. develop timber selling and reforestation plans to increase the long term
value of our timberlands;
. create economic value from the forest resources by pursuing premium
markets for forest products;
. focus on owning timber rights and selling timber for harvest, not on
owning or operating lumber mills or other timber conversion facilities;
and
. acquire additional timber rights that will increase our ability to
achieve economies of scale and market the benefits to individual
landowners.
Our limited liability company agreement expressly requires that if there is a
conflict among our conservation objectives on one hand and any of our economic
objectives on the other hand, our conservation objectives will take priority.
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Our Goal of Sustainable Development
Sustainability is providing for the needs of current generations while
maintaining the ability of future generations to meet their needs.
Forested land often provides the ecological matrix surrounding and supporting
critically threatened species and habitats. As the intensity of human use of
the forest increases, the conservation buffer provided by the forest decreases.
Threats such as fragmentation, erosion, sedimentation, and unsound harvest
practices can affect many aspects of a forest, from its viability for forest
species to the direct impacts on watersheds and aquatic health. Private forest
land produces approximately 60% of the nation's domestic timber supply. As the
intensity of use increases, private land bears an inordinate share of the
burden. At the same time, urban sprawl is pushing more people into rural areas,
decreasing the size of forest parcels, and fragmenting habitat.
Non-industrial forest owners often make choices about harvesting their land for
reasons unconnected to the forest and without professional advice or support.
We believe the most common reason for poor management is because of a sudden,
emergency need for cash, such as the need to pay estate tax, education expenses,
or medical bills. The need for cash may force a landowner to sell a forest
asset. If the landowner does not have the knowledge or time to ensure good
forest management and silviculture, the resource is often degraded and
conservation values are compromised.
The Forest Bank is an idea developed for and marketed primarily to private, non-
industrial landowners. These landowners can transfer the perpetual right to
grow, manage and harvest their trees to The Forest Bank, while retaining fee
simple ownership of the underlying land.
The Problems of Owners of The Non-Industrial Private Forest
The timber market is difficult for a small landowner to access efficiently, and
the small landholder who wants to harvest timber suffers from a competitive
disadvantage. Because the timber industry is a commodity market, economies of
scale tend to determine the relative likelihood of generating acceptable
financial returns. The timber market, as a result, favors large organizations.
When a cash emergency arises, small landowners often sell their timber to
procurement foresters without knowing the market value of the asset they are
selling and without being able to direct or control the means and manner in
which their timber is harvested. Only after the sale does the landowner realize
that she or he (a) may not have received a fair value for his timber and (b) is
left with no residual forest or value and, consequently, no additional income in
her or his lifetime.
Even if small landowners did have adequate market information or chose to employ
professional advice when selling into the timber market, they still have a set
of economic constraints that often preclude the application of sound forest
management principles. It is far more difficult for small parcels to time the
market to hit short term peaks in timber prices. Small landholders also often
face the difficulty of attracting competitive bids if their timber is not very
valuable or the parcel is small or difficult to access. And even if they can
manage to sell for a good price, an individual's sale may be a once-in-a-
lifetime event, which gives them much less leverage over the quality of the work
done by contractors and the quality of the residual forest.
The Forest Bank Solution
A solution to the small, non-industrial private forest landowner's common
problems of fragmentation, lack of market power, and susceptibility to short
term cash needs that result in ecologically damaging timber liquidation requires
the following elements:
. a mechanism for drawing small landowners into a larger entity that
unifies the group's economic interests and creates economies of scale;
24
. a more regular income than that which comes from a single harvest every
few generations;
. a way for owners to raise cash based on their timber asset, without
necessarily being forced to cut down trees immediately;
. a clear sense that the resource is well-managed, preferably confirmed or
verified by a third party forest certification program; and
. integration of entire landscapes through the application of sound forest
management practices on a small landowner level.
Our manager designed The Forest Bank to assist the private, non-industrial
landowner. By making a transfer to us of the right to grow, manage, harvest and
sell trees while retaining fee-simple ownership of the underlying land, you will
receive:
. the comfort that the land on which the contributed timber grows will
remain forest for future generations, will be managed sustainably and
will contribute functionally to the ecosystems of which it is part;
. a modest, annual return, or distribution, calculated on the contributed
timber's initial appraised value; and
. the option to withdraw in cash the initial value of the contributed
timber rights when you need it, subject to certain restrictions detailed
in our limited liability company agreement and each membership unit
certificate.
Our Plan of Operation
To implement our solution and pursue our conservation and economic objectives,
our plan of operation focuses on the following key functions:
. Pursuing Independent Landowner Contributions: We will aggressively seek
contributions of timber rights from non-industrial private forest owners
and manage the timber collectively to achieve economies of scale and
fair return for our members.
. Pursuing "Anchor Tenant" Contributions: We will identify contributions
larger expanses of timber rights covering in excess of 1,000 acres.
. Developing Management and Harvest Plans: For each member, we will
create a management plan to govern timber improvement and harvesting
operations and to allow us to schedule the volumes and species of
standing timber we plan to harvest and offer to the market in succeeding
years. Each management plan will be coordinated with all other
management plans to capitalize on economies of scale - both economically
and environmentally.
. Timber Improvement and Harvesting: We will undertake the active
management of timberland contributed to us. This will include timber
improvements, timber sales by various means including selective cutting
and marked sales, road and skid trail construction to access timber,
necessary stewardship management, such as vine control, logging and
post-harvest treatments, and regeneration, which may include tree
planting or seeding if necessary.
. Monitoring: We will work with staff from our manager and its partners to
monitor the effects of our timber operations on the habitats and
watersheds within which we operate. Our goal will be to minimize the
adverse effects from timber harvesting while maintaining a sustainable
economic benefit for our members.
. Certification: We will pursue third party certification under the
Forest Stewardship Council program. It is expected that we will
participate within an umbrella certification program in which
25
our manager, The Nature Conservancy, becomes a Certified Resource
Manager and can extend the benefits of certification to lands under
management by us, provided that we meet the required standards for
planning and management.
In addition to the activities above, in limited circumstances where landowners
have declined to contribute timber rights to The Forest Bank, our manager may
consider acquiring fee simple ownership of the property, either for cash or by
donation, and contributing the timber rights to that property to us in exchange
for class A units.
We have a three-phase approach to our operations, which is described more fully
below.
Phase One: Concept Validation and Membership Development
In the initial phase, we will focus on one region, the Clinch Valley. In the
Clinch Valley, we will attempt to validate to landowners our concept of
providing sustainable forest management and acceptable economic returns, and
begin to attract contributions of timber rights from landowners, as well as form
alliances with logging companies and marketing partners. We will actively
pursue contributions from lands throughout the Clinch Valley area. This phase
will extend over the first two years of our operations and will address the
following three sets of critical issues:
Assessing the willingness of landowners to make permanent contributions of
timber rights. During this phase, we aim to improve our understanding of the
factors that might encourage landowners in the Clinch Valley to contribute
permanently timber rights to us. We will measure this critical issue by the
number of acres we have rights to manage.
Refining our approach to forest management practices. During the initial
period, we will further develop an operations manual and individual forest
management plans, and we will begin timber harvests on identified tracts. We
anticipate that this work will establish the foundation for our application for
the Forest Stewardship Council certification of our holdings.
Developing key timber industry relationships. We are currently identifying and
developing alliances with two types of entities. The first are those companies
that will adhere to strict guidelines for harvesting the timber according to the
principles of responsible forestry. The second are companies that can assist us
in maximizing revenues for the timber harvested by marketing certified forest
products.
Our goal is that by the end of this first phase we will own rights to manage
timber on at least 5,000 acres of land and will have developed strong working
relationships with timber harvesting and marketing partners.
We anticipate that the initial $500,000 cash capital contribution from our
manager will be used to fund expenses incurred in connection with this offering
of class A units, including legal, accounting and printing fees and for hiring
independent contractors to conduct timber inventories and appraisals. In
addition, we may need to hire independent loggers to conduct harvests during the
first phase.
We anticipate that the initial cash contribution from our manger will satisfy
our cash requirements until at least through the first half of the 2002 calendar
year, in part because our management agreement provides that our manager will be
responsible for compensating all our employees and the employees of our manager
for the first five years after the commencement of this offering.
Phase Two: Expansion and Market Development
During our second phase, we seek to expand by acquiring at least 10,000
additional acres of contributed timber rights and further developing our
marketing operations. We anticipate that this phase will extend from year two
to year five of our operations. During this time, we will seek to identify and
enroll one or two larger sized
26
anchor tenant contributions and pay particular attention to clustering multiple
and abutting properties. Owning timber rights on adjoining properties provides a
variety of benefits, including the ability to manage a larger contiguous
property, to harvest larger quantities of trees at a single time, and to access
what may amount to inaccessible parts of a property from an adjoining area. We
also plan to further develop associations with value added processors,
distributors, and marketing partners during this time. For instance, we may
develop a production and marketing relationship with an outside manufacturer.
The key benchmark during phase two will be for us to generate sufficient cash
flow to cover our expenses of operation and distributions and withdrawals.
Phase Three: Full-Scale Implementation
During the third phase, years five through ten, we will move to a full-scale
rollout throughout the Clinch Valley. Our goal is to have acquired at least of
60,000 acres of timber rights with a value of $30 million by the end of this
phase. Additionally, we hope that during this phase we will become established
as a major alternative to the status quo of logging and land management in the
Clinch Valley and in the surrounding region. By year five, we hope to have the
requisite expertise, credibility, and financial strength to enable us to
aggressively compete for higher quality land and accept marginal timberland with
high conservation value and potential for improvement but lower current economic
value.
Expansion to New Regions
We do not have any immediate plans to expand into areas beyond the Clinch
Valley. However, our manger has assessed and will continue to asses other
forests and regions in the United States for potential expansion of The Forest
Bank concept, and we would consider expansion of the operations to new regions
provided that:
. operations in the Clinch Valley are stable and the concept appears to be
viable in terms of number of acres of timber rights under management and
our ability to generate cash flow;
. pro forma projections for the new site or region project similar or
better viability; and
. the new site or region has conservation importance as determined by our
manager.
Forest Certification
Integral to our plan is the need for independent, verifiable certification that
the lands are managed according to the principles of sustainable forest
management. Forest certification is a process of seeking independent
verification that sustainable forest management is taking place. We have two
important reasons for pursuing certification. First, it will provide third
party confirmation to landowners that the land is being managed sustainably.
Second, it may open key niche markets into which we can channel our products
directly. We anticipate that direct marketing by The Forest Bank and strategic
alliances with end-users of certified wood will provide financial stability
against the volatility of the broader commodity timber market.
Direct marketing of timber products to niche markets seeking certified wood
creates financial stability in two ways. First, it bypasses the industry
distribution system, in which prices for small producers are dictated by
commodity markets and typical sales go through multiple middlemen before they
reach the market. Instead, a direct marketing approach sells to the retailer or
manufacturer, one or two steps removed from the market, allowing us to capture
more of the value added. Second, direct marketing can allow producers to
develop long term contracts based on regional average timber prices, smoothing
many of the peaks and troughs in the highly volatile stumpage timber market.
Opportunities for direct marketing and contracting are more prevalent in the
niche markets that seek certified wood and are more rare in the general timber
industry.
There are two methods to have timber land certified. The first method is to
have individual lands certified by an accredited certifier. In this method,
each discreet parcel would be independently reviewed by the third party
certifier and judged on its own. The second method is for a company with
multiple properties to pursue
27
certification of the company itself as a form of umbrella certification. If the
company has this umbrella certification, then any properties it designates are
also certified. The umbrella certification process involves (1) the initial cost
to certify the company, (2) an initial per property cost to include properties
within the certified company's umbrella, (3) annual costs for spot checks on
properties within the umbrella certification to ensure compliance with the
certification, and (4) a cost to the company every five years to renew its
certification.
Our manager, The Nature Conservancy, will pursue the second method - umbrella
certification - which means that all the forest land managed and harvested by
our manager could be considered certified. Our manager anticipates beginning
the certification application in August of 2001 and anticipates being a
certified resource manager by May of 2002.
It is anticipated that our manager will incur the initial costs of certification
as a certified resource manager. The Forest Bank will be responsible for the
initial costs of including our managed properties within the Conservancy's
certified umbrella and for the annual costs of spot checks on our properties.
With respect to the re-certification fees, we will be responsible for
reimbursing our manager for the lesser of (1) our pro rata share of the cost of
the certification renewal based on the number of acres of timber rights it
manages for us compared to the total number of acres of timber right it manages,
or (2) the costs of the per-property method of certification. We anticipate
that the costs to us under our manager's umbrella certification will be less
than the cost that would have been incurred for individual property
certifications.
INDUSTRY AND MARKETS
Our Nation's Forests
According to U.S. Forest Service data, non-industrial private forest lands
produced approximately 60% of the nation's domestic wood supply in the mid
1990s. We believe the dependence on private forest lands for wood supply has
increased significantly in the last decade, particularly as production from the
national forests has dropped to under a third of peak levels in the 1980s.
A 1994 Forest Service survey reports that 90 percent of private forest land
owners nationwide have holdings of 100 acres or less. This group represents a
total of 118 million acres nationwide, or about 30% of the nation's private
forest land. It is this portion of the nation's forest resource where concern
about fragmentation and rapid turnover is concentrated.
The nature of harvesting practices on private lands has significant implications
for the health of our nation's forests and, as a result, for the conservation of
biodiversity. Even with half of the domestic wood supply coming from private,
non-industrial land, only 5% of private forest land owners have a management
plan for their woods, and this number is much lower for parcels under 100 acres.
Furthermore, according to the same Forest Service survey, land in this group
changes owners on average every seven years, an event that often drives
decisions to harvest timber.
The Clinch Valley Forest
For the first two years of operation, we will focus exclusively on the Clinch
Valley region. Encompassing more than 2,200 square miles across the mountains
of Southwest Virginia and Northeast Tennessee, the Clinch Valley is home to one
of the highest concentrations of rare and endangered species in the United
States and includes the headwaters of the Clinch, Powell and Holston rivers, the
former two being the only remaining free-flowing tributaries of the Tennessee
River system. These three rivers are the sole remaining habitat for several
species of freshwater mussels. There are 30 federally listed species -- both
threatened and endangered -- in the Clinch Valley, including 18 types of mussels
and four types of fish. The Nature Conservancy, our manager, recently ranked
the Clinch and Powell watersheds first and third, respectively, in a scientific
evaluation of the biodiversity in all watersheds across the United States.
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The Clinch Valley is 75% forested, including over 670,000 acres of oak-hickory-
type timber stands. And like other rural areas rich in timber resources but
comparatively poor economically, the Clinch Valley is vulnerable to reckless or
unsustainable harvesting of its timber resources. We believe that inappropriate
logging practices are one of the most critical threats to the health of this
watershed.
As the coal mining that has driven the economy of the region recedes in
importance, the absence of other obvious economic development alternatives has
begun to focus attention on the forest as a source of income generation.
Landowners, in turn, are feeling new pressure to cut and sell timber that would
otherwise be conserved. According to U.S. Forest Service data, the amount of
hardwood cut annually in the Clinch Valley region more than doubled from 1986 to
1996, while the amount of softwood cutting increased sevenfold during the same
period.
A recent U.S. Department of Forestry study in Virginia examined timber growth
compared to timber harvesting for all timberland in different regions of the
Commonwealth of Virginia. After omitting land that was inoperable (due to
slopes, parcel sizes, or configurations) and land that was unlikely to remain in
timber production (as measured by population density), the data showed that
harvesting of hardwood timber exceeded growth on suitable timberland in the
mountains of southwest Virginia by approximately 34%, which reveals the
unsustainable nature of the current practice.
Protection of the entire watershed through traditional land acquisition measures
is not financially feasible. Instead, we hope to provide a solution that will:
. allow us to direct the harvesting operations on significant forest
acreage while keeping the land in private ownership;
. provide liquidity to landowners to meet their financial needs; and
. allow the resource, as much as possible, to secure its own conservation.
The future of the Clinch Valley turns on a critical question: How can we use
our forests as an economic asset that will sustain us into the future while
preserving the remarkable Appalachian landscape of clean rivers, healthy farms,
and productive woodlands? Clinch Valley forest owners rely on the value of
their timber to protect and sustain their families. They want to harvest the
trees profitably, but they also want to know that those forests will be around
for their children, and for their children's children.
If we are able to acquire a number of acres of timber rights in the Clinch
Valley to enable us to manage, harvest and sell timber to cover our operating
costs, including distributions to and withdrawals by our members, and still have
a positive conservation impact on the region, we may expand our operation to
other regional forests in the continental United States. Our manager may decide
to explore these other opportunities in a separate entity or within The Forest
Bank entity.
Clinch Valley Products and Markets
Our primary commercial product from harvesting activities in the Clinch Valley
will be high quality sawtimber. With this in mind, we will select stands for
harvest in order to:
. receive the best prices for the products removed;
. capitalize on market trends to seek premiums for certain products when
available;
. promote efficiencies with local logging operators; and
. harvest mature trees to optimize the benefits from highly productive
sites.
To maximize income, our forest managers will pursue premium markets for all our
forest products. We intend to conduct and market timber sales as our business
requires, but only in accord with our conservation objectives. We will use sale
proceeds to cover the costs of management, pay the preferred annual
distributions and pay for requested withdrawals.
29
We plan to sell the timber harvested from our timberlands for processing as
either sawtimber or pulpwood by facilities located generally in close proximity
to our timberlands. Sawtimber typically is converted into lumber, plywood and
other solidwood products. The harvested timber that is of insufficient size or
quality to be converted into lumber or other solidwood products is sold for
conversion into pulp, paper and engineered wood products. The lumber, pulp,
paper and other wood products are then distributed in domestic and international
markets. Timber markets, while regional in terms of purchasers of timber, are
impacted by the availability and cost of timber from other regions and by global
economic conditions.
All timber that we categorize as merchantable is suitable for sale for some
commercial purpose, but we do not intend to harvest all of our merchantable
timber immediately. Over time, we intend to control the continued growth and
harvest of trees in our forests to manage them responsibly in accordance with
standards for certified sustainable management under the Forest Stewardship
Council. For example, on appropriate sites, we intend to allow trees that are
merchantable for lower value uses, such as pulp, to grow into higher-value
timber, such as sawtimber. We also include trees in our merchantable timber
volumes that are not immediately available for harvest under applicable law.
Advantages for Clinch Valley Certified Hardwoods
Because the temperate hardwoods common to the Clinch Valley are in great demand
at all grade levels and because a large, private timber company is already
marketing certified hardwoods in the general region, our Clinch Valley
operations will be able to access key niche markets.
The nine most prevalent species found in the Clinch Valley are Yellow Poplar,
Ash, Cherry, Hickory, Soft Maple, Hard Maple, Red Oak and White Oak. Each of
these species produces high grade wood product with a record of favorable market
performance when compared to broader timber market historical trends.
In addition, though many of the Clinch Valley's forests have been harvested in
high grade programs that cut the best timber leaving lesser quality stems, there
is significant demand, particularly within the certified niche market, for lower
quality hardwood timber. Many of the applications for the prevalent temperate
hardwoods require the middle and lower grade of lumber.
In time, the select lumber grades in Clinch Valley certified hardwood species
may find price premiums in the growing sector of retail lumber yards, presently
open or soon to open in Connecticut, New Hampshire, central and northern
Virginia, San Francisco, and on the Internet. All of these would like to expand
the breadth of their certified inventory but cannot because of the limited
species array regularly available in the marketplace. However, in spite of our
optimism, there is no expectation of price premiums in our business model.
Hardwood Demand, Supply and Prices
Demand for timber depends upon the markets for wood products, including lumber,
plywood, pulp and engineered wood products. Because these markets are impacted
by changes in domestic and international economic conditions, demand for these
products can experience significant fluctuations. Regional timber demand can
also fluctuate due to changes in operating rates, weather or the number and size
of wood conversion facilities within the region.
The timber to which we will seek to acquire rights in the Clinch Valley is
almost exclusively hardwood. Because much of the timberland has been high-
graded, we expect the early yields from an average contribution of timber to
contain no more than 50% grade lumber, the rest being made up of pulpwood.
However, good management and timber stand improvement operations will
substantially improve the mix of sawtimber on productive land.
Hardwood timber from the Clinch region generally is sold to the following
markets:
30
. Veneer processing: Generally the best tree stems in a particular stand
are used to produce thin hardwood veneer coating for uses such as
cabinets and furniture and command the highest prices.
. Export logs: Quite often the next best logs will be sold to export
markets for processing in Europe or Asia. It is our intention to
minimize export sales in favor of local processing as much as possible.
. Sawtimber: The third best grades of hardwood timber typically go into
producing molding, flooring, solid furniture, and other hardwood parts
and trim.
. Pulp: The lowest grades of timber are generally sold to paper or chip
mills for production of paper products.
The Appalachian and Midwest regions are the primary habitats for domestic
hardwood production and produce roughly half of the world's high value temperate
hardwood.
Timber supply in general has been significantly affected in recent years by
reductions in the volume of timber harvested from public lands. This reduction
is primarily a result of increased governmental policy emphasis toward
protection of endangered species, habitat preservation, conservation and
recreation. Since their peak levels in the mid-eighties, production from
federal lands has dropped by nearly 70%. This trend changes the supply emphasis
to the private sector and thus strengthens our position as a private seller of
timber. It also has caused a general shift to less production in the Pacific
Northwest and more production in the Lake States, the Southeast, and Appalachia.
Global log markets can significantly affect the prices paid for U.S. log exports
because U.S. exporters face strong competition in their key markets.
Our timber will be sold mainly in two ways, either as stumpage or at a delivered
rate to the market. Stumpage is the value for timber standing in the wood, or
on the stump. The buyer purchases the wood--usually through a bidding process--
and purchases the right to harvest whatever was sold within a certain time
period and according to the terms laid out in the sale. The purchaser is
responsible for logging and trucking costs to get the wood to market. In a
stumpage sale, we will closely monitor the harvesting operations to ensure it
meets the terms of our sale agreement and subsequent contract.
In cases where there are particularly sensitive conservation issues, such as
endangered species or threats to water quality, we may sell the timber to a
purchaser at a delivered price, in which case we would contract directly with
the logger to cut and haul the timber to market. This approach gives us a much
tighter control on the harvesting operations since the loggers are working for
us rather than the timber buyer. Generally, such an approach will lower the
overall return from the sale but should improve the ability to guard against
environmental problems. In either approach, the timber prices received by us
are determined by the marketplace in a competitive bidding process.
OUR MANAGER
Our manager, The Nature Conservancy, will control our operations, principally
through its appointment of our board of managers and the provision of officers
and employees to run our day-to-day operations.
The Nature Conservancy has extensive experience in the procurement and transfer
of timber and land rights, including fee simple ownership, easements and various
other rights. Thousands of transactions involving more than twelve million
acres in the United States have been managed by The Nature Conservancy during
its 50 year history. However, you should note that our manager has limited
experience harvesting and selling timber. Currently, it manages and when
appropriate, harvests and sells, timber on approximately 185,000 acres in Maine,
which it acquired in 1998, and 27,000 acres in Vermont, which it acquired in
1998. However, these operations are very different than our proposed operations
in the Clinch Valley, primarily because their sole
31
objective is conservation, and they do not have an economic objective like we
do. Our manager has little or no additional experience in managing timber sales
in other situations.
Since 1951, The Nature Conservancy has pursued a mission of preserving the
plants, animals, and natural communities that represent the biological diversity
of life on earth by protecting the lands and waters they need to survive. The
Nature Conservancy has pursued this mission through a range of protection
strategies -- ownership, conservation easements and related management
agreements among others -- that ensure conservation-oriented stewardship of
ecologically sensitive places. Our manager's success has been built on
innovation, a commitment to action driven by sound science, and a record of
strong and effective partnerships.
Our Manager's Virginia Operations
Our manager will manage our day-to-day affairs primarily through the Clinch
Valley Program of its Virginia Chapter. The Virginia Chapter of The Nature
Conservancy has been operating in the Clinch Valley since 1989 and today has
eight full time employees in Abingdon, Virginia, and a staff of over 25 in
Charlottesville, Virginia. The Clinch Valley Program routinely works with
landowners in the Clinch Valley to develop forest management plans and
agreements to protect streamside corridors along the Clinch, Powell and Holston
rivers. Since the late 1980s, the Clinch Valley Program has been responsible
for approximately 30 miles of streambank fencing on private landholdings,
approximately 30 management agreements with individual landowners and the
acquisition of approximately 2,500 acres in 20 transactions. In addition, since
the mid-1990s, the Clinch Valley Program has been working with local communities
in rural southwest Virginia to develop strategic plans for compatible economic
development and with forest owners to develop protection strategies for forest
land. That has involved pursuit of conservation easements, acquisitions and
forest conservation management planning. The extensive contact with forest
landowners over the past decade and the Virginia Chapter's growing understanding
of the issues those landowners face led our manager to develop The Forest Bank
concept as a conservation tool.
The Nature Conservancy currently owns forestland in the Clinch Valley. This
property is primarily of preserve quality, which means that it is either
restricted from harvesting timber in some manner or that the Conservancy does
not intend to conduct harvesting on the properties. As a result, these
properties would not be contributed to The Forest Bank, although the Conservancy
may seek to acquire properties that are suitable for contribution to The Forest
Bank in the future.
The Management Agreement
Our limited liability company agreement requires our manager, in exchange for
its class M membership units, to enter into a management agreement that
describes the manner in which The Nature Conservancy will manage our company.
The principal terms of the management agreement are summarized below. The
management agreement has been filed with the Securities and Exchange Commission
as an exhibit to the registration statement of which this prospectus is a part.
A copy of the management agreement is available from our manager on request. We
encourage you to read the management agreement in its entirety.
Generally, the management agreement obligates our manager to provide management
and administrative services to us, including a minimum amount of employee time,
payment of the salaries and benefits of those employees, office space and all
overhead in connection with the office space, and all bookkeeping and record
keeping functions. The management agreement obligates our manager to provide
these services to us free of cost for five years. At the termination of the
five year period, our manager will continue to provide these administrative and
managerial services, but we will be obligated to pay to our manager a management
fee equal to the lesser of (1) our manager's actual cost of the management
services provided plus a 15% markup or (2) 4.5% of the total value of membership
units outstanding, not including the class M membership units.
Prior to the first date on which we generate either positive net income,
excluding timber depletion charges, or positive cash flow, in either case for
six consecutive quarters or two consecutive fiscal years, the management
32
fee will be payable in additional class M or class A-1 membership units at the
manager's discretion. After we reach that profitability benchmark, the
management fee must be paid in cash. The management fee will be payable
quarterly on the last day of each quarter.
The management agreement obligates our manager to designate a number of its
employees who will devote time to us equal to at least three full time employee
equivalents, including the time devoted by our officers but excluding the time
devoted by our board of managers. For example, our manager could designate
three full time employees to devote all their time or six full time employees to
devote half their time to us. Our manager has the right to replace an employee
devoted to us or change the time commitments of its employees at any time as
long as it meets the minimum of three full time employee equivalents.
All future transactions with our manager or affiliates of our company are to be
on terms no less favorable than could be obtained from an unaffiliated third
party and must be approved by a majority of our board of managers, including the
majority of disinterested managers, if any, with respect to that transaction.
Board of Managers and Officers of The Forest Bank
Our limited liability company agreement provides that our company will be
managed by a board of managers, and our manager has the right to appoint, remove
and replace all the members of the board of managers. In addition, if we do not
pay the full preferred distributions for two consecutive calendar years, each
member of our board of managers can be removed or replaced by a vote of holders
of a majority of the outstanding class A units. Initially, the members of the
board of managers will be:
Tamar Datan
Kent W. Gilges
Stephen C. Howell
Michael L. Lipford
W. William Weeks
All of the members of our board of managers are employees of our manager. We
expect that the board of managers will always be comprised of employees of our
manager. The employment history and experience of the members of our board of
managers is summarized below.
Our limited liability company agreement provides that the board of managers has
a right to designate, remove and replace certain officer of our company to
manage the day to day affairs of our company. Initially, our officers will be:
Employee Forest Bank Office
-------- ------------------
Kent W. Gilges President and Chief Executive Officer
Steven T. Lindeman Vice President for Operations
William A. Kittrell Vice President
George W. Barlow, III General Counsel and Secretary
Ganesan Balachander Chief Financial Officer
We will not offer any units, options or warrants to members of our board of
managers, officers, employees or any other person affiliated with our company or
our manager, nor do we intend to make loans to any such persons.
Information on Our Key Personnel
The chart below identifies all of the employees of our manager that our manager
has designated as members of our board of managers, officers or employees to
manage the affairs of our company, including their name, age,
33
title and the time they will devote to us. Our manager may add or remove
individuals from the operation of The Forest Bank as long as it meets the
minimum requirements of the management agreement.
Position at
Employee Age The Nature Conservancy Position at The Forest Bank
- -------- --- ---------------------- ---------------------------------
Ganesan Balachander 50 Deputy Director and Chief Financial Chief Financial Officer
Officer of the Compatible Ventures
Group
George W. Barlow, III 37 Divisional Attorney Secretary and General Counsel
Tamar Datan 36 Vice President; Director and Chief Board of Managers
Executive Officer of the Compatible
Ventures Group
Kent W. Gilges 36 Director of the Forest Conservation President and Chief Executive Officer
Program and Board of Managers
Don W. Gowan 47 Land Protection Manager for the Manager of Conservation Lands Program
Clinch Valley Program
Stephen C. Howell 42 Chief Operations Officer Board of Managers
William A. Kittrell 37 Director of the Clinch Valley Program Vice President
Steven T. Lindeman 44 Operations Manager of the Forest Vice President for Operations
Conservation Program
Michael L. Lipford 45 Virginia Executive Director and Board of Managers
Mid-Atlantic Division Vice President
W. William Weeks 53 Executive Vice President Board of Managers
Ganesan Balachander
Mr. Balachander joined The Nature Conservancy in 2000. He is responsible for
financial and economic analysis and feasibility assessments of prospective
projects, and for developing business plans and expanding current compatible
business ventures. He also helps to create innovative new practices and manages
the Compatible Ventures Group's budget and related financial matters. As the
Chief Financial Officer of The Forest Bank, Mr. Balachander will be responsible
for (1) reviewing the financial operations of The Forest Bank, (2) maintaining
the integrity of the financial/accounting systems used at The Forest Bank, and
(3) ensuring the timely production of periodic financial statements of The
Forest Bank.
Prior to joining our manager, Mr. Balachander was Director of the Biodiversity
Conservation Network, a program funded by the United States Agency for
International Development and managed by a consortium of the World Wildlife
Fund, The Nature Conservancy and the World Resources Institute. The program
promoted sustainable development and the conservation of biodiversity in the
Asia/Pacific region through community-based micro-enterprises. He was with BCN
for over three years from early 1996 until it ended in 1999.
Prior to his employment with The Biodiversity Conservation Network, Mr.
Balachander worked in Europe, India and the United States in international and
corporate banking, including assignments as a Vice President for Citibank in the
areas of mergers and acquisitions, and corporate planning and development. His
interest in conservation and compatible rural development led him to obtain a
doctoral degree in Ecology from Rutgers University, during which time he also
consulted for a number of firms concerned with the development of forest-based
businesses. Following this, he was awarded a post-doctoral Bullard Fellowship
in Forest Research at Harvard University. Mr. Balachander also holds an MBA in
Finance and International Business
34
from Carnegie-Mellon University and a master's degree in Physics from the Indian
Institute of Technology, Madras, India.
George W. Barlow, III
Mr. Barlow serves as Counsel to The Forest Bank and is a Divisional Attorney for
the Mid-Atlantic Region of The Nature Conservancy with responsibility for the
states of Tennessee and Virginia. Mr. Barlow received his law degree from the
University of Virginia School of Law in 1988 and his undergraduate degree, cum
laude, in English in 1985 from Dartmouth College. For twelve years prior to
joining The Nature Conservancy in 2000, Mr. Barlow practiced law with Wharton,
Aldhizer & Weaver, PLC, in Harrisonburg, Virginia and engaged in real estate,
commercial lending, municipal finance and general corporate practice.
Tamar Datan
Tamar Datan is the Director and Chief Executive Officer of the Compatible
Ventures Group at The Nature Conservancy and is therefore in charge of the
overall operations for the management team designated by The Nature Conservancy
to manage The Forest Bank, LLC. She represents The Nature Conservancy in
agreements between the Conservancy and The Forest Bank.
As part of her additional responsibilities for our manager, Tamar works with
Conservancy colleagues, business and civic leaders, investors and others to
design and implement innovative compatible development programs. Prior to
joining The Nature Conservancy in 1997, Tamar managed The Pew Charitable Trusts'
Venture Fund from 1990 to 1997. Under her leadership, that venture fund was
responsible for approximately $150 million in grant awards. Her portfolio
covered many areas including rural economic development, conservation, civic
engagement and community problem solving.
Ms. Datan graduated with honors from Swarthmore College and holds a Master's
degree in administration, planning and social policy from Harvard University.
Kent W. Gilges
Kent Gilges has overall responsibility for planning and operations of The Forest
Bank. He directs the Forest Conservation Program of The Nature Conservancy, and
has had primary responsibility for the development and implementation of The
Forest Bank concept. His ongoing responsibilities for The Forest Bank will
include financial oversight and overall management, supervision of procurement
efforts, and the efforts to identify additional sites for future growth.
Mr. Gilges has eight years of experience with The Nature Conservancy. From 1993
to 1997 he was the Upper Peninsula Project Director in Michigan. Under Mr.
Gilges' leadership, that project negotiated conservation easements, acquired
property by donation and purchase and obtained federal protection designations
with respect to approximately 6,000 acres of critical habitat and seven miles of
Lake Huron shoreline and assisted in the acquisition of an additional 11,000
acres and five miles of shoreline from Bethlehem Steel. From 1997 to 1998 he
was the Great Lakes Forest Conservation Program Project Director, in which
position he reviewed and analyzed potential pilot sites for a forest bank type
concept within the Great Lakes region. In 1998, Mr. Gilges was named Director
of our manager's Forest Conservation Program and assumed overall responsibility
for implementing The Forest Bank in the Clinch Valley.
Mr. Gilges received his B.A. (magna cum laude, 1988) from Cornell University and
a graduate degree in forestry and rural development (M.Sc., 1992) from Oxford
University.
35
Don W. Gowan
Mr. Gowan has worked in The Nature Conservancy's Clinch Valley Program since
1989 and currently manages land and easement acquisition efforts. His prior
work experience includes two years as a biologist with the U.S. Army Corps of
Engineers and eight years working with the oil and gas industry as Environmental
Division Manager for Fenstermaker and Associates in Lafayette, Louisiana. Mr.
Gowan received a Bachelor of Arts in Biology from the University of Tennessee at
Chattanooga and a Master of Science in Ecology from the University of
Southwestern Louisiana.
Stephen C. Howell
Mr. Howell has worked for our manager since 1995 when he was hired as its
Controller. He then became the Director of Finance for the Nature Conservancy
in 1996 and Chief Operations Officer, the position he holds today, in 1999. As
Chief Operations Officer of our manager, Mr. Howell oversees all aspects of the
Finance, Human Resources, Information Systems and Administration/Facilities
departments. Prior to joining The Nature Conservancy, Mr. Howell worked for 15
years in public accounting, first at Deloitte, Haskins and Sells, and later at
Coopers & Lybrand. Mr. Howell received a BBA in Accounting from the University
of Texas in 1980 and became a certified public accountant in 1982.
William A. Kittrell
Mr. Kittrell has been with The Nature Conservancy since 1990 and has been
Director of the Clinch Valley Program in southwest Virginia and northeast
Tennessee since 1992. He has been involved with the planning and development of
The Forest Bank concept since 1996 and has been one of its primary architects.
He will be involved with enrollment and acquisitions of larger parcels, and will
particularly manage long term monitoring efforts and relationships with
landowners.
Under his leadership, the Clinch Valley Program's annual budget has expanded
nearly ten-fold. Mr. Kittrell has been responsible for the completion of many
land deals during this time, and has built strong community-based conservation
initiatives with a number of local communities and business organizations. His
work in building the Russell County (Virginia) Vision Forum with the Chamber of
Commerce has received numerous awards, and he has also completed a strategic
plan for compatible economic development with the Town of St. Paul, Virginia.
Bill was one of 100 leaders appointed by Congressman Rick Boucher to develop a
strategic plan for the Ninth Congressional District of Virginia and served as
Chairman of the Natural Resources subcommittee. Bill also helped create a
regional sustainable development organization and served as its treasurer for
several years. Prior to joining The Nature Conservancy, Bill worked as an
environmental consultant, and received degrees in biology and economics from the
University of North Carolina.
Steven T. Lindeman
Mr. Lindeman began his work for The Nature Conservancy as Forest Conservation
Program Operations Manager in 1999. He will have direct responsibility for
enrolling timberland within the Clinch Valley, for developing management plans,
and for overseeing all aspects of timber harvest operations and sales.
Mr. Lindeman came to The Nature Conservancy with over seventeen years of
forestry experience in wood procurement, land management, and landowner
assistance work throughout the southeastern United States. After several years
in wood procurement with Georgia Pacific and others in Florida and Pennsylvania,
in 1987 he took the position of Landowner Assistance Forester with Georgia
Pacific, starting a new program and having the responsibility of signing up
landowners, writing land management plans, and convincing landowners to grow
sawtimber in a market area dominated by a large paper mill. Georgia Pacific
then promoted Mr. Lindeman to the position of District Manager in North Carolina
in 1989. In that position, Mr. Lindeman ran a newly created timber procurement
district. His interest in pursuing a more sustainable type of forest management
convinced him to return to graduate school at Duke University's School of the
36
Environment in 1992. Subsequently, he took a position with Tall Timbers
Research Station, where he was the resource manager on approximately 7,000 acres
in north Florida and south Georgia from 1994 to 1999.
Mr. Lindeman received a Bachelor of Science degree in Forestry and Wildlife
Resources from Virginia Tech and a Master of Forestry and a Master of
Environmental Management from Duke University. He is a Registered Forester in
North Carolina, South Carolina, and Georgia, and a Certified Prescribed Burner
in Florida and Georgia. Steve is a founding member of the Forest Stewards Guild
and was the co-coordinator of the Southeastern Regional Forest Certification
Standards Project for the Forest Stewardship Council.
Michael L. Lipford
Mr. Lipford has served as Executive Director of the Virginia Chapter of The
Nature Conservancy since 1992 and Mid-Atlantic Division Vice President since
2000. Mr. Lipford and his staff have been intimately involved in the
development of The Forest Bank concept and its implementation in the Clinch
Valley. He supervises the Clinch Valley Program as well as conservation and
fundraising programs in Virginia, North Carolina, South Carolina and Tennessee.
Mr. Lipford served on The Nature Conservancy's Conservation Committee.
Before joining the Conservancy as Virginia Executive Director, Mr. Lipford
directed the Virginia Division of Natural Heritage within the Department of
Conservation and Recreation from 1986 to 1992. He was Assistant Professor at
Dabney Lancaster Community College in Clifton Forge, Virginia, where he taught
forestry and wildlife from 1982 to 1986. He received a Masters of Science in
Biology in 1984 from James Madison University and a Bachelor of Science in
Biology in 1978 from Virginia Tech University.
W. William Weeks
Mr. Weeks joined The Nature Conservancy as Director of its Indiana program in
1982. In 1988, Mr. Weeks was named the Conservancy's Chief Operating Officer.
In 1995, he founded the Center for Compatible Economic Development, now the
Compatible Ventures Group, and became its Executive Director. In 1998, he
became Executive Vice President of The Nature Conservancy and assumed management
responsibility for over 2000 employees involved in science and conservation
programs in the United States, Latin America and the Pacific. Mr. Weeks
practiced law with emphases in securities and antitrust litigation in
Indianapolis between 1979 and 1982. He earned his J.D. (magna cum laude, 1979)
at Indiana University. Indiana University's College of Arts and Sciences
recognized him as its outstanding alumnus in 1992. The Indiana University law
school presented him with its Distinguished Service Award in 1997. Mr. Week's
book on ecosystem conservation and compatible economic development, Beyond The
Ark, was published by Island Press in 1996.
THE OFFERING
Generally
We are offering up to 15,000,000 class A membership units to owners of land in
exchange for contributions of timber rights only. As of the date of this
prospectus, our manager has approved the issuance of 5,000,000 units and the
purchase of timber rights on up to 10,000 acres of land. We cannot assure you
that our manager will approve any more than 5,000,000 class A membership units
or the purchase of any additional timber rights, which could significantly
reduce the size of this offering. We will issue one class A membership unit to
you in exchange for every $1.00 in value of the timber rights you contribute to
us, based on our appraisal for the timber rights you contribute. If you have
owned, for at least one year, twenty or more acres of forest in areas designated
by our manager, you are eligible to contribute timber rights to us in exchange
for class A membership units.
37
We are offering three different types of class A membership units in exchange
for your contribution of timber rights.
Up to 8,000,000 Class A-1 Membership Units. Class A-1 membership units provide
for preferred annual distributions equal to 4% of the initial value of the
contributed timber rights; will permit withdrawal after the second year subject
to penalties; will permit withdrawal without penalty in connection with certain
allocations of built-in gain; and will permit withdrawal without penalty after
the sixth year.
Up to 3,500,000 Class A-2 Membership Units. Class A-2 membership units will
provide for preferred annual distributions of 4.5% of the initial value of the
contributed timber rights; will permit withdrawal of up to 20% of the value of
the timber rights every three years beginning on the fourth anniversary of the
contribution; will permit withdrawal without penalty in connection with certain
allocations of built-in gain; and will permit withdrawal of the full amount
after the fifteenth anniversary of contribution.
Up to 3,500,000 Class A-3 Membership Units. Class A-3 membership units will
provide for preferred annual distributions of 4.5% of the initial value of the
contributed timber rights less the amount of any prior withdrawals. Beginning
of the second anniversary of his or her initial contribution, the owner of the
class A-3 membership units will be entitled to withdraw up to 5% of the initial
value of the contributed timber rights for each year he or she has owned the
membership units. For example, the owner will be able to withdraw up to 10% of
the initial value of the timber on the second anniversary of his or her
contribution, up to 40%, less prior withdrawals, on the eighth anniversary and
up to 100% on the twentieth anniversary of the initial contribution. In
addition, owners of class A-3 membership units will be permitted to make
withdrawals in connection with certain allocations of built-in gain.
There can be no assurance that we will have cash available to make distributions
to you on any particular distribution date.
Subscription Process
In connection with each contribution of timber rights, the contributor will be
required to:
. sign and deliver a subscription agreement;
. sign and deliver a forest conservation and management easement; and
. sign and deliver a counterpart to our limited liability company
agreement.
Copies of the subscription agreement, the forest conservation and management
easement and the limited liability company agreement are exhibits to the
registration statement of which this prospectus is a part.
Upon receipt and acceptance of these items by our manager, we will:
. issue membership units to you of the class and in the amount set forth
on your subscription agreement, which interest will be evidenced by a
membership certificate; and
. admit you as a member in The Forest Bank.
After you become a member, you will continue to pay all real estate taxes and
assessments levied on your property. If the land underlying your contributed
timber rights is taken by eminent domain, you, as the contributor, and The
Forest Bank will be entitled to compensation for our respective interests in the
property.
The Subscription Agreement
Each contributor will execute and deliver to us a subscription agreement. In
the subscription agreement, a contributor will exchange timber rights for
membership units in our company. The contributor will also make representations
to the company regarding:
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. ownership of the timber rights;
. environmental liabilities;
. authority to execute the agreement;
. transaction expenses; and
. other customary matters.
The Forest Conservation and Management Easement
A contributor will convey timber rights to us by means of a forest conservation
and management easement. This easement will be recorded in the office where
deeds are recorded in the jurisdiction in which your land is located. The
easement becomes a permanent part of the title record for your land and
describes the permanent rights conveyed to us and the rights retained by you
with respect to the land. The easement generally accomplishes two things.
First, the easement grants us and our manager various privileges, including the
rights to:
. perform forest management activities and harvest timber, wood and forest
products present on the property or that may grow on the property in the
future;
. construct, maintain, repair and use timber haul roads, log landings and
skid trails to facilitate timber harvests, and construct and use other
facilities including access drives, extract sand and gravel for forest
access purposes, and enter on the property at reasonable times to carry
out all purposes contained in the easement;
. prevent any use of the property that will significantly impair or
interfere with the forest conservation values of the property or
exercise of our rights under the easement;
. facilitate economically and ecologically sustainable, commercially
viable management and production of forest and timber resources; and
. manage the forest for long rotations to allow high quality harvests
sustained over time.
Second, the easement generally will prohibit any acts that interfere with our
forest management activities. In particular, the easement will impose several
permanent restrictions on the use of the land. After we record the easement, no
one, including you, your transferees and heirs, may:
. erect or place any buildings, roads, billboards, fences, utility or
other structures on the forested property subject to the easement;
. divide, partition or subdivide the forested property subject to the
easement;
. dump spoils, trash or other materials on the property subject to the
easement, nor may activities occur that are detrimental to water
quality, levels or flow;
. excavate, dredge, remove soils, rock or sand, or construct roads on the
forested property subject to the easement; or
. introduce non-native plant or animal species on the forested property
subject to the easement.
In the easement, you reserve the right to continue to use the property to engage
in:
. hunting,
. fishing,
. hiking,
. camping and
. other recreational activities on the property.
The easement does not grant the public any right of access to the property. In
the easement, we agree to hold you harmless from liabilities arising out of our
activities on the property and you hold us harmless from liabilities associated
with your activities on the property.
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If the terms of the easement are violated, we will give you written notice of
the violation and will require corrective action to remedy the violation. If
there is a disagreement between The Forest Bank and you as an owner of the class
A units as to the permissibility of an activity on the property, the
determination of our board of managers will be binding on you. If the violation
continues for thirty (30) days without correction, we may enforce our rights by
injunction or may sue you for damages.
Nature Conservancy Conservation Easements. Rather than signing a forest
management and conservation easement with us, when a contributor requests, we
may allow that contributor to grant a conservation easement to our manager, The
Nature Conservancy, and a forest management easement to us. The conservation
easement granted to our manager will restrict development, land disturbance and
other activities on the property, and preserve the property's natural
communities and characteristics and will be similar to or more restrictive than
the conservation portions of the forest management and conservation easement
described above. In those situations, the forest management easement granted to
us will be the same as the forest management portion of the forest management
and conservation easement granted to us in other situations. The process of
granting the conservation easement to our manager, The Nature Conservancy,
instead of us may allow some, but not all, contributors to realize tax benefits.
You should consult with your tax advisor to determine whether a contribution
structured in this manner is appropriate for you.
Transfer of the Timber Rights. Our limited liability company agreement
prohibits us from transferring the timber rights to any third party other than
in connection with the dissolution and liquidation of our company. Our limited
liability company agreement also provides that our manager and The Forest Bank
shall use their reasonable best efforts to ensure that, in a dissolution or
liquidation, (1) the timber rights are transferred to their original contributor
in redemption of their class A units, or (2) if agreed to by the original
contributor and our manager, the timber rights are distributed to our manager
and the contributor's class A units will be redeemed in full for cash.
Contributing Timber Rights Encumbered by Mortgage Loans
In exchange for the class A units, you must contribute unencumbered access to
the forest resources on your property, together with the rights to manage these
resources as described in the easement. However, in many instances, the real
property over which the easement will be granted by a contributor is encumbered
by a mortgage or deed of trust securing a loan. In these instances, you will be
asked to seek a subordination of the lender's mortgage or deed of trust to the
easement granted to us. As part of the subordination process, the contributor
may pledge class A units as security for the loan to facilitate the lender's
subordination. If you pledge your class A units to a lender and then default on
that loan,
. the lender will be entitled to permanently acquire ownership to the
class A units in satisfaction or partial satisfaction for the loan; or
. a bona fide, unrelated lender may request a full or partial redemption
of the pledged units in order to satisfy, in whole or in part, the
defaulted loan.
DESCRIPTION OF MEMBERSHIP UNITS
The material terms of our membership units are set forth below. You should
review our limited liability company agreement in its entirety for a complete
discussion of the terms of our membership units. Copies of the Certificate of
Formation and Limited Liability Company Agreement are exhibits to the
registration statement of which this prospectus is a part. We will provide
copies of our Certificate of Formation and Limited Liability Company Agreement
to prospective contributors on request.
Our ownership structure will consist of two general types of membership units.
First, class M membership units can only be owned by a manager of The Forest
Bank. Second, class A membership units can only be issued to (1) landowners in
exchange for timber rights contributions or (2) our manager in exchange for cash
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contributions. There are three different types of class A membership units.
Each of the class M membership units and the class A membership units will be
evidenced by certificates. All units will be issued at a value of $1.00 per
unit.
Class M Membership Units
Shortly after formation of the Forest Bank, our manager acquired 1,500,000 class
M membership units in exchange for:
. an initial capital contribution of $500,000 in cash;
. an obligation to provide an additional capital contribution of $250,000
in cash on an as-needed basis; and
. an obligation to provide management and administrative services pursuant
to a management agreement for five years without cost to us.
If we need additional cash in excess of the initial $750,000 from our manager,
our manager has an option, but is not obligated, to:
. purchase additional class M membership units from us for cash equal to
$1.00 per unit;
. purchase class A-1 membership units from us for cash at a price of $1.00
per unit; or
. loan cash to us pursuant to a promissory note.
Our manager's initial capital account is $1,250,000 and will be increased by
$250,000 at the time it makes the additional $250,000 capital contribution. Our
manager will not receive any additional units at the time it makes the
additional $250,000 capital contribution.
If our manager purchases class A-1 units from us for cash, it would be entitled
to the same preferred distribution and redemption rights afforded to members who
contributed timber rights in exchange for class A-1 units. There are no
preferred distribution or redemption rights with respect to the class M units.
Our manager may chose to purchase class A-1 units rather than class M units in
order to receive a preferred distribution and the ability to redeem the units as
described in this prospectus.
If our manager lends cash to us, the note issued to our manager will be a two
year note with interest payable quarterly and the principal due on maturity.
The interest rate and other terms of the note will be no more favorable to our
manager than terms we could obtain from a disinterested third party lender at
the time of the loan. We do not intend to borrow money from any source other
than our manager. Our manager expects to obtain the funds necessary to meet
these cash obligations from charitable contributions it receives that are
restricted by donors for The Forest Bank.
Class A Membership Units
Each landowner who transfers timber rights to us will be issued a number of our
class A membership units. The class A membership units will be denominated in
whole dollar amounts and will equal the fair market value of the timber rights
contributed on the date of contribution to us. That fair market value will be
determined by an appraisal conducted by our manager, The Nature Conservancy.
However, our manager reserves the right to hire an independent third-party
qualified to conduct timber appraisals to appraise any specific contribution of
timber rights.
Each of the different classes of class A membership units provides for different
(1) preferred annual distributions and (2) rights to redeem the membership units
in exchange for cash. You may select which class of class A membership units
you would like to receive.
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Distributions
We will pay distributions to our members in accordance with the terms of our
limited liability company agreement. The limited liability company agreement
will provide for a preferred annual distribution to the class A members based on
the value of the timber rights you contributed to us, calculated at the time of
original contribution or pursuant to the revaluation described below. In
addition, in any year in which our operations produce cash flow in excess of our
preferred annual distributions and redemption payments, our manager, in its
discretion, may pay additional distributions to all our members, including our
manager as owner of the class M membership units, pro-rata in accordance to the
total number of membership units owned by each member. The aggregate amount of
any such additional distribution will be determined by our board of managers in
its sole discretion but will not exceed the amount of our cash flow in excess of
our costs of operation and preferred distributions.
The preferred annual distribution for each class of class A membership units is
different according to which class of membership units you choose to receive in
exchange for your timber rights. The preferred annual distributions for each
class of class A membership unit are:
Class Preferred Annual Distribution
----- -----------------------------
A-1 $.04 per unit
A-2 $.045 per unit
A-3 $.045 per unit
We will pay distributions annually or more frequently subject to the discretion
of our board of managers. If we do not pay the full preferred distribution in
any year, the amount of the distribution not paid will cumulate, without
interest, and be payable at the time of the next annual preferred distribution
or sooner at the discretion of our board of managers if we have positive cash
flow.
There can be no assurance that we will have cash available to make distributions
to you on any particular distribution date. In the event the preferred annual
distribution due on the outstanding membership units is not paid in full for any
two consecutive calendar years, the owners of at least two-thirds of the
outstanding class A membership units may vote to replace the manager, subject to
identifying a suitable replacement manager in compliance with our limited
liability company agreement.
Revaluations of Class A Units
Given the volatility of timber prices and the potential for appreciation
significantly over inflation, we will revalue the timber rights contributed to
us every tenth anniversary of the original contribution. At each revaluation
interval, our manager will re-appraise the timber rights contributed by each
member to ascertain the new fair market value. If the new fair market value
shows that those particular timber rights appreciated at a compounded rate of
9.5% per year or less, then the original valuation will not change. If the new
appraisal shows that those particular timber rights appreciated at a compounded
rate greater than 9.5% per year, then the original valuation will be increased
by the amount by which the new fair market value exceeds the assumed 9.5%
compounded annual appreciation.
The revaluation is conditioned on a 9.5% compound appreciation to protect our
ability to generate cash flow to make our required distributions to our members.
We roughly estimate that our cost of operation, annual preferred distributions,
distributions to fund withdrawals and our creation of a reserve for future
redemptions will amount to approximately 9.5% of the total value of our timber
rights in any given year. As a result, we are willing to revalue the timber
rights every ten years only if the timber rights appreciate at a rate in excess
of an 9.5% annual compound rate. This is a rough estimate made for purposes of
triggering a ten-year revaluation only and should not be relied on as an
indication of our expected expenses or costs of operations.
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Each revaluation process will account for any partial redemptions of class A
membership units relating to a particular timber rights contribution so that the
number of new units to be issued to the member, if any, after revaluation will
be reduced by the same percentage as the percentage of original class A
membership units issued for that contribution that were redeemed by that member
prior to the revaluation.
If the original value of your timber rights is adjusted as a result of any
revaluation, we will issue you additional class A membership units at $1.00 per
unit to reflect the revaluation and:
. the amount of your aggregate preferred annual distribution will be based
on your new total number of units; and
. the amount of cash you may receive on redemption will also increase to
reflect your new total amount of units.
If the reappraisal results in a value less than your original appraised value,
there will be no change to your number of units or preferred distribution.
Our determination of the value of the timber rights during revaluation will be
final, and you will have no input into the revaluation process.
Redemptions
As a class A member, you will be permitted to withdraw in cash the initial value
of your contributed timber rights, in whole or in part,
. after the second anniversary of your contribution of timber rights,
subject to restrictions and penalties depending on the class of
membership units you choose to receive in exchange for your timber,
. whenever you receive a special allocation of built-in gain and
. whenever an unrelated bona fide lender forecloses on membership units
used as security for a loan.
Your right to withdraw cash will be in the form of your ability to redeem class
A membership units for $1.00 per unit, subject to the restrictions described
below.
We will redeem units only on the last day of each calendar quarter -- each March
31, June 30, September 30 and December 31. To redeem membership units on the
last day of any calendar quarter, you must notify us in writing of your
redemption request at least 30 days prior to the applicable redemption date. If
we do not receive a redemption request from you at least 30 days prior to the
end of a calendar quarter, you will have to wait until the end of the next
quarter to redeem any units. If we do not have enough cash to redeem all the
units requested to be redeemed on any redemption date, we will redeem the units
pro rata according to the number of units each member requested to be redeemed.
Except for redemptions in connection with a special allocation of built-in gain
or a foreclosure by an unrelated bona fide lender of membership units pledged as
security for a loan, no redemptions will be permitted before the second
anniversary of the contribution. In addition, if your number of membership
units ever drops below 25% of your original number of units, we may choose to
redeem your remaining outstanding membership units. The redemption rights,
restrictions and penalties for each class of class A membership units are
described generally below.
Class A-1 Membership Units
If you chose to contribute your timber rights in exchange for class A-1
membership units, you will not be able to redeem any portion of your membership
units until after the second anniversary of your contribution. After
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the sixth anniversary of your contribution, you will be able to redeem any
number of your membership units without restriction or penalty. For redemptions
after the second anniversary but prior to the sixth anniversary of your
contribution, you must forfeit a portion of your membership units as a penalty
for early redemption according to the following schedule:
Redemption in Year Number of Membership Units Forfeited
------------------ ------------------------------------
3 20% of your initial number of units
4 15% of your initial number of units
5 10% of your initial number of units
6 5% of your initial number of units
In addition, each redemption of class A membership units must be for at least
25% of the original number of units issued to you, and you must redeem all your
remaining outstanding units on your third redemption.
Class A-2 Membership Units
If you chose to contribute your timber rights in exchange for class A-2
membership units, you will not be able to redeem any portion of your membership
units during the first three years after your contribution. After the fifteenth
anniversary of your contribution, you will be able to redeem any number of your
membership units without restriction or penalty. For redemptions after the
third anniversary but prior to the fifteenth anniversary of your contribution,
you will only be able to redeem a portion of your membership units according to
the following schedule:
Redemption in Years Maximum Amount of Redemption
------------------- ----------------------------
4-6 20% of your initial number of units
7-9 40% of your initial number of units
10-12 60% of your initial number of units
13-15 80% of your initial number of units
After 15/th/ Anniversary 100% of your initial number of units
Class A-3 Membership Units
Beginning on the second anniversary of your contribution of timber rights, the
owner of the class A-3 membership units will be entitled to redeem up to 5% of
the membership units originally issued to the member for each year he or she has
owned the units. For example, the owner will be able to redeem up to 10% of the
initial number of units on the second anniversary, up to 40% of the initial
number of units, less the units already redeemed on the eighth anniversary and
up to 100% on the twentieth anniversary of the initial contribution.
Built-In Gain Redemptions
If we harvest your timber, you will be allocated gain to the extent of your
built-in gain at the time of your contribution. To prevent you from being in a
position where your tax liability exceeds your cash distributions for a taxable
year, you will be permitted to redeem without penalty an amount of membership
units that, when combined with any distributions made to you for the year,
equals your presumed tax rate times the profit (including built-in gain)
allocated to you during the year. For this purpose, your presumed tax rate will
be the maximum federal income tax rate on long-term capital gains (currently
20%) plus 5%. You can exercise the built-in gain redemption right immediately
after we notify you of your allocable share of built-in gain.
Foreclosure Redemptions
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If you pledge your class A membership units to an unrelated bona fide lender as
security for the loan and the lender forecloses on the membership units, the
lender will be entitled to redeem the pledged units at the end of each calendar
quarter provided that the lender provides us with at least 30 day prior written
notice. Such lender can exercise those redemption rights without restriction or
penalty.
Emergency Redemptions
Except for the built-in gain and foreclosure redemptions described above, no
redemptions will be permitted during the first two years after your contribution
of timber rights. For all class A membership units, we will permit redemptions
in excess of the maximum redemption amount in any year after the second
anniversary of your contribution, but you must redeem at least 25% of the
initial number of units owned by you and you will be forced to forfeit a
percentage of your membership units, according to the following table:
Remaining Time Before
Unrestricted Redemption Number of Membership Units Forfeited
----------------------- ------------------------------------
1 day to 4 years 5% of the number redeemed
5 years to 9 years 10% of the number redeemed
10 years to 15 years 15% of the number redeemed
16 years to 19 years 20% of the number redeemed
Although you will be able to redeem units in many circumstances, you will never
be able to revoke your transfer of timber rights to us. The forest management
and conservation easement we require you to sign will permit us to permanently
manage and harvest timber on your property and permanently prohibits you from
allowing any commercial or other development of your property or otherwise using
the property in a manner inconsistent with the preservation and protection of
the forest conservation values of your timber.
Priority of Distributions and Redemption Payments
We will make distributions and redemption payments in the following order of
priority:
. First, to the class A members to the extent of their preferred annual
distributions.
. Second, to the class A members who have exercised their built-in gain
redemption rights to the extent of the built-in gain redemption
payments.
. Third, to the class A members who have exercised their regular
redemption rights, foreclosure redemption rights and emergency
redemption rights in proportion to the payments required to be made upon
the exercise of those rights.
. Thereafter, to all of the members in accordance with the total number of
membership units owned by each member.
Voting Rights
Owners of class A membership units will not be entitled to participate in or
vote on any matters involving the management or the business of our company,
except for the sale, merger or consolidation of our company to or with another
person or entity, which will require the approval of the manager and holders of
two-thirds of the class A membership units. Whenever a vote of the class A
members is taken, each class A member will have one vote for each class A
membership unit.
The owner of the class M membership units will have the right to appoint, remove
and replace all of the board of managers. However, if we do not pay the full
preferred distributions for two consecutive calendar years, each member of our
board of managers can be removed or replaced by a vote of holders of a majority
of the outstanding class A units.
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Restrictions on Transfer
You may sell, assign, pledge or transfer your class A membership units to any
person or entity, including non-landowners, as long as:
. you are transferring a minimum of 10,000 units;
. in the sole discretion of the board of managers, the transfer will not
materially adversely affect our company, the other members or the value
of other members' units;
. in the sole discretion of our board of managers, the transfer would
adversely affect our classification as a partnership for federal income
tax purposes; and
. you follow the notice and documentation requirements described below.
To transfer your membership units, you must:
. provide 30 days advance written notice to us;
. deliver to our board of managers a written instrument evidencing the
transfer in form and substance satisfactory to our board of managers;
. cause the transferee to execute a copy of, and be bound by, the limited
liability company agreement to evidence his, her or its agreement with
the terms thereof; and
. pay the reasonable out-of-pocket costs and expenses incurred by us in
connection with your transfer and the admission of the transferee as a
new member.
All of the class M membership units are owned by our manager, The Nature
Conservancy. Our manager may transfer all, but not less than all, of its class
M membership units:
. to another entity owned by our manager;
. if the transferee assumes the obligations of our manager under the
limited liability company agreement and management agreement; and
. our manager guarantees the obligations and performance of the transferee
under the limited liability company agreement and management agreement.
If any of these three elements are not true, our manager will not be able to
transfer its class M membership units unless the class A members vote to replace
the manager.
Allocations
Our limited liability company agreement provides that, except for certain
special allocations of built-in gains or losses described below, profits shall
be allocated:
. first, to class A members in accordance with their preferred annual
distributions until the cumulative profits allocated to the class A
members equals the aggregate amount of the preferred annual
distributions made to the class A members for the current and all prior
years; and
. second, to all of the members in accordance with the total number of
membership units owned by each member.
Our limited liability company agreement provides that, except for certain
special allocations of built-in gains or losses described below, losses shall be
allocated to all of the members in accordance with the total number of
membership units owned by each member.
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Our limited liability company agreement provides for special allocations to
members who contributed timber rights with "built-in gain" or "built-in loss."
The amount of such built-in gain or built-in loss is equal to the difference
between the fair market value of the contributed property at the time of
contribution and the adjusted tax basis of such property at such time. Pursuant
to those special allocations, all gain or loss from harvesting timber will be
allocated to the member that contributed the timber rights to the extent of the
member's built-in gain or built-in loss. If we harvest a portion of those
timber rights, a proportionate amount of the built-in gain or built-in loss will
be allocated to the contributing member. The remaining gain or loss from
harvesting timber shall be allocated as described above. Although we will
harvest your timber from time to time, we have agreed in our limited liability
company agreement not to sell your timber rights.
Liquidation
We will dissolve and begin winding up and liquidating our assets on the first to
occur of any of the following events:
. the bankruptcy or dissolution of our manager;
. the agreement of two-thirds of our members and our manager;
. the happening of any other event that makes it unlawful, impossible or
impractical to carry on our business;
. the first day on which there are no members; or
. the entry of a decree of judicial dissolution under the Delaware LLC law
or any other event or circumstance requiring dissolution under the
Delaware LLC law.
If one of these events happens, The Forest Bank, LLC entity will continue solely
for the purpose of winding up our affairs in an orderly manner, liquidating its
assets and satisfying the claims of its creditors and members. We will
liquidate our assets as promptly as is consistent with obtaining the fair value
for those assets. Our assets and amounts received on sale or disposition of our
assets shall be applied and distributed, subject to any reasonable reserves
maintained for contingent liabilities or other obligations, in the following
order:
. first, to the satisfaction, whether by payment or the making of
reasonable provision for payment, of all our debts and liabilities to
creditors other than members;
. second, to the satisfaction, whether by payment or the making of
reasonable provision for payment, of all our debts and liabilities to
members, including unpaid distributions; and
. the balance, if any, to all members in accordance with their respective
capital accounts, after giving effect to all contributions,
distributions and allocations for all periods.
Our board of managers will have reasonable discretion to determine the time,
manner and terms of any sale or sales of our assets pursuant to such
liquidation.
In the event of the bankruptcy of The Forest Bank, our assets, including our
timber rights, and amounts received on sale or disposition of our timber rights,
will be distributed as provided above. In any liquidation or dissolution,
including in bankruptcy, our limited liability company agreement requires that
we and our manager use reasonable best efforts to ensure that (1) the timber
rights are transferred to their original contributor in redemption of their
class A units, or (2) the timber rights are distributed to our manager and the
contributor's class A units will be redeemed in full for cash. We anticipate
negotiating with our manager and each individual member to attempt to provide
that the timber rights are disposed of in manner consistent with our business
and conservation objectives and consistent with the interests of the member who
contributed such timber rights, which may include offering the member the right
to repurchase the timber rights originally contributed. We cannot assure you
that this would occur, and the bankruptcy trustee or court may require that all
our assets, including our timber rights, may be distributed to the creditors of
The Forest Bank that are not affiliated with us, our manager or you.
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PLAN OF DISTRIBUTION
We will offer class A membership units only in exchange for grants of timber
rights.
Initially we will focus exclusively on offering to landowners in the Clinch
Valley region, a 2,200 square mile expanse of forest in southwestern Virginia
and northeastern Tennessee. We will attempt to make initial contact with these
landowners through direct mailings of this prospectus.
When a landowner decides to transfer his or her timber rights to us, we will
ascertain the monetary value of the timber rights which may involve an appraisal
of the timber rights performed by our manager or an independent appraiser.
After execution of subscription documents, including our limited liability
company agreement and various conservation and management easements, we will
issue the landowner a certificate evidencing his or her membership units.
The securities offering will be continually ongoing on a best efforts basis.
No brokers, placement agents, advisers or consultants will receive compensation
in connection with the distribution of the membership units.
MATERIAL PROVISIONS OF OUR LIMITED LIABILITY COMPANY AGREEMENT
This summary of our limited liability company agreement describes the material
provisions of that agreement as it will be in effect immediately after
completion of this offering. The limited liability company agreement has been
filed with the Securities and Exchange Commission as an exhibit to the
registration statement of which this prospectus is a part. You should read the
limited liability company agreement in its entirety.
The following provisions of the limited liability company agreement are
summarized elsewhere in the prospectus:
. With regard to distributions, allocations, revaluations, redemptions,
voting rights, restrictions on transfer and liquidation, see
"Description of Membership Units."
. With regard to our management, see "Our Manager."
. With regard to tax considerations, see "Federal Income Tax
Considerations."
Formation and Term
Our manager formed The Forest Bank, LLC as a Delaware limited liability company
on January 17, 2001, which will continue until an event of liquidation as
described under "Description of Membership Units -- Liquidation."
The Purposes of The Forest Bank, LLC
Our limited liability company agreement expressly provides that our purposes
are:
1. to conserve forest land to maintain ecological features and natural
processes;
2. to manage such lands, forests and associated resources to provide
economic and financial benefits;
3. to allow owners of forest land the opportunity to participate in the
purposes set forth in clauses (1) and (2); and
4. to do any and all acts and things which may be necessary or incidental
to the foregoing or the promotion or conduct of our business or any of
our property.
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Our limited liability company agreement expressly requires that if there is a
conflict among our forest conservation objectives in (1) above and any of our
economic objectives, our forest conservation objectives will take priority.
Factors that Might Prevent or Delay a Change of Control
Any sale of our company to another entity or person and the merger of our
company with or into any other entity must be approved by our board of managers,
the owner of the class M membership units and owners of a majority of all other
membership units issued by us. As a result, any one of these entities or groups
could block a sale or merger of our company that would result in substantial
economic benefit to you.
Exculpation and Indemnification
To the fullest extent permitted under Delaware law, none of our manager, any
affiliate of our manager, any member of the board of managers, any officers or
any member will be personally liable to us or to our members in connection with
any action taken or failure to act on behalf of our company within the scope of
the authority conferred on such person by us or under applicable law. In
addition, our manager and members of our board of manager will not be held
liable to us or our members for any breach of any fiduciary duty as one of them
has to us or our members, except for liability for acts or omissions not in good
faith or that involve gross negligence, intentional misconduct or a knowing
violation of law.
We will indemnify and hold harmless our manager, any of its affiliates, all
members of our board of managers and all our officers for any liability they
might have by reason of any acts, omissions or alleged acts or omissions arising
out of their activities on behalf of or in the interests of our company, except
for acts and omissions that constitute fraud, gross negligence, willful
misconduct, as long as such person reasonably believed that the acts or
omissions were in the best interests of our company. Our indemnification of
these persons will include paying for and even advancing the costs and expenses
of any litigation or similar proceeding in connection with the acts.
Tax Matters
Our manager will be our tax matters partner under federal income tax law and
will make all elections and decisions required or permitted to be made by us
under any applicable tax law. In addition, our manager will prepare and file
all income tax returns on a timely basis.
Information Rights
Any of our members or their agents will have the right to examine and copy, at
any reasonable time or times for all purposes, the books and records of account,
minutes and records of our company. If any member requests in writing, our
manager will send to that member our most recent financial statements and a copy
of our federal, state and local income tax returns.
Amendments of the Limited Liability Company Agreement
Either the owner of our class M membership units or our board of managers may
amend or repeal our limited liability company agreement at any time. However,
any amendment may not reduce (1) the distributions payable to a member as
described in this prospectus, or (2) amounts payable to a member to redeem his
or her units as described in this prospectus, without the written consent of
every member whose rights are being reduced.
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FEDERAL INCOME TAX CONSIDERATIONS
This summary discusses the material U.S. federal income tax considerations that
we reasonably expect to affect your investment in our membership units. This
summary assumes that you are an individual who is a U.S. citizen or resident
alien. It generally does not discuss the federal income tax consequences
applicable to other types of taxpayers, including corporations, tax-exempt
pension or profit-sharing trusts or IRAs, foreign taxpayers, estates, or taxable
trusts. This section is not to be construed as a substitute for careful tax
planning. The statements, conclusions, and opinions contained herein are based
on existing law as contained in the Code, the Treasury regulations there under,
administrative rulings, and court decisions as of the date of this prospectus.
We have received an opinion letter from Hunton & Williams, our tax counsel,
addressing the matters discussed below. You should be aware that an opinion of
counsel represents only that counsel's best legal judgment and does not bind the
IRS or any court. No rulings have or will be received from the IRS relating to
the treatment of your contribution of timber rights to The Forest Bank.
Accordingly, there can be no complete assurance that the IRS or a court will
agree with the legal opinion of Hunton & Williams, with the following
discussion, or with any of the positions taken by us for federal income tax
reporting purposes.
The following discussion is not exhaustive of all possible tax considerations.
The discussion does not substantively address any state, local, or foreign tax
considerations, and also does not discuss all of the aspects of federal income
taxation that may be relevant to you in light of your particular circumstance.
You are urged to consult your own tax advisor regarding the specific tax
consequences to you of acquiring, holding and disposing of our membership units,
including federal, state, local and foreign and other tax consequences of
acquiring, holding and disposing, and of potential changes in applicable laws.
Summary of Tax Opinions
Hunton & Williams has provided us with an opinion letter rendering its opinion
as to certain federal income tax consequences of acquiring, holding, and
disposing of our membership units. These opinions are based on the following
assumptions:
. the transactions contemplated by this prospectus will be consummated in
accordance with the descriptions in this prospectus;
. all of the terms and conditions of our limited liability company
agreement and other governing documents will be satisfied;
. no class A members will exercise their redemption rights within two
years of the contribution of timber rights to us;
. we will not assume the liabilities of any member or take timber rights
subject to any debt;
. prior to contribution, each member will have held his or her timber
rights for at least one year and no member will have held timber rights
as inventory primarily for sale to customers in the ordinary course of
his or her trade or business; and
. except for our limited liability company agreement, the management
agreement, the conservation easements, the subscription agreement and
certificates attached as exhibits thereto or as otherwise described in
this prospectus, there are no agreements or understandings, express or
implied, between The Forest Bank or The Nature Conservancy, on one hand,
and any of the members on the other hand.
The opinions that Hunton & Williams provided are as follows:
. We will be classified as a partnership for federal income tax purposes.
. Each owner of a membership unit will be treated as a partner of The
Forest Bank for federal income tax purposes.
. You will not recognize gain or loss for federal income tax purposes upon
the contribution of your timber rights to us in exchange for membership
units.
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. Any gain recognized by us for federal income tax purposes from our
harvesting activities will be treated as long-term capital gain.
. For federal income tax purposes, the allocation of income, gain, loss,
deduction and credit in our limited liability company agreement should
have substantial economic effect within the meaning of Code sections
704(b) and 704(c) and the regulations thereunder.
. The descriptions of law contained in this section are correct in all
material respects, and the discussions fairly summarize the U.S. federal
income tax considerations that are likely to be material to a member.
Such opinions are based on the Code, the Treasury regulations thereunder,
administrative rulings, and court decisions at the date of the opinion, any of
which could be changed at any time. Any such changes could support a contrary
position to the opinions of Hunton & Williams, possibly on a retroactive basis,
and could adversely affect the federal income tax consequences of acquiring,
holding, and disposing of our membership units. Accordingly, there can be no
assurance that such opinions, which do not bind the IRS or the courts, will not
be challenged by the IRS or will be sustained by a court if so challenged.
Classification of The Forest Bank as a Partnership
Under recently revised Treasury regulations known as the "check-the-box"
regulations, an unincorporated entity, such as a limited liability company, will
be taxed as a partnership unless the entity affirmatively elects to be taxed as
a corporation or the entity is considered a "publicly traded partnership." We
will not elect to be taxed as a corporation.
Under Code section 7704, publicly traded partnerships are generally taxed as
corporations. A partnership will be treated as a "publicly traded partnership"
if its interests are traded on an established securities market or readily
tradable on a secondary market (or the substantial equivalent thereof). Even if
a partnership is traded on an established securities market or readily tradable
on a secondary market (or the substantial equivalent thereof), the partnership
will not be taxed as a corporation if it satisfies the "qualifying income
exception" for each taxable year of its existence. That exception is satisfied
for any year if 90% or more of the gross income of the partnership for that year
consists of "qualifying income." Qualifying income includes gains from the sale
of real property, income and gains derived from timber activities, interest
(other than from a financial business), dividends and other forms of passive
income.
We do not intend to list our membership units on the New York Stock Exchange,
the Nasdaq Stock Market, or any other secondary market. Nonetheless, because of
the redemption rights granted to the class A members and the ability of the
class A members to transfer their membership units, we cannot be certain that
our membership units will not be treated as readily tradable on a secondary
market (or the substantial equivalent thereof). Accordingly, there is a
significant risk that The Forest Bank will be classified as a publicly traded
partnership. However, we will seek to avoid taxation as a corporation by
satisfying the "qualifying income exception." We expect that our only sources
of income will be from the harvesting of timber for sale to third parties and a
small amount of interest income from short term investments. Thus, we believe
that at least 90% of our gross income will constitute qualifying income during
each taxable year. If we avoid taxation as a corporation by satisfying the
qualifying income exception but are classified as a publicly traded partnership,
certain limitations would apply to your use of income from us to offset passive
activity losses from other sources and of losses from us to offset income from
other sources. See "--Passive Activity Losses."
An entity classified as a partnership for federal income tax purposes generally
is not a taxable entity and incurs no federal income tax liability. Each
partner in the partnership is required to take into account in computing his or
her federal income tax liability his or her allocable share of income, gains,
losses, deductions and other items, regardless of whether cash distributions are
made. Accordingly, as an owner of our membership units, you will be required to
report on your federal income tax return your allocable share of our income,
gain, losses, deductions, or other items. See "--Allocations of Our Income,
Gain, Loss, and Deductions."
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If we fail to qualify for partnership taxation, we would be treated as a
corporation for federal income tax purposes. As a corporation, we would be
taxed on our taxable income at corporate rates, currently at a maximum rate of
35%. Distributions would generally be taxed again to the owners of our
membership units as ordinary income to the extent of our earnings and profits.
However, you would not be required to report your share of our income, gains,
losses or deductions on your tax return. Because a tax would be imposed upon us
as a corporate entity, the cash available for distribution to you would be
reduced by the amount of tax paid, which could decrease the value of your
membership units.
We have received an opinion from our counsel that, based on certain assumptions
described above, we will be treated as a partnership for federal income tax
purposes. The discussion below is based on the assumption that we will be
classified as a partnership for federal income tax purposes.
Treatment of Members as Partners
A purported partner in a partnership can be treated for federal income tax
purposes as a creditor of the partnership, and conversely, a purported creditor
to a partnership can be treated for federal income tax purposes as a partner in
the partnership. No statutory or regulatory federal tax authority exists for
distinguishing debt from equity in the context of an interest in a partnership.
Consequently, the source of the law for determining whether an arrangement such
as the class A membership units constitutes debt or equity for federal income
tax purposes is court cases, and most of those cases address whether purported
debt in a corporation is an equity interest, and not whether purported equity in
a partnership is debt. Nevertheless, those cases are relevant to the analysis
of whether your membership units are debt of The Forest Bank. The case law has
not articulated a single test to determine whether a debtor-creditor
relationship exists. Instead, the courts have identified several factors, none
of which is determinative in itself, and analyzed each particular transaction on
its own facts and circumstances. Factors that have been viewed as pertinent to
such a determination include the following:
. the intent of the parties;
. the presence or absence of an absolute obligation to pay a certain
amount of money at a certain time;
. whether payments are required to be made only to the extent of future
profits;
. the form of the obligation as debt or equity;
. whether interest is required to be paid and whether it is fixed or
contingent;
. whether the alleged debt is subordinated to claims of outside creditors;
. whether third party lenders would have made similar loans under the
circumstances;
. the presence or absence of security for the alleged loan;
. the reasonableness of the expectation that principal and interest will
be paid in full; and
. the use to which the funds are put.
The determination of whether the class A members will be treated for federal
income tax purposes as holding evidence of indebtedness or as holding an equity
interest in us depends on an analysis of the factors listed above in the context
of the terms of the class A membership units and our operations. The treatment
of the class A membership units as equity is supported by a number of factors,
including the following:
. the members intend to enter into an arrangement pursuant to which they
are "partners" for federal income tax and other purposes and our limited
liability company agreement evidences that intention;
. we do not have an absolute obligation to make preferred annual
distributions or to redeem your membership units;
. both the payment of preferred annual distributions and the redemption of
class A membership units are dependent upon the future profits of The
Forest Bank;
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. in addition to preferred annual distributions, class A members
participate in the profits of The Forest Bank by sharing in residual
operating and liquidating distributions;
. the class A membership units are in the form of equity interests in The
Forest Bank;
. the class A membership units do not contain provisions for the
unconditional payment of interest;
. the class A membership units are subordinate to the claims of all
creditors;
. the class A membership units do not include creditor's rights and other
terms and conditions similar to those that would be required by a
commercial lender; and
. the class A membership units do not have a security interest in the
assets of The Forest Bank.
Accordingly, based on the factors listed above and certain assumptions described
above, we have received an opinion from our counsel that each member of The
Forest Bank will be treated as a partner for federal income tax purposes.
Contribution of Timber Rights
Code section 721 provides that no gain or loss is recognized to a partnership or
to any of its partners upon the contribution of property to the partnership in
exchange for an interest in the partnership. However, such tax-free treatment
is not accorded with respect to a contribution of property to a partnership that
is classified as an "investment company" under the Code, to a contribution that
is treated as a "disguised sale" of the contributed property under the Code, or
to the extent that the contributing partner receives consideration other than an
interest in the partnership. Based on certain assumptions described above, we
have received an opinion from our counsel that you will not recognize any gain
or loss on the contribution of your timber rights to us in exchange for our
membership units.
Investment Company Rules
If we were considered to be an "investment company" as defined in Treasury
regulations section 1.351-1, the contribution of the timber rights to us would
not be tax free under Code section 721. Treasury regulations section 1.351-1
provides that a transfer will be treated as having been made to an investment
company if the transfer results in a diversification of the interests of two or
more transferors, and the transferee is
. a regulated investment company ("RIC"),
. a real estate investment trust ("REIT"), or
. a partnership more than 80% of the value of whose assets are held for
investment and are stock or securities (including cash and evidences of
indebtedness), or interests in RICs or REITs.
Treasury regulations section 1.351-1 further provides that a transfer will
ordinarily result in diversification of the transferors' interests for this
purpose if two or more persons contribute nonidentical assets. Although the
transfer of the timber rights to us will result in the diversification of the
interests of our members, we will not be a RIC or REIT and will not hold
sufficient cash, stock or securities to otherwise cause us to constitute an
investment company. Accordingly, the contribution of your timber rights to us
will not be treated as a transfer to an investment company under Code section
721 and Treasury regulations section 1.351-1.
Disguised Sale Rules
A contribution of timber rights to us will not be tax free to the extent it is
treated as a "disguised sale" under Code section 707(a) and the Treasury
regulations thereunder. The disguised sale regulations generally provide that,
unless one of the prescribed exceptions applies, a partner's contribution of
property to a partnership and a simultaneous or subsequent transfer of money or
other consideration (including the assumption of or taking subject to a
liability) from the partnership to the partner will be presumed to be a sale, in
whole or in part, of such property by the partner to the partnership. Further,
the disguised sale regulations provide generally that, in the absence of an
applicable exception, if money or other consideration is transferred by a
partnership to a partner within two years of the partner's contribution of
property to the partnership, the transactions will be,
53
when viewed together, presumed to be a sale of the contributed property unless
the facts and circumstances clearly establish that the transfers do not
constitute a sale. The disguised sale regulations also provide that if two years
have passed between the transfer of money or other consideration from a
partnership to a partner and the contribution of property, the transactions will
be presumed not to be a sale unless the facts and circumstances clearly
establish that the transfers constitute a sale.
There are three types of distributions that may be made to class A members
within two years of the contributions of their timber rights: preferred annual
cash distributions, discretionary operating income distributions, and built-in
gain or foreclosure redemptions of membership units.
Our limited liability company agreement will provide for a preferred annual
distribution to class A members based on the fair market value of the timber
rights at the time of contribution. The preferred annual distribution for each
class of class A membership units is different according to which class of
membership units you choose to receive in exchange for your timber rights. The
disguised sale regulations provide that "preferred return" payments to partners
that are reasonable are presumed not to be a part of a sale of property to the
partnership. Distributions to a partner qualify as a "preferred return" if they
constitute preferential distributions of partnership cash flow to a partner with
respect to capital contributed to the partnership by the partner that will be
matched, to the extent available, by an allocation of income or gain. A
preferred return is reasonable only to the extent that the partnership agreement
provides for payment for the use of capital in a reasonable amount, and only to
the extent that the payment is made for the use of capital after the date on
which that provision is added to the partnership agreement. A preferred return
is reasonable in amount if the preferred return that is payable for that year
does not exceed the amount determined by multiplying either the partner's
unreturned capital at the beginning of the year or, at the partner's option, the
partner's weighted average capital balance for the year by the "safe harbor"
interest rate for that year. The safe harbor interest rate for a partnership's
taxable year equals 150% of the highest applicable federal rate in effect at any
time from the time that the right to the preferred return is first established
pursuant to a written agreement among the partners. In the case of our
preferred annual distribution, the distribution is based on each member's
capital contribution and will be matched by an allocation of income or gain to
the member receiving the distribution. The preferred annual distribution rate
is less than the "safe harbor" and, therefore, should be reasonable in amount.
In addition, the distribution will be made for the use of capital after the date
of our limited liability company agreement. Thus, our preferred annual
distributions should qualify as preferred returns under the disguised sale
regulations.
In addition to preferred annual distributions, our limited liability company
agreement provides for discretionary operating distributions, which should not
be treated as a part of disguised sales because they should qualify as
"operating cash flow distributions." In any year in which our operations
produce cash flow in excess of our preferred annual distributions and redemption
payments, our manager, in its discretion, may make an operating distribution to
our members pro rata in accordance to the total number of membership units owned
by each member. The disguised sale regulations provide that "operating cash
flow distributions" payments to partners are presumed not to be a part of a sale
of property to the partnership. Distributions to a partner during a particular
year qualify as "operating cash flow distributions" so long as the total amount
of such distributions to such partner does not exceed the product of the
partnership's net cash flow from operations for the year multiplied by the
partner's percentage interest in the overall partnership profits for that year.
Our discretionary operating distributions will qualify as operating cash flow
distributions under the disguised sale regulations.
You will be permitted to redeem membership units to the extent you receive a
special allocation of built-in gain in connection with the harvesting of your
timber. We may harvest your timber within two years of your initial
contribution. In addition, if you pledge your class A membership units to an
unrelated bona fide lender as security for a loan and the lender forecloses on
the membership units, the lender will be permitted to redeem the pledged
membership units. Such a lender may request a foreclosure redemption within two
years of your initial contributions. Were we to redeem your membership units
within the first two years after your contribution, all or a portion of the
original contribution would be presumed to be a sale. For example, if you
54
were to redeem 10% of your membership units, 10% of your original contribution
would be presumed to be a sale. You would have the burden of clearly
establishing that the contribution was not a sale. Such a determination will be
based on all of the facts and circumstances. Finally, if you claim that a
redemption within two years of your original contribution is not part of a
disguised sale, you would have to disclose that fact on your federal income tax
return for the year in which the redemption occurs.
If a redemption of class A membership units is treated as part of a disguised
sale, then the contribution of timber rights would be treated as a sale of
property, in whole or in part, to us by you acting in a capacity other than as a
member of The Forest Bank, rather than as a contribution to us under Code
section 721 and a subsequent partnership distribution. A transfer that is
treated as a sale under the disguised sale rules is treated as a sale for all
purposes of the Code, and the sale is considered to take place on the date that,
under general principles of federal tax law, the partnership becomes the owner
of the property. If the transfer of money or other consideration from the
partnership to the partner occurs after the transfer of property to the
partnership, the partner and the partnership are treated as if, on the date of
sale, the partnership transferred to the partner an obligation to pay to the
partner money or other consideration.
Although any such deemed sale should qualify as an "installment sale" under Code
section 453 and you therefore should be entitled to defer any taxable gain until
the date of such exercise, such gain would be determined with reference to the
adjusted tax basis of your redeemed membership units as of the date you
contributed your timber rights. In addition, other general tax principles
applicable in the case of installment sales would apply. For example, the
"pledging rule" of Code section 453A may apply if you use membership units with
a value in excess of $150,000 as security for a debt. If applicable, the
pledging rule would treat the net proceeds from the debt as a payment of the
disguised installment sale at the time of receipt, which would accelerate your
recognition of gain.
Receipt of Redemption Right
As a class A member, you will have a redemption right that will permit you to
withdraw in cash the value of your contributed timber rights, in whole or in
part, subject to restrictions and penalties depending on the terms of your
contribution. You should not have to recognize gain or loss because your
membership units contain a redemption right. As discussed above, Code section
721 provides that the receipt of a partnership interest in exchange for property
is nontaxable. However, the receipt of property by a partner, other than a
partnership interest, in connection with the contribution to a partnership is
treated as taxable boot. The redemption right is an inherent component of your
membership units, which should be classified as partnership interests. The
redemption right does not constitute property separate from your membership
units. Accordingly, you should not recognize gain or loss on the exchange of
your timber rights for membership units that contain a redemption right.
Tax Basis in Your Units
Code section 722 generally provides that when property is contributed to a
partnership in exchange for a partnership interest, the partner's initial basis
in its partnership interest is equal to its adjusted basis in the contributed
property. When a taxpayer disposes of part, but not all, of an asset, the tax
law provides that the taxpayer generally must allocate its tax basis among the
divided parts. Therefore, to determine your adjusted basis in the timber rights
contributed to us, you must allocate your adjusted basis in your forest land
between your timber rights contributed to us and the forest land retained by you
based on the fair market value of the timber rights and the retained interest at
the time of contribution. The basis allocated to your timber rights on the date
of contribution will become the initial basis in your membership units.
The adjusted tax basis in your membership units will be increased by any
subsequent capital contributions you make, your share of our income and gain,
and your share of our liabilities, if any (other than liabilities that are
recourse to, or loans that are provided by, The Nature Conservancy or one of its
affiliates). The adjusted tax
55
basis in your membership units will be decreased (but not below zero) by
distributions to you from The Forest Bank, your share of our losses and
deductions, and any decrease in your share of our liabilities.
Character of Gain or Loss from Harvesting Activities
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 Code
section 1231 as gain or loss from property used in a trade or business. Our
holding period for determining whether our timber has been held for more than
one year will include the contributor's holding period for its timber rights.
As discussed above, we will not accept timber rights that have not been held by
the contributor for more than one year. In computing such gain or loss, the
amount realized is reduced by the adjusted depletion basis in such timber. For
purposes of Code 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). We will retain an "economic interest" in the
timber subject to a contract or lease under which a third party will harvest our
timber. Accordingly, any gains or losses from leases or contracts for
harvesting timber will be treated as gains or losses from the sale of property
used in a trade or business under Code section 1231.
Your distributive share our gain or loss from the sale or exchange of Code
section 1231 assets will be aggregated with any other gains and losses realized
by you from the disposition of property used in other trades or businesses, as
defined in Code section 1231(b), 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 Code section 1231 gains will be treated as ordinary income to the
extent of prior net Code section 1231 losses of the taxpayer or predecessor
taxpayer for the five most recent prior taxable years, to the extent such losses
have not previously been offset against Code section 1231 gains. Losses are
deemed recaptured in the chronological order in which they arose.
Allocations of Our Income, Gain, Loss, and Deductions
Your distributive share of our income, gain, loss, or deductions for federal
income tax purposes generally is determined in accordance with our limited
liability company agreement. Under Code section 704(b), an allocation, or
portion thereof, will be respected only if it either has "substantial economic
effect" or is in accordance with the "partner's interest in the partnership."
If an allocation or a portion thereof contained in our limited liability company
agreement does not satisfy either test, the IRS will reallocate such items in
accordance with their determination of the economic interest of each partner in
the partnership. Treasury regulations section 1.704-1(b) contains guidelines as
to whether partnership allocations have substantial economic effect. The
allocations contained in our limited liability company agreement are intended to
have substantial economic effect under that regulation, and we have received an
opinion from our counsel that, based on certain assumptions described above, the
allocations of income, gain, loss, and deduction in our limited liability
company agreement to the members will have substantial economic effect within
the meaning of Code section 704(b) and the Treasury regulations thereunder.
Pursuant to Code section 704(c) and the Treasury regulations thereunder, income,
gain, loss, and deduction attributable to built-in gain or built-in loss
property that has been contributed to the partnership in exchange for an
interest in the partnership must be allocated in a manner such that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or loss associated with the property at the time of the
contribution. The amount of such built-in gain or built-in loss is generally
equal to the difference between the fair market value of the contributed
property at the time of the contribution and the adjusted tax basis of such
property at such time, commonly called a "book-tax difference."
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All of the timber rights contributed to The Forest Bank are expected to have
book-tax differences. Thus, any gain or loss we recognize from harvesting of
your timber rights will be allocated to you to the extent of your built-in gain
or built-in loss at the time of your contribution to The Forest Bank. As
described above, you will be permitted to make redemptions that are designed to
provide you with enough cash from The Forest Bank to pay taxes on the allocation
of built-in gain. See "Description of Membership Units-Redemptions-Built-In Gain
Redemptions."
Cash Distributions
A cash distribution made to you generally will not be taxable for federal income
tax purposes as long as the distribution does not exceed your adjusted basis in
your membership units immediately before the distribution. A cash distribution
will reduce your adjusted basis in your membership units. You will have to
recognize gain on any distribution of cash that exceeds your adjusted basis in
your membership units in an amount equal to the excess of the cash distributed
over your adjusted basis immediately before the distribution.
Redemption of Your Units
If you elect to redeem all or a portion of your membership units and The Nature
Conservancy contributes the cash necessary to effect such redemption, the
redemption likely would be treated as a sale of such membership units to The
Nature Conservancy in a fully taxable transaction, although the matter is not
free from doubt. In that event, the redeeming member would be treated as
realizing an amount equal to the amount of the cash received in the redemption
plus the amount of our liabilities allocable to the redeemed units at the time
of the redemption. If, instead, we choose to redeem a member's units for cash
that is not contributed by The Nature Conservancy to effect the redemption, the
tax consequences would be the same as described in the previous sentence, except
that if we redeem less than all of a member's units, the member would recognize
no taxable loss and would recognize taxable gain only to the extent that the
cash, plus the share of our liabilities allocable to the redeemed units,
exceeded the member's adjusted basis in all of such member's units immediately
before the redemption.
Sale of Your Units
If you sell your membership units, you will be required to recognize gain or
loss equal to the difference between the amount realized from the transaction
and your adjusted tax basis in your membership units at the time of sale. The
amount realized will include your share of our liabilities, if any, attributable
to your membership units, as well as any proceeds from the sale. Except to the
extent attributable to unrealized receivables or appreciated inventory, the gain
or loss generally will be taxable as long-term or short-term capital gain or
loss, depending upon whether you have held your membership units for more than
one year.
The IRS has ruled that a partner has one basis for his interest in a
partnership. Accordingly, if you later acquire additional membership units by
contributing additional timber rights, then the adjusted basis of the land
associated with those additional timber rights, and your share of our
liabilities, if any, attributable to such membership units, will be added to the
basis of your previously owned membership units. This will result in an average
basis for calculating gain or loss on any subsequent sale of less than all of
your membership units.
Under Code section 6050K and the accompanying Treasury regulations, any member
who transfers membership units generally will be required to notify us within 30
days after the transfer (or, if earlier, by January 15 of the calendar year
following the calendar year of the transfer). The notification must include the
names and addresses of the transferor and transferee, the taxpayer
identification number of the transferor and of the transferee (if known), and
the date of the transfer. Any failure to so notify us of such a transfer will
result in a penalty of $50 unless such failure was due to reasonable cause.
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Basis Limitations on the Deduction of Losses
Any net loss for a year allocated by The Forest Bank to a member for tax
purposes may be deducted by that member only to the extent of the adjusted tax
basis of his membership units. See "--Tax Basis in Your Units." Losses in
excess of a member's adjusted tax basis are carried over to succeeding taxable
years.
Passive Activity Losses
Code section 469 generally provides that individuals, estates, trusts, and
certain closely-held corporations and personal service corporations can deduct
losses from passive activities (generally, trade or business activities in which
the taxpayer does not materially participate and most rental activities) only to
the extent of the taxpayer's income or gain from passive activities (except that
in the case of a closely held corporation subject to passive loss limitations,
such losses can be used also to offset the corporation's "active" income, but
cannot be used to offset its "portfolio" income). We believe that our
activities will constitute a trade or business. Since limited partners, similar
to our class A members, are deemed not to materially participate in partnership
activities, any income or loss allocated to you by us will be treated as passive
activity income or loss. Consequently, subject to the possible application of
the additional restrictions described in the next paragraph, any losses
allocated to you by us generally may be used only to offset income from other
passive activities and, conversely, any income allocated to you by us generally
may be offset by losses from other passive activities. Any passive activity
losses that you cannot deduct in a taxable year may be carried forward
indefinitely and used to offset passive activity income in subsequent years.
Special restrictions apply to publicly traded partnerships that avoid taxation
as corporations because of the qualifying income exception. Depending upon the
frequency of transfers or redemptions of our membership units, we could be
treated as a publicly traded partnership not taxable as a corporation. See "--
Classification of The Forest Bank as a Partnership." In that case, you would
not be able to offset your income from us with your passive activity losses from
any other passive activity, including from any other publicly traded
partnership. In addition, you could not offset income from any other source to
offset the losses allocated to you from us.
Any gain realized from the sale of all or part of your membership units will be
gain or loss from a passive activity, except to the extent that such gain is
attributable to any of our assets that produce portfolio income. Similarly, any
loss realized from the sale of a part of your membership units will constitute a
passive activity loss and will be subject to the limitations on the
deductibility of passive activity losses, except to the extent such loss is
attributable to our assets that produce portfolio income. Any loss realized
upon the sale of all of your membership units generally will be deductible in
full.
Limitations on Deductibility of Interest
As described above, we believe that we will be engaged in a trade or business.
However, if we are engaged in an investment activity, rather than a trade or
business activity, our noncorporate member's deduction for "investment interest"
(i.e., interest expense allocable to investment property) may be limited under
Code section 163(d). Investment interest is not deductible to the extent that
it exceeds the taxpayer's net "investment income" (generally, the excess of (i)
the ordinary income derived from investments and the net gain attributable to
the disposition of property held for investment over (ii) the deductions, other
than for interest, which are directly connected with the production of
investment income). However, under the Code, net long-term capital gains are
excluded from the category of net investment income, except to the extent a
taxpayer elects to reduce his net capital gain eligible for the maximum rate
generally applicable to net long-term capital gains. A member who cannot deduct
investment interest currently as a result of the application of Section 163(d)
would be entitled to carry forward such deductions to future years, subject to
the same limitation.
58
Deductibility of Certain Expenses by Individual Members
The expenses of an individual paid or incurred for the production of income
("Section 212 expenses") are deductible for any taxable year only to the extent
that such expenses, along with certain other "miscellaneous itemized
deductions," exceed 2% of his or her adjusted gross income for that taxable
year. In addition, the amount of an individual's Section 212 expenses and
otherwise allowable itemized deductions for the year (with some exceptions) are
reduced by the lesser of (i) 3% of the amount by which the individual's adjusted
gross income exceeds a specified amount ($132,950 for 2001), which is adjusted
for inflation, or (ii) 80% of the individual's otherwise allowable itemized
deductions which are subject to this rule will be disallowed. Further, as
miscellaneous itemized deductions, an individual's Section 212 expenses will not
be deductible for alternative minimum tax purposes. These limitations on
deductibility would apply to an individual member's share of any expenses of The
Forest Bank falling into the category of Section 212 expenses.
If we are engaged in a trade or business, the general and administrative
expenses we incur in connection with our activities, including any management
fees, would not be treated as Section 212 expenses subject to the limitations
above. If, however, we are not engaged in a trade or business, our general and
administrative expenses would be Section 212 expenses subject to the limitations
above.
Section 754 Election
If requested by a purchaser of membership units from any member of The Forest
Bank, we will make an election under Code section 754, which may be revoked only
with the consent of the IRS. The election will generally permit the purchaser
of the membership units to adjust its share of the "inside" basis in our
properties pursuant to Code section 743(b) to fair market value (as reflected by
the value of consideration paid for the membership units), as if such purchaser
had acquired a direct interest in our assets. The Code section 743(b)
adjustment is applicable solely to a purchaser of membership units and is not
added to the "inside" basis in our assets with respect to the other members.
Anti-Abuse Regulation
Treasury regulations section 1.702-1, commonly known as the "anti-abuse
regulation," provides that if a partnership is formed or availed of in
connection with a transaction with a principal purpose of substantially reducing
the present value of the partners' aggregate federal tax liability in a manner
that is inconsistent with the intent of the partnership provisions of the Code,
the IRS may recast the transaction as to achieve tax results consistent with the
intent of the partnership provisions. The Forest Bank is a vehicle to pool
individually owned forest land for purposes of achieving long-term conservation
objectives while at the same time providing an investment return to the owners
of the forest land. It is a joint undertaking between the class A members and
The Nature Conservancy, and members will be taxed on gain corresponding to their
true economic return from The Forest Bank. We will not be a vehicle for either
The Nature Conservancy or any other member to substantially reduce its federal
tax liability in a manner that is inconsistent with the partnership provisions
of the Code. Accordingly, the "anti-abuse regulation" should not apply to your
investment in us.
Information Reporting and Tax Returns
We will file annually a federal partnership information return (IRS Form 1065)
but will not be subject to federal income tax liability. You will be required
to report on your own federal income tax return your allocable share of our
income, gain, loss, deduction and other tax items. Each year, we will furnish
you with a report on a Schedule K-1 of your distributive share for such year of
our taxable income and other tax items for use in the preparation of your
federal income tax return.
59
Audits
The IRS may examine the returns of The Forest Bank and may disagree with our tax
positions on such returns. If challenged by the IRS, our tax positions may not
be sustained by the courts. An audit of our tax return could lead to a separate
audit of your tax return, which could result in adjustments to your tax
liabilities attributable to The Forest Bank as well as items not attributable to
The Forest Bank.
Generally, the tax treatment of partnership items will be determined at the
partnership level pursuant to administrative or judicial proceedings conducted
at the partnership level. Partners generally are required to file their tax
returns in a manner consistent with the information returns filed by the
partnership or be subject to possible penalties, unless the partners file
statements with their tax returns on IRS Form 8082 describing any inconsistency.
The Nature Conservancy will be our "tax matters partner" and as such will have
certain responsibilities and control over any IRS audit and any litigation
relating to the tax treatment of The Forest Bank.
In the event of an audit of our return, the tax matters partner, pursuant to
advice of counsel, will take all actions necessary to preserve the rights of the
members, will provide the members with any notices of such proceedings and other
information as required by law, and will notify members of their rights with
respect to settlement negotiations. All expenses of such proceedings undertaken
by the tax matters partner, which might be substantial, will be paid for
entirely out of our assets, which might otherwise be distributable to you.
Moreover, the tax matters partner is not obligated to contest adjustments made
by the IRS. Any member who elects to participate in such an audit or court
proceedings will be responsible for any expenses the member incurs in connection
with the proceedings.
State and Local Taxation
In addition to the federal income tax consequences described above, you should
consider the state and local tax consequences of an investment in us. The rules
of some states and localities for computing and reporting taxable income may
differ from the federal rules. In addition, under the tax laws of certain
states, we may be subject to state income or franchise tax or other taxes. Such
taxes will decrease the amount of income available to be distributed to you.
Furthermore, we may be required to withhold and pay over to state income tax
authorities income allocated or cash distributed to members that are not
residents of those states, and nonresident members may be required to file tax
returns to those states. We recognize the potential burden on our members
caused by having to file returns and pay taxes in multiple states. To the
extent feasible, we will structure our future expansion to minimize the state
and local tax burden on our members.
Summarized below are certain Virginia and Tennessee state tax considerations
related to acquiring, holding, and disposing of our membership units.
Virginia Income Tax
All owners of membership units will be subject to the Virginia state income tax
on their share of our net income apportioned to our activities in Virginia. The
Virginia state income tax will apply regardless of whether you are a resident of
Virginia. Members that are not Virginia residents will be required to pay
estimated taxes on a quarterly basis for any year in which the member reasonably
anticipates having a Virginia income tax liability in excess of $150. In
addition, members that are Virginia residents may also have to pay estimated
taxes, depending on their Virginia adjusted gross income and on withholding from
other sources.
The Virginia partnership income tax regulations permit a partnership to request
permission from the Virginia State Tax Commissioner to file a statement of
combined partnership income tax attributable to nonresident partners, which
would relieve nonresident partners from the obligation to file individual
nonresident returns. A combined statement of partnership income tax may also be
used to make quarterly estimated tax payments. If we receive the consent of all
of our members who are not Virginia residents and who do not have other
60
Virginia-source income, we will request to file a combined partnership income
tax return for our members who are not Virginia residents. There can be no
assurance, however, that such a request will be granted. In addition, if such
request is granted, it will apply only to members that do not have other
Virginia-source income. Further, the Virginia income tax will be calculated
without the benefit of itemized deductions, standard deductions, personal
exemptions or credits for income taxes paid to states of our members' residence.
Members whose income is reported on a combined return must sign a statement
electing combined filing and indicating the member's responsibility for his
share of the income reported on the combined return. Because there can be no
assurance that we will be allowed to file a statement of combined partnership
income tax, non-Virginia resident members should be aware that they may be
required to file a Virginia income tax return.
Virginia Recordation Tax
The contribution of Virginia timber rights will be subject to the Virginia
Recordation Tax Act. Contributors of Virginia timber rights will be liable, when
the consideration received or the value of the property exceeds $100, for a tax
equal to 50 cents for each $500 or fraction thereof of the net consideration
received by the contributor. In addition, we will be liable for a tax equal to
20 cents for each $100 or fraction thereof of the net consideration received by
the contributor. "Net consideration" will generally be equal to the fair market
value of your timber rights.
Virginia Real Property Tax
Members contributing Virginia timber rights will continue to pay Virginia real
property tax on the total value of their land.
Tennessee Excise and Franchise Taxes
We will be subject to the Tennessee Excise Tax and Franchise Tax. Under the
Tennessee Excise Tax, we will pay a 6% tax on our net earnings apportioned to
Tennessee sources. In addition, we will be subject to the Tennessee Franchise
Tax at the rate of 25 cents per $100 of our net worth apportioned to property in
Tennessee.
Tennessee Recordation Tax
Members contributing Tennessee timber rights will not be liable for the
Tennessee Recordation Tax. However, we will be liable for the Tennessee
Recordation Tax when we record our Tennessee timber rights contributed to us.
Tennessee Real Property Tax
Members contributing Tennessee timber rights will continue to pay Tennessee real
property tax on the total value of their land.
YOU SHOULD CONSULT YOUR TAX ADVISOR CONCERNING THE STATE TAX TREATMENT OF THE
FOREST BANK AND THE EFFECT OF THAT TAX TREATMENT ON YOU.
OTHER REGULATORY MATTERS
Protection of the environment is our most important goal, and in achieving that
goal, we intend to comply fully with the statutory and regulatory frameworks
that govern timber harvest and forest management practices. Standard industry
timber operations often involve the use and storage of various materials such as
herbicides, pesticides, fertilizers and gasoline, and may result in air
emissions, releases to soil or groundwater, or discharges of potentially
hazardous materials into streams and other bodies of water. In addition, our
operations could result in material liabilities, fines, costs and restrictions
under current or future environmental
61
laws and regulations. We describe below the methods that we intend to implement
to address the requirements of these environmental laws and regulations.
Endangered Species Laws
We will survey our timberlands for the presence of endangered or threatened
plant and animal species before we harvest any specific tract of timberland at
least to the extent required by law. Wildlife biologists will review the
survey and determine whether our harvesting activities will affect any
endangered or threatened species. Our harvest plans will take into account any
potential restrictions for endangered or threatened species.
Our manager, The Nature Conservancy, has access to an extensive database of
endangered species and their known locations. In the Clinch Valley, most of the
federally listed species--endangered and threatened--are not terrestrial species
that would occur in forest systems. Rather, they occur in the river systems or
in caves. We do not foresee major issues from endangered species in our forest
operations with the possible exception of harvesting that might adversely affect
the quality of water entering the river system. Designing management operations
which minimize erosion and sediment runoff is our highest priority.
If we were to discover endangered or threatened species on a particular tract,
we have the flexibility to adjust our harvest plans in an effort to avoid any
significant reduction in yield. We can choose to sell timber from a different
tract or have the timber cut at a different time of the year to avoid disturbing
the habitat of an endangered or threatened species. We can exercise this
flexibility because we harvest only a small percentage of our timberlands each
year. Nonetheless, the presence of protected species on or near our timberlands
may significantly affect our operations, including restricting or prohibiting
timber harvesting, road building, access across federal lands and silvicultural
activities on the affected areas of our timberlands.
Currently, most of the federally listed species in the Clinch Valley are
aquatic. However, additional species could be listed under the Endangered
Species Act, and we would be required to assess and modify our harvesting
activities accordingly. For example, several environmental organizations have
petitioned the U.S. Fish and Wildlife Service to list the cerulean warbler, a
bird that nests in mature hardwood forests, as a threatened or endangered
species, and the listing of this bird would require us to adjust our harvesting
and management activities.
Laws Relating to Clean Air, Clean Water and Wetlands
The Federal Clean Air Act and Clean Water Act, and their state equivalents,
control our on-site preparation activities such as slash burning and regulatory
programs designed to reduce runoff discharged into bodies of water. For
example, the U.S. Environmental Protection Agency and its state counterparts
have designated certain bodies of water as "water quality impaired," triggering
a requirement to establish Total Maximum Daily Loads, or TMDLs, for those bodies
of water. The TMDL process could result in additional limitations on harvesting
activities in places where we operate. Additionally, some states, most notably
Virginia, may levy substantial monetary penalties and enjoin timber harvest
activities if such activities cause, or are likely to cause, water pollution by
runoff from timbering operations into streams. Our harvest plans will be
designed to comply with appropriate best management practices to minimize
impacts on watercourses, and we will monitor those with whom we contract for
harvesting services to ensure their compliance with such plan.
Our business is also affected by federal and state laws designed to protect
wetlands. The Federal Clean Water Act authorizes the regulation of wetland
areas. Access to timberlands located within or beyond a protected wetlands area
may be limited, and we may be required to pay for the protection of wetland
areas. Alternatively, we may have to stop harvesting in wetland areas.
62
Regulation of Insecticides and Herbicides
The Federal Insecticide, Fungicide, and Rodenticide Act regulates the use of
pesticides used in forestry practices. It is our intention to avoid if
possible, and minimize if not, the use of pesticides, herbicides, and
fertilizer. In addition, the requirements of forest certification under the
Forest Stewardship Council program generally require certified forests to limit
use of these substances to extreme circumstances.
Laws Governing Hazardous Wastes
Some environmental statutes, such as the Federal Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and comparable state laws,
impose strict liability, regardless of the lack of negligence or fault on the
part of the person held liable. Under CERCLA and various state laws and
regulations, an owner or operator of real property may become liable for the
costs of removal or remediation of certain hazardous substances released on,
from or in its property, often without regard to whether the owner or operator
knew of, or was responsible for, the release of the substances. The presence of
these substances, or the failure to remediate them properly, may adversely
affect the owner's ability to sell contaminated real estate or to use it as
collateral.
Our operations involve only owning timber rights and selling standing timber. In
some circumstances, past owners may have disposed of hazardous substances on
property the present owner of which intends to contribute to us. All tracts
proposed for contribution to us will undergo a site inspection and hazardous
waste assessment to minimize the chance of enrolling land with such liabilities.
Despite these precautions, we may acquire timber rights on timberlands that are
subject to potential environmental or other liabilities. We may not know about
material environmental conditions on such lands that may have been created by
us, a prior owner or operator of our land or an adjacent landowner. However, we
are not aware of activities or conditions on any of the timberlands on which we
would like to acquire timber rights that would likely result in material
liability for remediation or other environmental costs.
Other Regulatory Matters
To the extent that we acquire new timber rights that require access through
federal lands, we may need to enter into right-of-way agreements with the US
Forest Service or other federal agencies. Access across federal lands or Forest
Service roads generally incurs a fee. Inability to obtain a right-of-way or
license agreement to access such timber may prevent us from harvesting certain
timber.
EXPERTS
The balance sheet of The Forest Bank, LLC dated as of June 15, 2001 included in
this prospectus and elsewhere in this registration statement, has been audited
by Mengel, Metzger, Barr & Co. LLP, independent auditors, as stated in their
report appearing in this prospectus and elsewhere in this registration
statement, and is included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the membership units offered by this prospectus will be passed
upon by Hunton & Williams, Richmond, Virginia. Hunton & Williams has also
advised us with respect to tax matters.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act to register the membership units we are offering. This prospectus
is part of that registration statement and omits some of the information set
forth in the registration statement and the exhibits and schedules to the
registration statement.
63
For further information about us and our membership units, you should read the
registration statement and the exhibits and schedules to the registration
statement. Statements contained in this prospectus regarding the contents of any
contract or other document are not complete. You should read the exhibit for a
more complete description of the contract or document included in the exhibit.
Upon completion of this offering, we will file annual, quarterly and special
reports, proxy statements and other information with the SEC. You can read and
copy any materials we file with the SEC at its Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC also maintains a website that contains information we file electronically
with the SEC, which you can access over the Internet at http://www.sec.gov.
64
THE FOREST BANK, LLC
(a Development Stage Company)
AUDITED BALANCE SHEET
AND
INDEPENDENT AUDITORS' REPORT
JUNE 15, 2001
CONTENTS
--------
PAGE
----
Independent Auditors' Report F-2
Balance Sheet F-3
Notes to Balance Sheet F-4
F-1
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Managers
The Forest Bank, LLC
We have audited the accompanying balance sheet of The Forest Bank, LLC (a
development stage company) as of June 15, 2001. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance sheet
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of The Forest Bank, LLC as of June 15,
2001, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Mengel, Metzger, Barr & Co. LLP
Rochester, New York
June 20, 2001
F-2
THE FOREST BANK, LLC
(A Development Stage Company)
-----------------------------
BALANCE SHEET
-------------
June 15, 2001
-------------
ASSETS
------
CURRENT ASSETS
- --------------
Cash $ 121,856
Cash restricted for payment to certain land owners 27,120
Certificate of deposit 345,341
----------
TOTAL CURRENT ASSETS 494,317
OTHER ASSETS
- ------------
Deferred offering costs 184,172
Deposits - timber rights 400
----------
184,572
----------
$ 678,889
==========
LIABILITIES AND MEMBER'S EQUITY
-------------------------------
CURRENT LIABILITIES
- -------------------
Accrued legal fees $ 53,411
Due to The Nature Conservancy 117,586
----------
TOTAL CURRENT LIABILITIES 170,997
MEMBER'S EQUITY
- ---------------
Class M membership units 1,250,400
Less management services receivable (750,000)
Earnings accumulated in the development stage 7,492
----------
507,892
----------
$ 678,889
==========
The accompanying notes are an integral part of the balance sheet.
F-3
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------------------------------
The Company
- -----------
The Forest Bank, LLC (the "Company") was organized as a limited liability
company (in the State of Delaware) on January 17, 2001. The mission of the
Company is to work in partnership with private landowners to promote the
economic productivity of working forests while protecting the ecological health
and natural diversity of the landscapes in which they occur.
The Company is currently in the process of filing a Form S-1 Registration
Statement with the Securities and Exchange Commission, with the objective of
being able to offer membership interests in the Company to private landowners in
exchange for their timber rights.
Since January 17, 2001 (date of inception), the Company's efforts have been
devoted to raising capital. Further, as of June 20, 2001, the Company has not
commenced its operating activities. Accordingly, through the report date of
this financial statement, the Company is considered to be in the development
stage and the accompanying balance sheet is that of a development stage
enterprise. Upon the successful completion of its public offering, the Company
expects to commence its operations, which will consist primarily of the
harvesting and managing of standing timber.
Cash and certificate of deposit
- -------------------------------
The Company maintains its cash balances and a certificate of deposit (which had
an original maturity of six months) at a financial institution located in
Washington, DC. Accounts at this institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured balances aggregate $394,000 at
June 15, 2001.
Deferred offering costs
- -----------------------
Deferred offering costs represent legal, accounting and other filing fees
incurred in connection with a proposed public offering of membership interests
in the Company. These costs will be charged against capital contributions
received in connection with the offering. In the event the offering is
unsuccessful, these costs will be charged against the operations of the Company.
Income taxes
- ------------
For tax purposes, the Company will be treated as a partnership. Accordingly,
net income (loss) of the Company will be allocated to the individual members and
included in the determination of their taxable income.
Estimates
- ---------
Although the preparation of a balance sheet often requires estimating some
information, estimates were not necessary to prepare the accompanying balance
sheet.
NOTE B: LEGAL FEES
- ------------------
The Company has incurred legal fees of $170,997 through June 15, 2001, for
services rendered by the Company's attorney in preparing a Form S-1 registration
statement. This registration statement is expected to be used to offer Class A-
1, Class A-2 and Class A-3 membership units in the Company. These legal fees
have been included in the asset "deferred offering costs" (see Notes A and C) on
the accompanying balance sheet. At June 15, 2001, $53,411 of the above-cited
legal fees remained unpaid.
F-4
NOTE C: DUE TO THE NATURE CONSERVANCY
- -------------------------------------
In May 2001, The Nature Conservancy paid legal fees of $117,586 on behalf of the
Company. These costs are referred to in Note B above. The Company intends to
repay the above-cited amount to The Nature Conservancy by July 31, 2001.
NOTE D: MEMBER'S EQUITY
- -----------------------
On January 30, 2001, The Nature Conservancy (the "Managing Member") invested
$500,000 and committed to provide management services (for a period of five
years, commencing on the effective date of the S-1 Registration Statement cited
in Note A) to the Company, valued by the parties at $750,000, in exchange for
1,500,000 Class M membership units. The value ascribed to these management
services has been reflected in the accompanying balance sheet as member's equity
with a corresponding reduction in equity of $750,000 for management services to
be received. As the Managing Member provides the management services, the
Company will record a charge to its operations with a corresponding reduction of
the management services receivable. The Managing Member is a non-profit
conservation organization located in the United States.
Prior to the formation of the Company, The Nature Conservancy made payments of
$400 to certain landowners in connection with the agreements described in Note
E. An asset for these payments (Deposits - timber rights) has been recorded on
the accompanying balance sheet with a corresponding addition to the Class M
membership units of the Managing Member.
Given the occurrence of certain events, the Managing Member may also be
obligated to provide up to $250,000 of additional cash to the Company, under the
terms of the Class M membership units cited above. This contribution, when and
if received, will be recorded as additional member's equity.
NOTE E: LETTERS OF INTENT - TIMBER RIGHTS
- -----------------------------------------
The Company has signed letters of intent (the agreements) with four landowners
that prevent each landowner from taking any action that might harm timber
located on their property for the period covered by each agreement. Each
landowner received a deposit of $100 to secure the agreements (see Note D). In
addition, if a landowner eventually contributes their timber rights to the
Company, the Company will be obligated to pay such landowner an amount equal to
4% per annum (calculated from the date of signing the letter of intent through
the date of the actual deposit of the timber rights into The Forest Bank, LLC)
of the appraised value of their timber rights on the date of the contribution.
The current value of the timber rights covered by these agreements is
approximately $678,000.
The agreements each cover a period of one year and are scheduled to expire at
various dates from June 21, 2001 through August 8, 2001. The Company and each
landowner, by mutual consent, shall have the option to renew their agreement for
an additional one-year period under the same terms and conditions contained
within the original agreement. However, the landowners are under no obligation
to contribute their timber rights to the Company and may rescind the above-cited
agreement at any time.
Should any or all of the above-cited landowners contribute their timber rights
to the Company, they will do so in exchange for Class A membership units.
However, in the event such landowners have contributed their timber rights into
The Forest Bank, LLC, each landowner may have the right, arising under the
federal securities laws, for a period of one year from the date of the
contribution, to rescind their contribution. Should a landowner be entitled to
rescind their contribution, their timber rights will be returned and they will
surrender their membership interest to the Company. Due to the nature of this
rescission clause, no amounts will be recorded as equity at the time these
landowners contribute their timber rights to the Company. Instead, such amounts
would be recorded as "Membership Units Subject to Rescission," and would appear
on the balance sheet after debt but before members' equity. Such amounts will
only be recorded as equity after the one-year
F-5
rescission period described above has expired.
NOTE F: RESTRICTED CASH
- -----------------------
In connection with the letters of intent described in Note E, the Company has
cash of $27,120 which is restricted for payment to the landowners cited in Note
E. These amounts will be paid to the landowners in the event that such
landowners deposit their timber rights into The Forest Bank, LLC. The
restricted amount was determined as follows:
Current value of timber rights covered by
letters of intent (see Note E) $678,000
Annual percentage to be paid to landowners
per letters of intent (see Note E) 4%
--------
$ 27,120
========
F-6
[Logo with the words "The Forest Bank,
Protecting Our Working Forests"]
The Forest Bank, LLC
c/o The Nature Conservancy c/o The Nature Conservancy
146 East Main Street 339 East Avenue, Suite 300
Abingdon, Virginia 24210 Rochester, New York 14604
(540) 623-4007 (716) 232-3530