VARDAMAN VIRTUAL FORESTRY COMPANY

The Most Direct Link to Knowledge Workers in the Southeast Forest Economy

We have created a new vehicle for investing in a pure-timber play, perhaps without putting up any cash at all, but merely by being able and willing to do so at specified times and under certain conditions. The vehicle is a Liquidity Insurance Contract (LIC). We have described below its useful economic role, its availability, and how it works.

Basis for the LIC is the Pine Plantation Investment Contract (PPICâ ), an installment-purchase contract that conveys to its owner all pine trees growing or to be grown on selected tracts of land. The PPIC owner, therefore, owns the trees without sinking capital into the land under them. Details of 29 PPIC’s offered for sale are posted on http://www.se-timbersales.com/; a summary of all of them is included with each. They range in size from 40 to 270 acres, in cost from $42,070 to $356,984, and in remaining duration from 11 to 22 years.

Investors in PPIC’s agree to make a series of annual payments to the landowners. In return they receive a small cash income when the trees are thinned at Age 12 and a very large one when they are harvested at Age 22. They are attracted by substantial returns from timber growth, internal compounding without taxation, deductibility of expenses, and classification of incomes as long-term gains.

They do not expect or want to liquidate their investments prematurely. On the other hand, some investors in assets with distant maturities worry that at times in the future they may face unexpected financial emergencies in which they could be badly hurt if they cannot quickly raise cash. Their PPIC’s cash flows begin at age 12, and although premature sales would eliminate the chance to make the predicted returns, the trees can be sold at any age thereafter. Prior to age 12, however, substantial cash can be raised only by selling the PPIC’s, and there is so far no established market for them.

LIC’s solve this problem. Underwriters of LIC’s agree to buy PPIC’s for specified prices at specified times in exchange for fees paid by Investors. These fees include cash in advance plus purchase prices significantly below the predicted value of the PPIC’s. Investors thus sacrifice some yield in exchange for more liquidity. Whenever they decide that the protection is no longer needed, they can cancel their LIC’s at each year-end.

Obviously, LIC’s are not available until PPIC Investors want them. The first PPIC Investor chose not to purchase one, and there are no PPIC Investors now standing in line. On the other hand, we believe that, if we could announce in advance the terms of an LIC offered for each PPIC, they would be standing in line.

PPMC offers each PPIC for sale at a specified price; it now solicits offer to underwrite LIC’s on each PPIC at specific prices. The attached sheets illustrate how both PPIC’s and LIC’s work by showing cash flow for both parties in a typical situation.

I’ve sent this material to you because, over the past few years, you have shown an interest in timber investments. I hope that either vehicle will attract you. If it does or if you need more information, please give me a call at 800+455-4568.

LIQUIDITY INSURANCE FOR PINE PLANTATION INVESTMENT CONTRACTSâ

The greatest obstacle to investment in Pine Plantation Investment Contracts (PPIC’sâ ) is the lack of liquidity before the trees grow large enough to sell in normal timber markets. Since PPIC’s are installment purchase contracts that create ownership of trees, but not the land under them, on certain tracts and since there is now no regular market for such contracts, an investor cannot liquidate by selling out while the trees are still small. While it is creating a regular market for PPIC’s, Pine Plantation Management Company LLC (PPMC) seeks to find an institution or individual to underwrite Liquidity Insurance Contracts (LIC).

AL93270WG_ is a PPIC on 270 acres of a pine plantation in Bullock County, Alabama now finishing its seventh growing season. The schedule of cash flows for it is attached, and maps, photos, and other details appear on http://www.se-timbersales.com/. Details of an LIC for it appear below:

CALCULATION OF HYPOTHETICAL LIQUIDITY INSURANCE CONTRACT FOR AL93270WG_***

Assumptions: Investor will buy LIC’s at prices in Column C
Investor will earn 2% on his cash outlay including cost of LIC’s
Value of PPIC will increase at 11.85% per annum

*If LIC is exercised, these are sale prices to new investor.
**Net Cost is less by whatever UNDW earns on B2 ($36,000 advance payment) each year.
***UNDW’s obligation is cancelled in proportion to tree values lost by fire, windstorm, or insect attack.

We do not believe that the Investor will buy LIC’s after the 11^th growing season. In the 12^th season (2004), he must make the Annual Payment of $36,720 and pay $27,000 for fertilization, but he will receive $99,681 in net thinning proceeds. At 12/31/04, his total cost will be $288,714 + $36,720 + $27,000 – $99,681 = $252,733. Estimated market value of the remaining timber will be $171,720. Its estimated annual compound value increase for the next ten years is 27.3%, a remarkable return resulting from genetic improvement, expert thinning, fertilization, and growth from pulpwood into sawtimber.

The cash-flow schedule shows that the Net Present Value of the PPIC is $356,984. PPMC will pay a 5% fee or $17,849 to anyone who refers to it an Investor who buys a PPIC. PPMC will handle all details of closing the sale with the Investor; the mere referral is all that is necessary to earn the 5% fee. If the referral comes from the LIC underwriter, it will earn the 5%. If it comes from a broker whose client does not require an LIC, he will earn the 5%. If the broker’s client requires an LIC, the 5% will be split between the underwriter and the broker. As additional compensation, the Underwriter will receive the right to acquire the PPIC at reduced prices if the LIC is exercised (see Column H above). It will also receive whatever it can earn on the advance payment of $36,000 over the $720 it must pay out one year later.

The costs in this schedule are fixed; proceeds from timber sales will surely be different.
* These interest amounts are deductible expenses for PPMC Members, but may not be for other owners in other situations.
**The surpluses above cost basis in these timber sales are long-term gains for PPMC Members, but their cost basis is small because they deduct interest costs.

Estimated compound, annual return from timber growth along = 11.85%