VARDAMAN VIRTUAL FORESTRY COMPANY

PPIC GUIDING PRINCIPLES

5. In appraising PPICs, PPMC uses sales data produced as in 4. above and not general data from price-reporting agencies.
6. Except for special uses of fertilizer, modern technology can be employed in plantations only at time of planting. PPMC will concentrate on these.
   

PPIC UNDERLYING ASSUMPTIONS

1. Real timber prices current at acquisition will not change over the life of the PPIC.

2. Timber prices will fluctuate in the same magnitude of, and generally in sync with, the CPI-U.

3. PTAEDA2V makes accurate growth predictions. Analysis of investing in pine plantations involves many variables, including how much timber of what type will be produced at what time during the life cycle of a forest. To quantify these variables, various management practices have been studied by scientists over the last 40 years and the results incorporated into growth-and-yield models. When empirical data, gathered over long periods from numerous experimental sites, each designed to test the effects of different management techniques, are combined into a single model, the results provide reliable data for making operational decisions and projecting future timber yields.

Growth-and-yield models have been developed in the Southeast by scientists at Virginia Tech, North Carolina State, and the University of Georgia. JMV&CO is a member of the Loblolly Pine Growth and Yield Research Cooperative based at Virginia Tech. Other members are Boise Cascade Corp., Bowater Incorporated, Champion International Corporation, International Paper Company, Georgia-Pacific Corporation, Mead Corporation, Temple Inland Inc., Union Camp Corporation, Westvaco Corporation, Weyerhaeuser Company, Willamette Industries, and the Virginia Department of Forestry. This co-op developed the PTAEDA2 growth-and-yield model (Pinus taeda is the scientific name for loblolly pine).

4. PTAEDA2 in its standard form is based upon the periodic re-measurements of pine plantations scattered over the Southeast. These plantations were planted between 1960 and 1980 with no modern technology. Therefore, unless the inputs are adjusted for new developments, PTAEDA2 predicts much smaller volumes than will be produced by plantations established today with modern technology.

PPMC's scientific advisory panel prescribes accurate adjustments to PTAEDA2V inputs to reflect use of modern technology. To arrive at these adjustments, JMV&CO staged seminars in 1989, 1990, 1993, 1996, and 1998 at which six leading scientists reported progress in their fields and then jointly suggested adjustments to PTAEDA2. The scientists at the 1998 seminar and their fields of expertise are as follows:
Dr. Harold E. Burkhart, Head, Department of Forestry, Virginia Tech, and Leader, Loblolly Pine Growth and Yield Research Cooperative, on growth-and-yield models
Dr. Robert J. Weir, Associate Professor of Forestry, NC State University, and Director, Cooperative Tree Improvement Program, on genetics
Dr. David B. South, Professor, School of Forestry, Auburn University, on seedling morphology and planting
Dr. Shepard M. Zedaker, Professor of Forestry, Virginia Tech, on competition control
Dr. H. Lee Allen, Professor of Forestry, NC State University, and Director, Forest Nutrition Cooperative, on forest nutrition
Dr. Lawrence A. Morris, Professor of Forest Resources, University of Georgia, on soils and cultivation

The following adjustments were made at the 1998 seminar:
a. Use of first-generation or second-generation genetically-improved seedlings and selection of specific families adapted to specific site conditions: Site index gain of 7% for first-generation stock and 12% for second-generation stock, reduction of pulpwood-quality trees to 16%.
b. Morphologically-improved seedlings with 6mm to 9mm ground line diameter (planted in the fall if possible) or use of containerized seedlings: Harvest 1 year and 2 years sooner.
c. A combination of herbicides before planting to control hardwood brush and in spring following planting to control herbaceous vegetation: Harvest 1 to 2 years sooner.
d. Subsoil plowing: Two-foot increase in site index, higher survival of planted seedlings, and easy access for control of herbaceous vegetation.
e. Fertilization where needed. (various impacts on site index, increased harvest.)

The adjusted model used by PPMC is PTAEDA2V. Its projections of IRR are made using PTAEDA2V+ECONVR, a version of the basic model that takes into consideration intensive timber management practices on tree growth and yield, timber prices, and management costs.

PTAEDA2V+ECONVR is a powerful quantitative tool for predicting growth-and-yield and economic return for each PPIC. PPMC uses the model to compute IRRs and annual or lump-sum payments based on differing site indexes, regeneration costs, etc. For example, on a high-site-index tract requiring lower regeneration costs, the PPIC can offer high payments. Conversely, a low-site-index tract will call for lower payments if the hurdle IRR is to be achieved. The model is used in each case to determine what specific regeneration steps will result in the highest growth-and-yield and the payments that can be offered following these decisions. Subjectivity in decision-making is reduced to a minimum.

In spite of the impressive gains from intensive timber management, most forested lands in the Southeast are not managed under these regimes. The main obstacle to their implementation is that they must be started at the time of regeneration. There is no meaningful way to catch up once regeneration is finished. To maximize the intensive timber management effect, PPMC deals primarily with cut-over land or open fields.

5. Timber supplies around the world are being restricted by governments, even as forest products companies expand their capacity in response to increasing demand for fiber and wood products. In the U.S., environmental concerns have reduced the volume of timber to be harvested from public lands. The resulting supply imbalance has caused prices for logs and lumber to reach peak levels in 1997, and even though prices since then have declined, current prices still exceed pre-1995 levels. The trend of limited availability of timber from federal lands is expected to continue. Although it may be mistaken, PPMC believes that these forces will likely lead to:
a. Ongoing reduction in timber supplies.
b. Increased competition for the available timber.
c. Higher prices for timber.
PPIC RISKS

1. A PPIC is an investment in timber, but not the timberland. This results in risks that are different from the situation where land is owned. The principal risk is that predictions of PTAEDA2V are incorrect, that the timber actually produced will be less than the predicted amount. The greatest cause of mortality in plantations is competition between the trees themselves, but this has been taken into account by PTAEDA2V. In addition, all timber investments face risks of loss from fire, insect infestation, weather, wind, and theft. In each case, good management will reduce risks by the following actions:
a. Ensuring that timber holdings are geographically diversified.
b. Avoiding areas subject to hurricanes or icestorms.
c. Participating in and implementing fire prevention programs.
d. Performing annual timber inspections on each PPIC to check for insect or fungus infestation, trespass, encroachment, theft, etc.

2. A PPIC expires at a certain time, and timber prices at that time may not equal those originally projected. On the other hand, PPICs at age 10 contain quite a bit of merchantable timber, and the amount will rise rapidly each year. As the trees in each PPIC reach age 10, PPMC will monitor the amount of merchantable timber, the market prices then current, and the remaining amount of payments due the landowner. PPMC believes that, sometime between the age 10 and 22, it will be able to liquidate its investment and earn the projected return. Nevertheless, PPMC cannot guarantee that its effort to prevent or minimize losses will succeed.

3. Public concern in recent years over protection of the environment and natural resources has brought increased regulation and control of the timber industry by federal and state governments. In the Southeast, environmental groups have made efforts to restrict the harvesting of timber on either private or public lands that would reduce the habitat of the Red-Cockaded Woodpecker. Restrictions on harvesting of old-growth timber are being considered at both the federal and various state levels. PPMC confines its purchases to cutover lands, open fields, and young plantations that neither provide habitat for the Red-Cockaded Woodpecker nor fit the description of old growth timber. Nonetheless, there can be no assurance that future legislation or governmental or judicial decisions will not affect PPMC and its ability to harvest timberlands.

4. Timberlands and the harvesting and processing of timber are subject to federal and state environmental laws, regulations, and administrative rulings, which, among other things, impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage, and disposal of solid and hazardous waste. Further, PPMC is subject to laws and regulations relating to the environment, natural resources, forestry operations, health, and safety, as well as increased social concern with respect to environmental issues, which could affect timber values. Although there is no assurance, PPMC believes that, if more restrictive laws are enacted in the future, timber prices will increase to offset increased costs.

Nearly 75% of all timberland in the Southeastern U.S. is privately owned and not subject to politically-motivated decisions regarding its use. The generally pro-business attitude and the importance of the forest products industry in the Southeast have usually resulted in the development of regulations that seldom hinder timberland investment returns.

5. PPMC's operating results will be affected by the cyclical nature of the forest products industry. Prices for logs and manufactured wood products have been, and can be expected to be, subject to cyclical fluctuations due to changes in economic conditions, interest rates, population growth, weather conditions, and other factors. Furthermore, changes in industry supply of timber have an effect on prices. Over the last several years the U. S. Government has significantly reduced its sales of timber in response to environmental and endangered-species concerns, resulting in increased prices for logs and timber, which has benefited owners of timber. Although PPMC believes that sales of timber by U. S. government agencies will remain at low levels for a long time, any reversal of policy that increased such sales could reduce prices for logs and lumber and could have an adverse affect on PPMC. Furthermore, increased imports from Canada and other foreign countries could reduce the prices PPMC receives for its products. Log and timber price increases attributable to declining availability of timber from U. S. Government lands, declining interest rates, and a recovering U. S. economy resulted in increased profitability for most timber products in 1993. By contrast, in 1994 and early 1995 weakening demand for logs and lumber and natural disasters, coupled with resulting increases in lumber inventories and increased competition from foreign suppliers, resulted in log and lumber price decreases. Increases in interest rates may also adversely affect PPMC's results of operations due to the historic correlation between increased interest rates and decreases in the level of residential construction activity, which will be reflected in reduced demand for logs, lumber and plywood.

6. Sale of timber may be affected by weather, damage by fire, insect infestation, disease, prolonged drought, natural disasters, access limitations, and regulatory requirements. Although damage from such cases usually is localized and mitigated by geographic diversification and thus affects only a limited percentage of timber, there can be no assurance that any damage will be so limited. Climate, extensive road systems providing access to the timber, physical separation of tracts containing the timber, and fire prevention programs all limit the risk of significant fire damage to timber.

7. Investments made by PPMC are illiquid. Dispositions of investments may also be subject to limitations on transfer or other restrictions that could interfere with the subsequent sales of such investments or adversely affect the terms that could be obtained upon any disposition thereof.

8. PPIC sellers may buy back their tracts at any time for a price that guarantees PPMC a real IRR of10%, which may be less than PPMC would earn if allowed to maintain its ownership. PPMC doubts that this will be a significant risk because, to obtain PPMC's return, landowners must have PPMC's expertise in selling timber.

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